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Apples Problem Is Not Product Innovation, It's Message Renewal

Alan Brew

It was no coincidence that Samsung ran an eight-page ad in the Wall Street Journal last Tuesday (April 23) trumpeting the Galaxy S4 smartphone. It was the same day Apple was to announce its financial results for the fiscal second quarter and they were expected to be bad so Samsung saw an opportunity to gloat.

While they were better than analysts expected, Apple’s financial performance was a mixed bag. Revenue was slightly higher than they were expecting. But it’s true, the company posted its first year-over-year quarterly earnings decline in a decade.

Why? There’s a perception that Apple has lost its product edge.

The iPhone, the engine of Apple’s phenomenal profitability over the last few years, is old news. Growth has slowed and the hot new S4 is giving it a run for its money.

So jittery investors have battered Apple’s share-price over the last few months. About $280 billion has been wiped off its market capitalization since its stock reached a high of $702.10 last September.

One of the biggest questions facing Apple is whether it can innovate its way out of its funk by delivering a breakthrough new product that rekindles growth and investors’ passion.

But as the Wall Street Journal reported this week, the company has another equally urgent challenge to surmount: Apple has an identity crisis on Wall Street.

Analysts are a simple bunch. They like to know what they are dealing with. They like to put companies into tidy categories and assess them against ‘comparables’ — other companies that do the same thing.

Some have Apple pegged as a traditional hardware company tied to product cycles. Other technology hardware companies such as Blackberry, Nokia, Dell, HTC and Hewlett-Packard are having a hard time of it. Once innovation slows, they quickly become commoditized by low-cost imitators. Apple is a hardware company: sell!

Other investors think differently: they believe Apple should be viewed as a software-hardware hybrid.

The distinction matters. If Apple is classified as a software-hardware hybrid, the company could be valued more like Internet and software makers that have recurring revenue streams and that often trade at higher price-to-earnings ratios than hardware firms.

Apple has characteristics that differentiate it from many other hardware businesses. Customers buy into a brand that offers ease of use similar to companies like Amazon.com. They often upgrade their Apple products annually, far more frequently than the four-year PC upgrade cycles typically found at Hewlett-Packard and Dell.

The large network of Apple stores is a place where users can get help and advice. And Apple’s operating system and iTunes software is ubiquitous. In fact iTunes now tops the charts in online video sales according to market research firm The NPD Group.

At an investor conference in February, Chief Executive Tim Cook went to the heart of the matter when he said “we don’t look at the sale of a product as our last part of the relationship with the customer. It’s the first.”

That’s the central message Apple has to position itself on. It must invent its own category, as well as new products, and tell its own story powerfully. It can’t leave it to Wall Street to tell it for them.

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