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Why the Business Behind Apple’s Latest iPad Is Like Netflix’s DVD Rentals

Netflix Inc. Illustrations Ahead Of Earnings FiguresNetflix Inc. Illustrations Ahead Of Earnings Figures
The Netflix app displayed on an iPad miniPhoto by Daniel Acker — Bloomberg via Getty Images

The tech world has become accustomed to big events and flashy announcements, and few companies do them bigger or flashier than Apple. So it came as a surprise to many this week when the company sheepishly released a series of new products and updates with minimal fanfare.

Many were quick to jump to the conclusion that Apple has lost its mojo as a disruptive giant, and is suffering from a severe case of innovator’s block. Indeed, the updates were hardly revolutionary – a cheaper iPad, a new color for the iPhone (but no new features) and a copycat video product. All in all, not a very impressive line-up.

What was Apple thinking?

I suspect that Apple is pursuing a “harvest” strategy. As explained in Digital Vortex, a harvest strategy is about gaining as much profit as possible in a static or declining market. iPad sales are down (along with all tablets), and Apple is trying to capture profit while it is still possible to do so. Investors don’t seem to be too worried; the share price is up this week – not down as you may expect.

There is nothing wrong with wringing profits out of declining businesses, especially not when the proceeds are used to fund disruptive growth areas. Apple has not stopped innovating. The company increased R&D spending by more than 20% in 2016, to a little more than $10 billion. Apple is most likely saving more exciting news for the fall, when it is rumored to be announcing major product changes, including to both the iPhone and iPad.

Apple is not the only tech giant to be using a harvest strategy to fund more innovative and disruptive activities. Netflix is still making huge margins from its DVD business (yes, it seriously still sends DVDs to people’s homes). The company is using the proceeds to fund, among other things, the international expansion of its loss-making streaming video business. Despite pulling in over $3.2 billion in the 2016 calendar year, the international streaming business lost $309 million, which is approximately equal to its DVD profits.

We’ve come to expect paradigm-shifting products from Apple every year, but this is unrealistic in the long run. It can also be reckless. Too much disruptive innovation can be distracting and risky. Harvesting existing business lines, even declining ones, can still lead to significant gains. Smart companies, like Apple and Netflix, recognize that disruptive innovation must be balanced with less exciting, but more profitable, harvesting.

Michael Wade is director of the Global Center for Digital Business Transformation, professor of innovation and strategy at IMD, and co-author of Digital Vortex: How Today’s Market Leaders Can Beat Disruptive Competitors at Their Own Game