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Wednesday, July 27, 2011

Apple - The Happy Brand

July 25, 2011
Apple: The Happy Brand!
Talking about Apple these days is hip. Writing anything about Apple will almost always guarantee readership. In fact, you probably will not be able to open a newspaper without finding at least one article on Apple or the man himself, Steve Jobs. [Is he really being paid $1 in total compensation?] I will agree, the company and the man are equally fascinating. The 10-K reads like a mystery novel, with interesting detail on units sold, cash on hand. The company is bold, creative, and seemingly full of financial wizards. So Jobs himself gets paid an annual salary of $1. In January, it was reported that he held 5.5 million shares of Apple stock, which right this minute is valued at $398.63 (up +1.36% today). Ergo, his stake is worth over $2 billion (according to the calculator on my iPhone). An article in the Associated Press from January 2011, claimed that Tim Cook's compensation, who currently serves as COO received $59.1 million in total compensation (including bonuses, etc.). Fascinating has also been to watch the insider trading activity at Apple. Senior Vice President of Operations, Jeffrey E. Williams, stands out with more than 7 transactions since the beginning of April as part of which he exercised stock options and sold stock worth over $8 million. According to Form 4, the stock option exercise price was roughly $46 versus the current share price of over $300. Happy times at Apple.
Company sales have increased  $19 billion in fiscal 2006 to $65 billion in fiscal 2010. 44% of net sales stem from the U.S. 39% of total sales are generated by iPhone related products and services, which equaled $25 billion in fiscal 2010. According to the 10-K, Apple sold roughly 40 million iPhones in fiscal 2010 and 7.5 million iPads. As of late September 2010, the company maintained a total of 317 retail stores of which 233 are located in the U.S. and 84 internationally. On a side note, I have seen the Apple store in London…it is almost intimidating. Much like one of the seven world wonders. It is very evident that Apple places a lot of emphasis on the buying experience in its stores. The Annual Report states that it is key to attracting and retaining customers… "genius".
But is there a worm in the apple? Without a doubt, when you grow as fast as Apple has, sustainability of that momentum is in question, and should the momentum slow, Wall Street will be ruthless. We have seen it before!!
Steve Jobs has been on and off on medical leave, smartphone adoption is outpacing adoption of Apple iPhones, and according to the WSJ today, Apple appears ill-equipped to address the low to mid level tier of cell phones. Analysts are expecting this market segment to be the future growth drivers in the space. If true, so the article, Apple's share of the smartphone market may have reached its peak.
Apple invested roughly $1.8 billion in R&D in fiscal 2010. One can only imagine what the engineers are dreaming up. But from my perspective this is a real dilemma. The Apple iPhone brand has developed into something elite, high-end, so have the companies computers (at least from my perspective). And quite frankly, the brand here has become a huge sales driver at this point, without a doubt. How do you bring that to the mid or low cost level without losing the brand equity that the iPhone has established for the Apple name? I wonder what the Apple brand is worth?  I am sure a business school case has been written on this topic. [Let's call HBS and find out.] Clearly, Steve Jobs gets it and does not allow any tarnishing of the Apple brand. An article published in Fortune earlier this year in May, clearly highlights the unforgiving and ruthless culture and importance of public image to the CEO and co-founder or the organization. [Love the org chart that was published as part of the article.]
Maybe the solution would be to develop a separate business unit and brand for lower-cost products that remains disassociated from the corporate Apple brand. Pharma companies have done so in order to develop and sell generic drugs without negatively impacting the image of its branded products.
The Apple brand is still strong despite its share of negative associations. Articles appeared on child labor employed at supplier companies as well as the poisoning of workers by n-hexane in factories in China. Yet the brand stays strong. Today, news surfaced that both Kobo, Inc. and the WSJ halted direct sales on Apple applications in rebellion against Apple's seemingly ever tightening rules regarding the sale of digital content. Let's just hope that Apple can withstand the current glory without developing a "God-complex" and remain creative and bold enough to protect its brand. Happy times at Apple.

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