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Apple Grows Its Ecosystem, And Its Advantage

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Apple slipped off its high horse in 2015 and 2016, but has hopped back aboard and is now streaking at the front of the market.

This is not just about technicals or cheapness. The company has successfully rebuilt its business around grabbing your undivided attention. Do I have your attention?

Although the iPod and iTunes are emblematic of the transition to digitalization, for a long time investors feared Cupertino had lost its way. Alphabet, Amazon, Facebook and even Netflix all seemed to have better strategies in the new era of the cloud and streaming media.

Yet it turns out Apple had a plan, too: Its ecosystem. Now it is pressing that advantage in a big way – and it will lead to more iPhone, Watch, Macbook, accessory and subscription sales than ever. This is where the new cheaper iPad fits in.

In September 2016, a day ahead of the release of iPhone 7, Verge writer Thomas Ricker explained his devotion to Apple products even though they were no longer at the cutting edge of innovation:

“I’m from the halo generation, where my first iPod caused me to buy my first MacBook, which led to an iPhone and then an iMac and then more iPhones, iPads, and finally, an Apple TV. And all this Apple hardware begat dozens of compatible accessories including speaker docks, cradles, cables, and Kickstarter doodads, not to mention hundreds of apps and other content purchased in Apple’s stores,” wrote Ricker. “So maybe what I’m describing is akin to Stockholm syndrome. But I don’t think so, not yet, anyway. Nevertheless, I’m at the point where I judge the best device to be the device that works best in the ecosystem where I live.”

There are many more like Ricker. My daughter, for instance. She’s a junior at Purdue University in Indiana, and not too long ago her Macbook Air died. She knew I prefer Windows laptops because you get more bang for your buck, but after a couple of weeks of indecision decided to go for a new Macbook Pro because it worked with all her other devices, and it’s just still cooler than a Dell. I remember going through the same exercise a decade ago when she got her first iPod. The brand still has stunning relevance after all these years; too bad Sears never figured that out.

The aura of its brand and the lure of its ecosystem puts Apple in a powerful position. Captive customers mean robust sales regardless of the level of innovation. It also allows the company to tightly integrate products and services to put competitors at a distinct disadvantage.

For example, iPhone users can ask Siri to stream specific songs and playlists from Apple Music to any of their Apple devices. And Airpods, the dorky new Bluetooth headphones, get the same connectivity smarts. They work magically with everything in the Apple ecosystem as soon as you open their carrying case.

It’s not really magic. It’s by design. It’s a trap to keep customers captive in the Apple ecosystem. And it’s working.

“We’re making Airpods as fast as we can,” said Tim Cook, Apple chief executive at the most recent shareholder meeting, reported Business Insider . “We have a few comments from people who don’t think we’re making them fast enough, but we’re definitely working on that.”

In the workplace, Apple forged partnerships with IBM (IBM) and the German enterprise software giant SAP (SAP). They will build productivity software applications for iPhones. Since Apple’s mobile devices are tightly integrated with its MacBook computers there should be built-in efficiencies not available to traditional PCs. And that should lead to more corporate iPhone, iPad, Mac and Watch sales.

Apple shares gapped up to a record high Tuesday. Its market cap is now tops in the world at $741 billion, which is $160 billion more than its next largest competitor, Alphabet (GOOGL). Yet its forward price/earnings multiple is just 13.9x, which is barely half the level of much slower growing companies like Altria (MO) and a third the level of Amazon.com (AMZN). Yes, the most valuable company in the world is cheap.

Most of the leading technology firms found a way to monetize data, time or a combination of the two. Apple found a way to ensure its customers do not even consider buying other products. With iPhone 8 coming in the fall, and likely to be its best product in years, it's still a buy on pullbacks.

 

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