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AT&T The (Apple) Brand Destroyer

by Trace Mayer, J.D. on August 4, 2009 · 2 comments

Reading time: 10 – 16 minutes

One of the most recognized, innovative and valuable brands in the world, Apple, is under assault.  Apple has long been known for its fanatical followers, innovative solutions like a graphical user interface or the mouse and stylish products that meld hardware and software to create the best user experience possible.

With several successful product launches, the new Snow Leopard operating system which quickly rose to #1 on Amazon being available for pre-order and iPhone sales being up 700% over last year which contributed $1.69B to revenue the company looks to be doing well fundamentally.

Many within the cult of Apple are developers who build applications for the iPhone with over 65,000 currently available in the App Store.  These are developed at no cost to Apple while the developers hope to have them pass Apple’s arbitrary and discriminatory review process for inclusion into the App Store where significant revenues can be earned.  The applications add significant functionality to the iPhone and provide for a better user experience.

But with the stock price rising to about $165 the P/E has soared to 29 and it appears that speculative fervor may be beginning to boil.  Fundamentally Apple’s profitability is inextricably linked to its brand and its venerable brand is now under assault from some of its most loyal (formerly) followers.  After all, the opposite of love is not hate but apathy.

EXPLODING IPHONES

The TimesOnline reports, “Apple attempted to silence a father and daughter with a gagging order after the child’s iPod music player exploded and the family sought a refund from the company.”

The iPhone started hissing and then spontaneously combusted flying 10 feet into the air.  I have been unable to find a functioning hyperlink to the exploding iPhone app in the App Store though, sorry.  Despite Apple’s environmentally friendly advertising this is not the first example of a iPhone posing a serious health hazard.  There are many examples which can be found using Google.

AT&T – THE BRAND DESTROYER

I remember watching Steve Jobs announce the iPhone.  I was incredibly excited and made the decision that I would buy it.  When I found out that there would be an exclusive agreement with the notorious AT&T I simply held my nose.  AT&T’s core competencies include (1) damaging the customer and (2) destroying shareholder value.  For example, over the past two years since this millstone was hung around the iPhone’s neck the share price has fallen from about $42 to $27 or 35% decline.

Having been an iPhone user since they were launched and I even waited in line for hours at launch day.  I think the device is that is great (it has not exploded yet and burned down my house or car) but the relationship with AT&T has been absolutely horrible and over-priced.  AT&T does not add-value they destroy value.

One of the strategic reasons for the iPhone was to be an introductory product for Apple.  People who had never bought an Apple product would purchase an iPhone and then after a positive user experience go on to purchase a MacBookPro, etc.  Since the iPhone release Apple’s market share for smartphones, computers and operating systemss has been rising.

Most new users probably have a good experience with the iPhone so long as they ignore the massive debacles that happened during activation, do not mind being required to purchase the iPhone in an AT&T or Apple store and not online, the serious dropped calls issue and other problems.

Then there are the tethering restrictions which really, really annoy me as I travel often and if I could access the Internet with my laptop through my iPhone’s $30/month unlimited (only on the iPhone) data plan 3G connection then the user experience would be that much better.  Overall, this is all extremely frustrating for a luxury product where the cheapest monthly plan is twice what my friend pays for his cell phone.

AT&T is the likely culprit when it comes to the tethering restrictions.  Why?  So AT&T can attempt to charge more.  In fact, AT&T is the likely culprit for the activation issues because it did not want iPhones sold and then jailbroken and then used on a different cellular network.  Just blame AT&T for everything that goes wrong.

And if AT&T is not the culprit Apple should still try and shift as much blame as possible to them.  But ultimately Apple made an exclusive agreement with AT&T and therefore only so much blame can be shifted before Apple’s brand begins to be degraded by associating with brand destroyers.

GOOGLE VOICE

Another Internet behemoth is moving into the cellular market.  Google Voice, currently available by invite only, is one of the greatest innovations for handling voice communications I have ever used. To ease the burden on American solders “Military staffers with .mil addresses will receive Google Voice invites within 24 hours after requesting them”.

