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Kass: More Bruises on Apple

Can Apple keep the well-above-smartphone-industry-average customer upgrade cycle going? With Steve Jobs gone, Apple is at risk of losing that magical Walt Disney feeling. This is what Apple had going for it. The dogs just wanted to eat the dog food -- no matter what. It was delusional at times. Apple could beat them and customers would come back and beg for more. But the company will lose this cachet. As I mentioned last week, almost all of a sudden, Apple's suite of products is becoming more expensive and no better to worse than other products on the market. Eventually, this will hurt Apple.

Importantly, Apple had really leveraged its unique customer position in a way that benefited revenue and gross margins. The company has been able to get away with some unfriendly customer practices. Examples include:

  • proprietary connectors that lock people into Apple peripherals or third-party ones on which Apple gets a royalty (we would not have had this latest connector fiasco if the iPhone 5 was on industry standard micro-USB that is much more convenient for customers who can share chargers, same points of connectivity, etc.);
  • leaving basic features out of phone launches to capture annual upgrades to the next phone (only 2 megpixel camera, no video recording, late with 4G/LTE by a year, etc.), generating excess revenue and margin from a much higher-than-average turnover rate; and
  • other customer inconveniences that give Apple more margin -- no Nand card slot, can't change battery.

Samsung picks on a lot of this stuff in the advertisement previously mentioned. All this proprietary stuff is done to capture more margin -- it does not make life easier for the consumer -- just like what Sony (SNE) tried to do all the time, and we all know how that company ended up (as well as most other proprietary tech ecosystems, with Research In Motion (RIMM) being the latest one). See this older article on the Apple "tax."

Also, Apple has started to experience Microsoft-like virus problems, and Apple's well-publicized customer service response has been dismissive and poor.

How much longer can Apple treat customers this way and extract extraordinary excess gross margins by doing so? And will as many people buy a new iPhone annually as have in the past given that the innovation curve has slowed? What would happen to Apple's revenue and margins if its customer upgrade rate regressed to industry average?

Say what you will about whether or not Steve Jobs would have let iOS 6 go out in that condition with those maps, but go play with the iPhone 5 yourself. It feels terrible. It's very light and to me feels like a toy. It needs a lead weight. I cannot believe Steve Jobs would have let it go out the door like that. He would have understood that it just doesn't feel right. That was the value of Steve Jobs -- he understood the whole picture, technical and non-technical alike.

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