The foundation of Apple’s brand equity is its promise to deliver a delightful user experience to consumers. Less than stellar consumer reviews on a number of applications from MobileMe to Apple Maps have nicked away at that promise. As the stock price and recent analyst price-target drops would lead us to believe: Is Apple losing its luster?
Apple’s online satisfaction has slipped. ForeSee ranked online customer satisfaction on four criteria: price competitiveness, merchandise appeal, site content and site features. Apple’s score for online customer satisfaction slipped to its lowest level in four years, to a rating of 80. For context, top-ranked Amazon received a score of 88. Some blame Ron Johnson’s (previous Head of Retail at Apple, credited with creating the Apple Store) successor for not updating the experience quickly enough. A more telling reason may simply be the variety of merchandise sold by Apple compared to those by other sites. The survey indicated that variety of merchandise had a far greater impact on satisfaction than did price. Apple primarily sells Macs, iPads, iPhones and iPods, while Amazon seemingly sells everything.
However, if satisfaction is measured by pocket books, Apple still reigns in retail stores. A recent study in November released by Retail Sails put Apple’s sales per square foot as the highest among retailers, and over twice as high as the second ranked Tiffany.
Competitors are taking notice and are replicating Apple in retail experience. Microsoft’s new stores are beautiful, clean, sleek, frosted glass and angular, and appear as if Steve Jobs designed them himself. The biggest aesthetic difference is that Microsoft has its colorful cascading tiles lighting up the walls, which is a really attractive feature. Microsoft stores, however, do not attract the crowds that the Apple stores do. For example, over two days last week at the Stanford Shopping Center in Palo Alto, Microsoft’s store, twice the size of the Apple’s, saw hardly any traffic during my visits compared to a bustling Apple store. Comparing to Apple is tough. Last quarter, Apple reported over 19,000 visitors per store per week, and 94M visitors, a 22% increase over the prior year.
Loyalty for iPhones dropped for the first time. For the first time since the survey began, Strategy Analytics found that only 88% of iPhone users would purchase another iPhone, down from 93% last year. One explanation could be that Apple phones are simply losing favor. Another could be the timing of the survey as the iOS6 Map debacle was fresh in consumers’ minds. Numbers next week will provide some insight.
Yet iPhone loyalty still outranks competitors. Despite the first drop in iPhone loyalty, Apple competitors are working hard to even get to Apple’s reduced measure. Another study found that Samsung has improved its customer loyalty, but only up to 82%. And, an August poll by Barron's found only 48% of Android users plan to purchase another Android phone, and 2% of BlackBerry will remain with Research in Motion.
Other products can finally compete. The product gap between Apple and its competitors is certainly compressing. Samsung, Google Motorola and Nokia are putting forth impressive smartphones, wrapped with their own media and app stores. The same cast plus Amazon, Sony and Barnes & Noble have tablets, each with a slightly different angle, also nicking away at Apple’s prize iPad market dominance. Today, more products can enter the boxing ring but that does not mean they will prevail. Perhaps Apple’s demise has been cast in stone too soon?
Because switching costs from Apple are high; sticking value is very high. The installed base of Apple products is high. Over half of the US households own at least one Apple device. Of those that own a device, they own an average of three devices. Syncing amongst devices is over-the-air and automatic with iCloud and, as of October, there were 190M iCloud users. It is a challenge to persuade consumers who have linked several devices to, say, unlink one iPhone and replace it with an Android. Regardless, consumers will worry about how easy it is to sync a non-Apple device with the others. Moreover, there are over 435M iTunes accounts from which Apple users have downloaded music, video and apps. Over 40B apps have been downloaded. Some media may transfer to a new operating system, but certainly not all and none of the apps. In addition to the sunk cost and uncertainty, there is the perceived hassle of learning a new system.
For investors, the low valuation has luster. Apple has a strong brand. And while customer satisfaction and loyalty dropped marginally, they still hold a rank enviable to competitors. Consider this: A company that has popularized the three hottest categories in consumer electronics, continues to dominate in the fastest growing category of consumer electronics, sets the standard for retail stores across categories, has 435M customer accounts, and is rumored to have new products in the pipeline for 2013 is trading at less than 8x FY2013 earnings and less than 7x FY2014 earnings (excluding cash).
In the blogs, Apple is often compared to Cisco and Microsoft, and their respective falls from lofty levels. What these articles fail to point out is that these companies started to decline with entire tech bubble in 2000. According to YCharts, Cisco’s trailing P/E at that time was 200; Microsoft’s trailing P/E was 64; and, today, Apple's, on a comparable basis, trailing P/E is 11. Cisco's and Microsoft's lofty stock prices were because their multiples were high. Apple's stock price is "high" due to its robust earnings and limited number of shares, but Apple's stock price is not "expensive". This is why the comparison fails to hold.
Apple’s brand remains strong. Yes, there is competition. Yes, they have come up with great products that can challenge Apple. Yet, Apple still has strong brand loyalty ratings compared to competitors and continues to attract buyers into their stores. Once in the Apple fold, the switching costs are very high. The high switching costs give Apple latitude to fix missteps (such as Maps) while customers remain in their ecosystem. And all of this for a historically low valuation.
