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On Jan. 2, Apple lowered its first-quarter revenue guidance, resulting in Apple’s biggest drop in market value since 2013. This culminates a three-month decline in market capitalization of $452 billion—roughly the size of Facebook’s total market capitalization.
Apple’s situation shows that even the most innovative companies in the world have trouble staying ahead of the curve in the internet economy.
The Apple Case
Apple has a TAM problem. TAM stands for total addressable market, which is a critical measure of a company’s potential for success. TAM involves two key questions: Is the TAM large enough for the company to succeed, and is the company’s product a good enough idea to scale to that potential market?
For Apple in general and the iPhone specifically, the TAM is the biggest in history—essentially, it is everyone. The iPhone created this TAM by being one of the most compelling tools ever invented. Apple maintained its TAM for more than a decade by ensuring that each new version of the iPhone was innovative enough for consumers to want that new version. Apple’s success in reaching this enormous TAM resulted in Apple becoming the world’s first company to reach a $1 trillion market capitalization.
However, as the iPhone market has matured, Apple has begun to face a problem that its competitors know all too well: It can’t innovate fast enough. The iPhone idea may be becoming an “old” idea. Apple now is struggling to make each iteration of the iPhone innovative enough to compel consumers to trade up to the newer model. The result is a shrinking TAM and a shrinking market capitalization. And Apple has not come up with a new product idea as compelling as the iPhone.
Legacy Healthcare’s TAM Problem
TAM also is a developing problem for legacy healthcare organizations. The growth rate for inpatient admissions, which has been decreasing for several years, was at 1 percent in 2017, according to Moody’s outlook for not-for-profit healthcare. Also in 2017, outpatient visit growth was only 2 percent, representing the first growth rate decline in five years. Moving forward, Moody’s expects inpatient volume growth to be flat and outpatient volume growth to decline further due to new non-hospital competitors in the outpatient space. The combination of decreasing volume and decreasing reimbursement growth means deepening revenue challenges for legacy healthcare.
Legacy healthcare has depended on two primary sources to maintain its TAM. The first is an aging population and an expected demand for more healthcare services associated with age. However, this overall increase in volume driven by an older American society has not occurred, and at this point, there is no assurance that it will.
The second source has been the creation of new technologies and services, such as the ability to do knee and hip replacements on an outpatient basis. For legacy healthcare, however, relying on innovation to drive volume growth is a double-edged sword. Today, much innovation—from telehealth to artificial intelligence—is directed toward lowering total costs and reducing the need for expensive services from traditional providers.
In virtually every industry, legacy and innovative companies alike are working to establish the largest possible TAM. They do that by looking for the next breakthrough idea—the next idea that, like the iPhone, will become an indispensable part of daily life for as many people as possible. Legacy car manufactures and big tech companies are trying to find the next breakthrough idea for mobility. Legacy television networks and big streaming services are trying to figure out the next breakthrough idea for video entertainment. The tools to create these new ideas and related products include financial resources, technological capabilities, intellectual capital, and a culture that values rapid generation of ideas, rapid testing, willingness to fail, and, for those ideas with promise, ability to scale quickly.
This is the idea chassis for today’s economy. As the Apple example shows, even the most innovative companies in the world need this chassis to maintain their TAM once their innovations begin to saturate the market.
Legacy healthcare organizations face a similar situation. Their market is large, but it is largely mature, and innovations increasingly are designed to draw market share away from traditional care settings. To grow, legacy organizations will need to develop their own first-class idea chassis that will generate new ways to become an indispensable part of consumers’ daily lives.