During yesterday’s earnings call, Apple CEO Tim Cook extensively discussed his company’s take on cannibalization, or the negative impact of a new product on sales of existing products. His take:
In terms of cannibalization and how we think about this, I see cannibalization as a huge opportunity for us. One, our base philosophy is to never fear cannibalization. If we do, somebody else will just cannibalize it, and so we never fear it. We know that iPhone has cannibalized some iPod business. It doesn’t worry us that it’s done that. We know that iPad will cannibalize some Macs. That doesn’t worry us. On iPad in particular, we have the mother of all opportunities here because the Windows market is much, much larger than the Mac market is, and I think it is clear that it’s already cannibalizing some. And I think there’s a tremendous amount more opportunity there, and as you know, I’ve said for two or three, actually three years now, I believe, that I believe the tablet market would be larger than the PC market at some point, and I still believe that. And you can see by the growth in tablets and the pressure on PCs that those lines are beginning to converge. I think the other thing for us, maybe not for others, but for us, is if somebody buys an iPad mini or an iPad and it’s their first Apple product, we have great experience through the years of knowing that when somebody buys their first Apple product that a percentage of these people wind up buying another type of Apple product. And so if you remember what we had termed the “halo effect” for some time with the iPod, with the Mac, we’re very confident that that will happen, and we’re seeing some evidence of that on the iPad as well. And so I see cannibalization as a huge opportunity.
He’s absolutely right. Smart businesses cannibalize themselves rather than wait for someone else to do it. You can see this in telecom where Verizon and AT&T aggressively went into wireless, knowing that land line business didn’t have much of a future. The phone company that wasn’t aggressive—Qwest—is an also ran at best.
The market is overreacting to the natural progression of a well-run business. It’s insane that Apple is trading at a lower multiple than newspaper companies like Gannett, the Washington Post and the New York Times.
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