Why the iPhone Will Continue to Dominate the Smart Phone Market Even if It Doesn’t Have the Biggest Screen or Fastest Processor

It All Comes Down to the Existing Investment Consumers Have Made in their iTunes Library of Music, Movies, Games, Apps, and Television Shows

It seems that a handful of tech folks and business bloggers – and, in fact, even my own brother – don’t seem to understand that the reason people choose the iPhone over other smart phones, even if those other smart phones have bigger screens, more memory, and non-restricted applications, is because tens of millions of consumers now have a vested financial interest in their music, movie, television, and podcast libraries on the proprietary iTunes store.

In other words, the Apple iPhone was the market leader in smart phones as a result of its state-of-the-art debut in 2007. More than 50 million consumers switched to the iPhone and began buying music, movies, and apps through iTunes. Those intellectual assets have real value and won’t work with other formats or machines, at least not without some non-standard skills that most people don’t have. By being first to market, especially for those who bought an iPod almost ten years ago, Apple locked people into their closed economic system.

Thus, the ability to simply plug the iPhone in to your existing system, have it synced with your Mobile Me mail, calendar, apps, music, movies, and more without any additional work on your part is the primary reason that the iPhone will continue to dominate other smart phones, even the competitors release better models to market. A slightly larger screen or faster processor doesn’t compensate for losing access to the library that you’ve built up over years.

In my own case, right now I have nearly 3,000 songs, at about $1 each, so $3,000. I have probably 500 television shows and movies at an average of $2 each, so another $1,000. I have maybe another $300 to $400 worth of apps for both my iPhone and iPad. Thus, my investment is roughly $4,300 thus far in the iTunes format, and that doesn’t even include the new iBook program, which I have been using to purchase books from Apple (and will probably become bigger than my music budget before long).

Furthermore, it helps that the iPhone is a kick-ass product with a lot of great features that most people have never seen.  This causes people to increase their media investment, and the cycle strengthens.  It is one of the reasons I expect Apple to have a huge market share in the publishing industry for books in a few years, and why I am working to have my new upcoming book released in the iBook store before the printed publications are available.

The Wave Surfing Mental Model

In Charlie Munger mental model terms, this is known as “wave surfing” whereby one firm reaches market first, gathers market share, and gets consumers invested in maintaining their financial commitment to the company’s products so it becomes painful to switch to another brand.  Charlie explains that it is predominately why Microsoft generated so much wealth for its owners.  DOS and Windows were never the best operating system, but they were the first to enjoy widespread market acceptance, entrenching their dominance (to the dismay of some people who didn’t understand the underlying reasons behind this).

With the release of Apple’s video game platform expected later this year, which rumors compare to Microsoft’s Live network for the Xbox, I imagine that market power will be strengthened even further. I’ve already purchased some of the original Final Fantasy titles for my iPad, which were originally released on NES. My save files are native to the iPad and iPhone now … meaning if I move to a new platform, not only will I be forced to buy the content again, but I’ll have to start over and lose my progress.

Related posts:

1. Turns Out, I Hardly Use My iPhone
2. Just Bought a New iPhone 4
3. Picture of Manuscript from New iPhone – The Camera Is a Lot Better
4. My iPhone Just Shipped!
5. We Rule by Ngmoco for iPad and iPhone Has a Really Cool Business Model
6. American Households Continue to Deleverage But That Only Tells Part of the Story
7. We Are Living in the Midst of One of the Biggest Bond Bubbles in History
8. The Hindenburg Omen and the Stock Market
9. Market Capitalization Asset Allocation
10. Worst Single Day Percentage Drops in the Stock Market as Measured by the Dow Jones Industrial Average