Want to integrate Google Voice and the iPhone in order to greatly simplify your life?  There was an app for that.  On 27 July 2009 TechCrunch reported about all Google Voice applications being excluded from the App Store.  It seems ‘a reliable little birdie’, probably through Twitter, told John Gruber of the Daring Fireball that AT&T is the chief instigator of blocking which software can and cannot be used on the iPhone.  The move has sparked many customers, developers and even the influential TechCrunch blogger and early adopter Michael Arrington to ditch the expensive and luxury iPhone.

Being in the catbird’s seat the Google spokesman throws all the blame for a sub-optimal user experience on Apple:

We work hard to bring Google applications to a number of mobile platforms, including the iPhone. Apple did not approve the Google Voice application we submitted six weeks ago to the Apple App Store. We will continue to work to bring our services to iPhone users — for example, by taking advantage of advances in mobile browsers.

Even the regulators are annoyed with their user experience being disrupted and the Dow Jones reports, “The Federal Communications Commission has launched an inquiry to AT&T Inc. (T) and Apple Inc. (AAPL) over the rejection of Google Inc.’s (GOOG) voice application for the popular iPhone.”

BRAND DAMAGE

Apple is taking marching orders from AT&T to degrade the user experience of their most loyal and lucrative customers.  Currently, Apple earns $4.8B on $32.5B in gross revenue compared to Dell which earns $2.5B on $61.1B in gross revenue.  It is Apple’s brand and their focus on the user experience that is a significant factor in the better margins.  Additionally, Apple sells premium products that are more expensive.

Apple should learn a lesson from Dell’s past mistakes.  I found that Simpson’s video on Apple Hell which must be modeled after Dell Hell which got started by a single little blog post by Jeff Jarvis who later recounted,

But the most telling moment came in a blog post by Toronto venture capitalist Rick Segal, who overheard a bank teller in his office food court saying, “I was going to buy a new Dell but did you hear about Jeff Jarvis and the absolute hell he is going through with them?”

Apple ought to get this situation of exploding iPhones and their relationship with the brand destroyer AT&T under control before they have an absolute PR nightmare on their hands.  It is a lot easier to sell another expensive luxury product to a happy customer than attempt to acquire one through intrusive advertising via failing mediums like television, magazines or newspapers.

The 29 P/E ratio is largely contingent upon the ability to acquire new customers at double digit growth rates, sell expensive luxury products and maintain high margins.  All of this when there is nothing positive about the fundamentals of the American economy and there is another massive market crash coming.  An expected 1.5M unemployed seeing their unemployment benefits cease by year end.  They are going to continue cutting any extra expense they can.

If this idea virus that Apple is intentionally degrading the user experience begins to spread it could turn into a full-fledged epidemic.  AT&T spends millions on advertising an who believes them?  Likewise every negative blog post that is written, email that is sent and conversation that is had causes damage to Apple’s brand and erodes shareholder value.

CONCLUSION

Apple has a tremendous brand and has been able to monetize it to create shareholder value.  Google also has a great brand and is working hard to leverage it to provide a better user experience.  On the other hand, AT&T is a giant brand destroyer and has targeted Apple with its Death Star.

Apple’s current P/E is contingent upon virile growth but they are making the same mistakes Dell did which prompted a community to gather and commiserate which spread the idea virus that Dell treated their customers poorly.  That stigma still has presence in the social zeitgeist.  All of this in the midst of not just a recession or even depression but The Great Credit Contraction.  I would stay away for now.

What is Apple thinking?  Caveat venditor.

Disclosures:  No position in Apple or AT&T.  Long Google.

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2 comments

ABOUT THE AUTHOR: Trace Mayer, J.D., author of The Great Credit Contraction holds a degree in Accounting, a law degree and studies the Austrian school of economics. He works as an entrepreneur, investor, journalist and monetary scientist. Follow him on Twitter. This is merely one article of 241 by .
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{ 1 comment… read it below or add one }

1 Anonymous August 6, 2009 at 2:20 pm

I believe that Apple is all about taking away our agency and their hearts are too set upon their profits. I believe that they lock their users into hardware and software that only they deem acceptable.

Just check out one of their recent Patent schemes:
http://www.appleinsider.com/articles/09/08/06/apple_working_on_device_abuse_detection_technology.html

Do you really need Big Brother on your shoulders?

Real software is about community, real software is about freedom.

Open your eyes. In the future, all software will be free, all platforms will be free and our hearts will not have to be jail broken. Long live the GPL!

http://www.gnu.org/copyleft/gpl.html

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