As Earnings Season Rolls On, Apple Leaves Competitors in the Dust


This article is part of our Rising Stars Portfolio series.

As earnings season rolls on, the ripple effects of Apple's (NAS: AAPL) success are being felt everywhere. Competitors are not only directly attacking Apple's products, but also segments that seemed to be safe from Apple are having to reorient themselves to a life in which traditional rivals matter less and finding a way to hold the line against new uses of Apple products is the new normal.

Tales of woe
The story reads like a joke at first. "Logitech (NAS: LOGI) announces negative sales of Google (NAS: GOOG) TV product." Negative sales. That's impossible, right? But then you read further into the company's earnings call and realize that returns outpaced actual sales. Ouch.

Then there's Nintendo (OTC BB: NTDOY.PK), which had previously announced that its new 3DS was still being outsold by the legacy DS system by a 2-to-1 margin. In its recent earnings release, Nintendo announced further misery for its new system: Sales of the 3DS plummeted 80% from the previous quarter. To spur sales, Nintendo had to offer deep price concessions on a system that is still very new to the market and should be selling briskly. Simply put, this is an unprecedented move for the company. Nintendo has never had to offer such deep cuts on a major product this close to release.

Finally, we have Motorola Mobility (NYS: MMI) announcing that it expects to move only 1.3 million to 1.5 million tablets this year. Remember when the company's Xoom was lauded as a potential iPad killer? Not so much anymore. In fact, analysis from popular blog Daring Fireball showed that the iPad could be outselling Android tablets by as much as 24-to-1. Further analysis of browsing habits on tablets showed that the iPad is 53 times as popular as its closest rival, the Samsung Galaxy Tab.

Hail to the disruptor
The headline from The Wall Street Journal announcing Nintendo's slumping sales sums it up best: "Nintendo: Apple's Latest Prey." There's little doubt, though, that some of these wounds are self-inflicted as well. Google TV is a mess of a product that was widely panned for its complicated nature. Consumers have yet to accept 3-D whether in video games or expensive TV sets. Android's tablet offerings have proved underwhelming and have weak developer support. Not to mention that manufacturers haven't been able to crack the iPad's aggressive entry-level pricing.

However, these tales do illustrate a simple fact: The iPhone and iPad are incredibly disruptive devices across a wide breadth of rival technologies. Thanks to their portability, a legion of dedicated developers finding new uses of the technology, and their ubiquitous nature, iDevices are expanding into new arenas and knocking shell-shocked incumbent leaders backward.

On to new frontiers
While Nintendo's 3DS is the most obvious gaming platform that Apple threatens -- it is, after all, a mobile system -- this could be a canary-in-the-coal-mine announcement.

Consider that Electronic Arts (NAS: ERTS) has called the iPad its fastest-growing device for gaming. Gaming companies lust after Apple's huge user base -- more than 200 million iOS devices have been sold to date.

The best part of all is that the video-game industry isn't firing on all cylinders right now. Sales have been slumping for years as consumers increasingly shift away from powerful consoles and toward games on smartphones or Web platforms like Facebook. This is the exact type of situation Apple loves to disrupt.

The MP3 player market existed with a number of struggling rivals before Apple came in and dominated it. The smartphone market was already quite large before Apple introduced the iPhone and a quantum leap of smartphone usability followed its arrival. Tablets had been around for a decade before Apple finally solved the puzzle.

Hey, Microsoft, that's a target on your back
Now, video games are a badly broken market and Apple stands at the doorstep. The model of costly systems that are subsidized by $60 games is a lumbering dinosaur. A less-powered system that not only offers a wide array of games but also has tie-ins to entertainment offerings like Netflix, Hulu, and digital media has the largest market moving forward. That's exactly the kind of system Apple can offer. Would a slightly upgraded Apple TV that connects with ubiquitous Apple devices like the iPhone and iPad as a controller be difficult for Apple to implement? I don't believe so. Given time, Apple could solve the challenges that face this set-up.

So while Microsoft's (NAS: MSFT) Xbox 360 has been -- to the company's credit -- the best at morphing video-game systems into entertainment hubs this generation, it'll have far more competition in this area when it releases its next system.

At some point, Apple will be the greatest rival to Nintendo, Sony, and Microsoft in video games. Not because it offers the most powerful system. Not even because it'll offer the most "innovative" product. In the end, it'll be because Apple best understands what consumers want and will change the way the video-game console cycle works.

Then it's up to the developers to create innovative ideas around the product. While Nintendo is lauded for its constant creativity, its next-generation system is largely a tablet that connects to a video-game system. Will that product be as innovative when hundreds of thousands of developers are creating games controlled by an iPad that show up on their TV through a refreshed Apple TV product? Continuing to stay ahead of hundreds of thousands of developers toying around with a similar concept will be daunting for Nintendo. The games won't be as in-depth as a Zelda or Mario opus, but they don't need to be, either.

Disruption, an inexact science
This isn't to say there won't always be an audience of gaming enthusiasts who prefer dedicated consoles. However, with Microsoft seeing over a billion in sales each year to Xbox Live and Kinect propping up its recent results, losing a portion of the mass market to Apple would hurt. For a company like Nintendo, that's a pure play on video gaming, and it could be a fatal blow.

We don't always know what direction technology disruption will take, but for Apple, the pieces are in place to aggressively move into the living room. Before the first real shot has been fired, this is Apple's market to lose.

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At the time thisarticle was published Eric Bleeker owns shares of no companies listed above. You can follow him on Twitter to see all of his technology and market commentary. The Motley Fool owns shares of Microsoft, Apple, Google, and Logitech International.Motley Fool newsletter serviceshave recommended buying shares of Google, Microsoft, Apple, Netflix, and Logitech International, creating a covered collar position in Microsoft, creating a bull call spread position in Apple, buying puts in Netflix, and creating a write covered call position in Logitech International. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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