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.

But what Apple's last two quarters prove is that some of the received wisdom of the "S" curve may be wrong. The market wasn't the U.S. The market was the world. And a big part of that world is China, where the iPhone is made.

While Android sales have been topping out, Apple has been racing through China's mass market, multiplying sales in "greater China" -- China, Taiwan and Hong Kong -- fivefold. A total of 35.1 million iPhones were sold in the last three months, allowing the company to blow the doors off Street estimates for the second quarter running.

While carriers delivered fewer iPhones to customers in the first quarter of 2012 than the previous quarter total shipments rose dramatically.

Now that the news is out, analysts are jumping back on the "S" curve, insisting that Apple can't keep this going. They see Android and (now) Windows Phones inevitably eating into Apple's share, thanks to value pricing.

They may be disappointed again. Because when you're talking about something in your hand, that connects you to the world, the real market opportunity is bigger than anyone imagined. The global "S" curve is bigger than we think, and that may prove true for other products beyond the iPhone.
At the time of publication, the author was long AAPL.