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Think BR: Strong sell? Can Apple really maintain its staggering share price?

Apple's market valuation is 15 times its annual profit, but there are three reasons why the bubble could be about to burst, writes Dr Ekkehard Stadie and Friederike Gettmann of strategy consultants Simon-Kucher & Partners.

Dr Ekkehard Stadie of Simon-Kucher & Partners

Dr Ekkehard Stadie of Simon-Kucher & Partners

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A few years down the line, when we look back at the development of Apple’s share price, we’ll undoubtedly see that the launch of the iPad 2 marked the end of the Apple’s previously uninterrupted success story on the stock exchange.

Apple didn’t invent the smartphone or the MP3 player. But its own versions of these products, the iPhone and the iPod, have become highly successful thanks to effective marketing, superior design and an unparalleled user experience.

Apple even created an entirely new product segment with its popular iPad - one that other manufacturers are now trying to grab a piece of.

At US$325bn, Apple’s market valuation is now a staggering 15 times its annual profit. But isn’t the bubble about to burst?

There are three reasons why it could: Apple’s segmentation strategy, pricing strategy and business model.

Segmentation strategy:


Apple has taken the concept of segment stretching to extremes. Its products have gone from being adored by a clearly defined target group to mass popularity.

The problem is that premium design products that offer an outstanding user experience simply aren’t suitable for the mass market. In the long term, the mainstream public won’t be prepared to pay a considerable premium for stand-out design and ease of use.

When the initial hype dies down, many customers will switch to cheaper competing products instead. And that’s the catch: penetrating the smartphone market means attracting the masses.

By definition, "followers" are not willing to pay more money for innovations, so it will be hard for Apple to find buyers in this segment in the long run.

Price strategy:


Apple has tried to enforce its high-price strategy for as long as possible. Now we’re seeing a turnaround, with the new and improved iPad 2 being launched at the same price as its predecessor.

A price premium of up to 100% will not be feasible in the future mass market for tablet PCs; Apple’s target segment is too broad for that.

Its price premium is too high for new segments, and the competitors, especially Samsung, are too good and too smart not to take advantage of that.

If Apple wants to cling to its strategy of appealing to the masses, it will have no choice but to lower its prices - but its share price will suffer as a result.

Business model:


Apple has turned paid content into a successful model. No other manufacturer makes it as simple to buy content.

Initially, nobody seemed to mind too much that Apple demanded a 30% cut of content subscriptions.

But content partners have started to grumble, and are developing bypass strategies. The real danger lies elsewhere, however.

In reality, it’s the customers who will make this business model crumble. Not everyone is happy about Apple banning Flash applications, or about the omnipresent iTunes, or Apple’s attempts to decide what consumers might like to buy and how - and none of this will be accepted in Apple’s new, broader, customer segments.

No manufacturer, Apple included, will be able to handcuff mass content exclusively to a single device. Why should newspaper readers be able to read the latest headlines on a PC but not on an iPad?

Such restrictions will be less of a hindrance to loyal Apple customers, but they’ll annoy the mass public.

In light of the fierce competition, Apple will have to slacken its rigid business model, or else it won’t be able to continue targeting a wider segment. And that would be the death knell for another bastion of profit growth and share price development.

Conclusion:


The unavoidable changes to Apple’s price level and business model will put its share price under pressure. Apple is not Nokia, but neither is it worth ten times more than the world’s largest cell phone manufacturer.

Unless Apple invents another revolutionary new product, it has two strategy choices.

  • Continue with segment expansion. To be able to stay in step with the prices of competing products in the mass market, Apple will have to stretch its portfolio and its brand even further. The iPad and iPhone will need to be offered in more versions (like Apple’s Mac computers), with a range of model variants that suit buyers’ varying willingness to pay.
  • Skim existing segments more effectively and push for further growth in these segments. By delivering a unified user experience with its various products, Apple can make its customers more likely to buy products from more than one category - iPhone users entering the world of Macs, for example. The more Apple products a customer has, the closer his or her attachment to the brand.

Dr Ekkehard Stadie, partner at Simon-Kucher & Partners and Friederike Gettmann, senior consultant at Simon-Kucher & Partners.


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