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2 More Myths About Apple

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It's amazing how often something is said about Apple (NASDAQ: AAPL) and reported as fact as opposed to opinion. I recently read an article in USA Today by Michael Wolff that seemed to follow this pattern. He made several statements that seemed to typify some of the more popular myths about the company. Here is the problem; just because something is said in the press doesn't make it true. Since investors need to pay attention to facts and take opinion with a grain of salt, let me take on two of these myths and bring some enlightenment to the conversation.

Myth #1 – Phone And Tablets Are Fairly Basic Machines:

In another suggestion from Mr. Wolff, he says that Apple's smartphone and tablet will have a tough time competing over the long-haul because they are, “fairly basic machines. It's a game of price and features and shrinking margin”. While I agree the machines components are relatively basic, to suggest that this indicates a game of price and shrinking margins is simply not supported by the facts. What Mr. Wolff is in fact suggesting is, that smartphones and tablets are going the way of the PC. He believes that customers look at tablets and choose based on price and features. This is only half true. Price clearly isn't a defining factor of market share, or the iPad would not still hold just over 50% of the market. While it makes sense that the iPad's market share is shrinking as new competitors introduce their own tablets, customers have been able to buy cheaper tablets than the iPad for a while. What really matters in both smartphones and tablets is the overall experience. Most smartphone and tablet users don't really care what components are inside. What they care about is functionality and form. If you need proof that price doesn't determine sales in either space, look at the top selling smartphones. Some of the top smartphones are the iPhone 5, Samsung Galaxy SIII, Google (NASDAQ: GOOG) Nexus 4. If price determines sales, then you would expect each of these phones to be low cost leaders. In fact, each of these phones with a two year contract sells for about $200. Even the newer Windows Phone 8X by HTC, arguably one of the better Windows phones, sells for $199.99 with a two year contract. The top selling tablets are produced by Apple and Samsung and each starts at about $500. While newer tablets like the Kindle Fire HD 7”, iPad Mini, and Google Nexus 7 are available at the lower end, these tablets all have one thing in common. They each are supported by a large company with a unique feature set. You don't see the cheapest tablets dominating the space because to be blunt, the cheapest tablets can't do what the more expensive tablets can. PC sales on the other hand, have slowed down, and pricing has become so competitive, because there is little to differentiate a PC to most users. For most users a $300 laptop or a $2,000 laptop can pretty much do the same things. Where smartphones and tablets are concerned, there are huge leaps forward in features that are being accomplished. Until companies stop being able to take leaps forward in features in both tablets and smartphones, you won't see the type of margin compression that you do in the PC industry.

Myth #2 – “Apple is a peer-pressure buy, often at the expense of functionality and, even, common sense.”

This is one of the most popular myths that many in the press would have investors believe. Since Mr. Wolff was referring to the iPhone, let's focus on that product. Apple did not always dominate the smartphone industry conversation in the U.S. Even today after all of the company's gains, Apple has the second highest market share when it comes to operating system in smartphones. Just for a bit of history, in 2008 the top two smartphone manufacturers were Nokia (NYSE: NOK) and Research in Motion (NASDAQ: BBRY) with 42.4% and 15.9% respectively. By the fourth quarter of 2009, Apple moved up to a solid third place finish at 16%, but RIM still held 19.6%, and Nokia dominated with 38.2%. If you look at 2010, Nokia was at 41%, RIM held 18%, the new Android system took 17.2%, which knocked Apple into fourth place. Even as recently as April 2011, Nokia still held the top spot at 34.7% and Samsung controlled 18.8%. Recent studies by the IDC suggest that Android controls about 75% of the smartphone market and places Apple at about 14%. Suggesting that peer-pressure would compel customers to buy a smartphone would mean that everyone would still be buying Nokia Symbian phones, and RIM BlackBerry models. In fact, if peer-pressure were to induce anyone to buy it would be to purchase an Android phone since 75% of market share belongs to that eco-system. Why do customers actually buy the iPhone? According to J.D. Power and Associates it is due to customer satisfaction. In J.D. Power's survey this year, Apple's iPhone has the highest U.S. customer satisfaction score. This was no fluke, as this was the 8th time in a row that Apple won top honors from the survey. When it comes to functionality, the argument is dead before it even begins. While the iPhone may not have every feature that other Android models do, the iPhone 5 has many features of competing smartphones. If you search for reviews on the iPhone 5 versus other popular smartphones, you will routinely find that the iPhone 5 outperforms others based on pixel density, satisfaction with features, satisfaction with available apps, and more. To say that peer-pressure is causing customers to buy the iPhone “often at the expense of functionality” is simply untrue.

Conclusion:

When it comes to smartphones and tablets, there are two clear leaders, Apple and Samsung. While Google is tied to the Android operating system, the company's primary business is advertising and search. In fact, some have argued that Microsoft makes more money from Android than Google does. What is really ironic about the argument that Apple could be in trouble because it makes “basic” machines and they are bought under “peer-pressure”, is these arguments might actually hold water when talking about Samsung. Let's face it, Samsung makes smartphones and tablets of all sizes, the company produces the Nexus 4 for Google, and most of its models run the Android OS. Since Android dominates the mobile OS market, doesn't it seem like if there is peer-pressure at work it would occur when it comes to Samsung products? It's funny how I have yet to hear this argument. I honestly believe that writers like Mr. Wolff have a negative view on Apple because the company gets a lot of press and it makes a good headline. The problem with his arguments like many other myths about Apple is they don't hold up when you examine the facts.


MHenage owns shares of Apple. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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