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Apple's Decade: A Matter of Trust

Apple is in a good position to benefit from the trend toward more personal data on the Internet.

Editor's note: This is the third excerpt of an e-book on Apple by Jason Schwarz, an analyst at Lone Peak Asset Management in Westlake Village, Calif. Part 1 appeared Monday and Part 2 Tuesday.

If we are going to use the Internet to store our photographs, our home videos, our digital libraries, our school work, our medical records and our personal information, then we better know who controls our precious data. The only way consumers will trust putting that information online is if they trust the custodian.

For

Apple

(AAPL) - Get Apple Inc. Report

or any other company to achieve success in the era of cloud computing, it must command consumer trust. Apple already has a competitive advantage because of its success with iTunes.

For the past 10 years, more than 100 million consumers have developed a relationship with Apple through the iTunes platform. For many, this was their first experience buying products (music) online with a credit card. If Apple didn't execute music sales and the subsequent storage of that music flawlessly, it would not have been given a second chance.

The seamless integration between iTunes and the iPod is what led to the halo effect of consumers migrating to Macs. The level of trust in iTunes produced consumer willingness to take the next step. This pattern will only grow as we evolve deeper into a society dependent on digital storage.

It has become common for companies to deliver products that fail to meet expectations. Why has Apple been able to cultivate a reputation of reliability among consumers? Look no further than the expertise and precision of Chief Operating Officer Tim Cook, who was brought on board in 1998 to streamline the company's manufacturing and distribution operations.

As COO, Cook oversees Apple's worldwide operations, including supply chain, support and sales services.

Michael Janes, who was the first general manager of Apple's online store, told

Wired

in a January 2009 interview, "Tim runs Apple, and he has been running Apple for a long time now. Steve Jobs is the face of the company and very involved with product development, but Tim is the guy who takes all those designs and turns it into a big pile of cash ... he has an analyst's mind and is very organized and action-oriented; a few years ago, Larry Bossidy came out with a book called

Execution

, that book could have been Tim Cook's Bible, it could have been his biography."

New products are announced so frequently at Apple that inventory management and product introductions need to be micromanaged. One premature leak, and consumers will stop buying current models as they await the update. One unfulfilled promise, and the Apple brand suffers. Apple's operations are the tightest in the industry; the company's predictability is a major reason why consumers flock to their products.

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Confidence is high that Apple will consistently come out with up-to-date operating systems, software and hardware that meets modern demands. How many other companies will announce a new product and have it available that day? Apple's efficient capabilities can be traced to the genius of Tim Cook.

A total of 99% of respondents to a RBC/IQ ChangeWave survey in August 2009 said they were satisfied with their iPhone 3GS, with 82% of those "very satisfied." That's an improvement from the already stellar statistics on the last two iterations of the iPhone, of which 73% of customers gave a superior ranking.

Similarly, 94% of iPhone 3GS buyers said the product met or exceeded their expectations. "iPhone 3GS owners are a highly satisfied group, strongly loyal to Apple, and that Apple innovation (touch screen, software UI, applications) is what continues to lure new buyers to its smartphones," the report reads. "The benefits to Apple for achieving this premium customer satisfaction include: strong pricing power, high customer lifetime value, powerful, inexpensive viral marketing (recommend to others), increased carrier channel leverage, indirect benefits to Apple's other businesses (e.g. Macs)."

Nobody understands the importance of trust in business like management guru Stephen R. Covey. In his book,

The 8th Habit

, he explains that "Win-lose thinking is the underlying assumption of almost all negotiations and problem solving. It comes from society's scarcity mindset, which says the more the other guy wins or gets, the less there is for me ... the way to break out of this win-lose mindset is to become emotionally and mentally settled on championing the other party's "win" as much as your own. It requires courage, abundant thinking, and great creativity to not settle on anything that is a compromise for either party."

Apple products have been very profitable for the company and great to use, according to consumer surveys. The brand has a high level of trust due to this win-win philosophy. The average selling price on the iPhone is slightly greater than $600. The ASP for other smartphone suppliers is $345 for

Research In Motion's

(RIMM)

BlackBerry; $435 for the

Palm

(PALM)

Pre; $288 for

Nokia

(NOK) - Get Nokia Oyj Report

, $171 for

Sony (SNE) - Get Sony Corp. Report-Ericsson

(ERIC) - Get Telefonaktiebolaget LM Ericsson Report

, and $124 for

Motorola

(MOT)

handsets.

Now see: Apple's Decade: Innovation Kings >>>

At the time of publication, Schwarz was long Apple.

Jason Schwarz is an option strategist for Lone Peak Asset Management in Westlake Village, Calif. He is also the founder of the popular investment newsletter available at www.economictiming.com. Over the past few years, Schwarz has gained acclaim for his market calls on the price of oil, Bank of America, Apple, E*Trade, and his precision investing in S&P 500 option LEAPS. His book, The Alpha Hunter, is set to be released by McGraw Hill in December 2009.