Tuesday, April 28, 2009

Apple Monopoly? Let’s Check the Numbers…

I was thumbing through the April 20th issue of eWeek this morning when I came across an article entitled “Apple monopoly”, penned by Jim Rapoza, eWeek’s Chief Technology Analyst (basically the same article can be found here, on eWeek’s website).  Being a fan of Apple and their products, I thought I’d see what Mr. Rapoza had to say.

I was surprised, no shocked, to read what Mr. Rapoza had to say.  In his article, he lays out an argument suggesting that Apple has positioned itself to be a monopoly in the technology industry.  He argues that, of the largest technology manufacturers in the industry, Apple eclipses Microsoft, Intel, and even Google, placing Apple, on a monopoly severity scale from 1 to 10, at a 9.

His argument, in my opinion, is fundamentally flawed, however.  He argues:

In the Apple universe, competition is pretty much nonexistent.  There’s only one hardware provider, and Apple dominates the software side as well, with the third-party vendors playing by very strict rules.

To me, what he is saying is that Apple maintains very tight control over products branded with their name.  I understand where this could be construed as a “monopoly”, however one has to take a look at the bigger picture.

According to Gartner’s data on PC sales for the first quarter of 2009, over 15 million computers were sold in the United States alone.  Of these 15 million, 4.2 million were shipped by HP, 3.9 million by Dell, and just over 2 million by Acer.  Apple, however shipped only 1.1 million, or 7.4% of computers shipped to customers in the US.

Now I know what you’re thinking: Apple is a distinct type of computer, and can be looked at as a distinct market.  I completely disagree with that concept.  Sure, this might have been true when Apple released the first Macintosh, 25 years ago, but it’s hardly true now.  With versions of major software titles available for both the Apple and PC platforms, the choice between a MacBook Pro and an HP notebook is more personal preference than technical necessity.  It’s difficult to argue that Apple is a distinct market when you can do exactly the same work on one of their computers as you can on a PC from Dell, HP, Lenovo, or Acer.  Therefore, Apples and PCs share a common market, and can be considered suitable substitutes for each other.

Which leads me to Wikipedia.  Mr. Rapoza, in his article, attributes his definition of “monopoly” to Wikipedia’s entry for the economic definition of the word.  He states:

Wikipedia’s definition of a monopoly hinges on two points: One is that a monopoly exists when “a specific individual or enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it.”  The other is that a monopoly process occurs when “a firm gains persistently greater market share than what is expected under perfect competition.”

Unfortunately, he left out a part of Wikipedia’s definition.  It is:

Monopolies are thus characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods.

It is the last seven words that I’m interested in.  According to Gartner, the “market” includes all computer manufacturers, including Apple.  This would imply that a PC would be a viable substitute for an Apple computer, and vice versa, and since we have already established that major software titles are available for both the Apple and PC platforms, we know that technology itself isn’t creating distinct markets.  Given that Apple only contributed 7.4% to computer sales for the first quarter of this year, it would be safe to say they do not have significant enough market share to determine the terms on which people have access to computers.  And since Apple sales were actually down 1.1% from Q1 of 2008 to Q1 of 2009, they obviously aren’t gaining more market share than competition should allow.

Mr. Rapoza constructed an argument around the concept that a company that tightly controls its product is, in essence, creating a monopoly.  By definition, however, monopolies are created within a market, not just within a company.  Saying Apple is a monopoly is akin to saying Pepsi is a monopoly.  Just because a certain percentage of soda drinkers drink only Pepsi, and Pepsi keeps tight control over their formula, doesn’t mean that Pepsi has a monopoly in the soft drink market.

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