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Apple and the 'S' Curve

NEW YORK (TheStreet) -- The first lesson any marketer learns is about the "S" curve.

The "S" curve describes a product's acceptance by the mass market over time. It starts off slow, and it may take years to get off the ground, but once you have lift-off you can zoom through the heart of the market. After the glory days, sales stabilize at a replacement number and the ride is over.

The curve also implies a pricing strategy. You want full pricing, maximizing profit, at the front of the curve. At the top of the curve, you want lower, value pricing, minimizing unit profit and maximizing market share. Some products, like diamonds, never leave the high price part of the market. Others shoot through like kids on a water slide.

The big uncertainty in all of this is the size of the total market. For TVs, which went through the "S" curve 60 years ago, the number of U.S. households defined the market. For PCs, which went through it 30 years ago, it was roughly the workforce.

What is it for smartphones, devices that combine PC and Internet functions with telephony? Turns out that number is bigger than anyone imagined.

Throughout its history Apple (AAPL) has defied the received wisdom of the "S" curve. It maintained full pricing, and simply upgraded or replaced products that got cheap.

I paid about the same price for an iPod in 2010 that I did in 2003. But the new one had four times the storage, it's sturdier, and my guess is it's even more profitable to Apple than the original.

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As smartphones raced through the U.S. market, Apple maintained its relatively high price, about $500 with the network subsidy. Again, this defied the wisdom of the "S" curve, which held that you need to move to value pricing as you move through the market.

Google (GOOG) sensed this as a weakness in Apple's model. The Android phone looks like an iPhone, feels like one, even sort of works a lot like one. By basing the Android on a free Linux, practically giving it away to OEMs, and letting those OEMs compete for market share, Google dropped the price to near-zero. That is, you can walk into a phone company store today and walk out with some Android device, just for the price of the contract.

Stock quotes in this article: AAPL 

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