Catching the Smart Phone Market Wave

Antennagate is not hurting iPhone sales, nor should we expect that it will. Once the market decides that it loves a product it takes a lot of pain to sever that relationship. While Apple's release of quarterly results this week do not reflect loss of sales due to antenna problems -- the quarter ended before the issue became public -- there are ample indications that there is no business problem.

[Interviewer] Any changes in demand since antennagate?

Cook: “Let me be perfectly clear: We are selling every unit we can make, currently.”

Follow up: So you haven’t seen any slowdown in order rates, or any increase in returns?

Cook: “My phone is ringing off the hook with calls from people who want more supply.”

This is not unique to iPhone as even Toyota found out this year. When Toyota's sales dropped precipitously there was real concern that the company would suffer a blow it would not easily, or ever, recover from. Yet their sales have recovered quite nicely. Unfortunately I don't have the reference at hand, there was a survey of car shoppers done at the height of the public crisis over uncontrolled acceleration and Toyota's apparent malfeasance and negligence. What the survey found was that buyers that were considering Toyota before the crisis arose were still considering Toyota.

Rather than buying a vehicle from another manufacturer they were content to wait for Toyota to solve the problem and, importantly, for the recession to end: all vehicle manufacturers were deeply hurt by loss of consumer confidence and the resulting deferral of big-ticket purchases. If customer loyalty survived a product defect that could kill you, I imagine that a malfunctioning antenna and public relations missteps would not seriously hurt Apple.

A recent survey by IDC found that 66 percent of people who own older iPhones are holding off on upgrades, and 25 percent of new buyers are now delaying their [purchases].

...barring any other foul-ups with the iPhone or other products in the near future, Apple should escape this fiasco with its reputation intact. "The best defense against it is to have a strong cushion of good will already established. Apple has that," Bernstein said.

Apple is not unique with smart phone product defects. As I mentioned previously, the Nexus One built by HTC for Google has an almost identical problem. Then there's Droid X with its own problems. The fact is that all smart phones suffer from a host of defects, most small but some that are large: user interface peculiarities, speed, multi-tasking, networking, screen and camera glitches, and so forth.

The sad thing about this is that it is not unexpected; product releases with known defects is a necessary evil that manufacturers accept when there is a new market category -- smart phones -- that becomes enthusiastically adopted by consumers who can not buy the phones fast enough. Just consider all the new phones that have rapidly sold out or even had people lining up to buy them the first day, including every iPhone version, Droid X and HTC Evo.

There is money on the table right now, and only a foolish company would delay products to fix every last defect since gaining market share and riding the market wave demand that products are released early and often. If this is not done at the now critical phase of smart phone adoption, there is real risk of losing the market to competitors, not just this week or this quarter but forever. Not every smart phone platform will survive and survival requires maintaining market share and customer loyalty. Non-catastrophic defects can always be resolved in the next release (hardware defects, such as iPhone's antenna problem) or downloaded to customers' phones (software defects). Customer loyalty in this environment is sustained with a rapid release cycle that delivers new features and, we hope, defect resolution.

Get used to dealing with defects for some time to come, and even Android "fragmentation" for that matter. The nature of the smart phone market ensures that this mode of operation will continue for at least the next one to two years. Eventually the market will stabilize, the quantity of platforms and variants will settle down to a workable number, and the manufacturers will have some leisure -- but not much! -- to fix their products before you buy them.