Apple disappointed Wall Street by announcing an iPhone 5C that isn’t cheap. As a result, Apple’s stock price took a hit.
That’s the polite way to say it. Let’s usher all the financial industry people out of the room so I can tell you the blunt truth. Ready?
Wall Street has systemic blind spots and institutional biases that make it incapable of appreciating where Apple is headed. And they demonstrated all that this week by focusing on all the wrong things.
In general, analysts were expecting a $400 iPhone 5C. But Apple announced one starting at $549 — not a budget or low-cost phone by any measure. Apple’s stock price dropped about 5% and stayed there.
Overemphasizing the wrong information — whether or not Apple would compete in the budget smartphone category — speaks volumes about Wall Street’s myopic, misguided and clueless understanding of consumer electronics and Apple’s role in it.
Here are the five reasons why Wall Street is wrong about Apple.
1. Wall Street over-values measurable data
Unit sales and market share are perfectly measurable data points and Wall Street loves them.
It stands to reason that if Apple, a coveted brand, suddenly shipped a very low-cost phone that its unit sales and market share numbers would go through the roof.
Never mind that Apple’s current pricing strategy gives Apple most of the entire industry’s profits and that the hundreds of companies making nothing are using the low-cost approach Wall Street wants for Apple.
A huge reason for Apple’s success is a long list of unmeasurable and hard-to-measurable qualities that Wall Street doesn’t get.
For example, Apple is viewed in Asia and around the world as a luxury, aspirational brand. A cheap iPhone would tarnish that brand, erasing Apple’s difference in the market.
Another hard to measure attribute is the influence of iPhone owners. A great many celebrities and other influential people are die-hard iPhone fans in part because it’s a higher-priced status symbol.
And still another is that Apple’s pricing, marketing and positioning attracts a higher concentration of the kinds of people who spend more for apps, content, services and who at whom higher-end advertising can be aimed.
Diminishing the unmeasurables for the sake of measurables is Wall Street thinking, but not Apple thinking. In fact, the ability for a technology company to win on unmeasurables could be one definition of what makes a company visionary. Anyone can count beans.
2. Wall Street can’t think long-term
A super cheap iPhone fueled by the Apple-brand halo effect would have brought a huge jolt to unit sales and market share to be sure. But that tarnishes the halo for short-term gain.
One of the reasons public companies (like Microsoft) struggle is that shareholders force short-term thinking on companies. Instead of investing in the future and playing the long game, companies without visionary leaders short-term-think themselves into irrelevance.
Companies with visionary leaders — Amazon.com, for example — are able to push back and play the long game, and that’s why they win.
If you offer Wall Street a dollar today or ten dollars a year from now, they will always take the dollar and run.
3. Wall Street doesn’t appreciate irrational decision making around price
Behavioral economist Dan Ariely has written and spoken a great deal about how people make irrational decisions about pricing. But if you follow Ariely’s work, it’s clear that having a “cheaper” iPhone is almost as compelling as a “cheap” iPhone.
I’ll explain how this works with an oversimplified, hypothetical scenario. If you’re a middle-class Chinese smartphone buyer, your choice before (from an Apple-centric point of view) was a desirable, high-cost iPhone or a cheaper non-iPhone. This choice leads many to say, well, the iPhone is just too much of a luxury — I’d better get the Huawei.
But once Apple has their high-cost luxury iPhone, plus a second iPhone that’s $100 cheaper, a huge number of people are going to satisfy both their iPhone lust and their desire to avoid extravagance by choosing the 5C.
It’s an irrational buying choice, but that’s the point. Human decisions, especially around pricing, are irrational and easily influenced by strategically crafted options.
Wall Street assumes people make rational buying decisions. Apple understands that people do not, and that with strategic, savvy pricing, it can sell to the top segment of the budget market with a phone that really isn’t very cheap at all.
4. Wall Street doesn’t understand the power of Apple’s decommoditization branding strategy
Apple’s colorful new phones and colorful new operating system, and other attributes like the fingerprint reader and ultra high-quality camera, are decommotitization features. In the minds of consumers, Apple will be “more different” with the new colors and features.
Sure, Samsung is hard at work to build a gold smartphone. So will others. And Motorola beat Apple to market with a variety of wild colors. Others will jump on board, too.
But for awhile, Apple’s new phone look and feature set will help keep the copycats at bay for now, and more clearly differentiate Apple’s brand in the market.
5. Wall Street doesn’t understand Apple’s breathtaking plan to own identity, mobile wallets, eCommerce and more
Apple is going to kill it in the smartphone market for the next year at least. But the reason Wall Street should really be throwing money at Apple is what the company may achieve with the combination of Touch ID, iBeacons and its WifiSLAM acquisition — an opportunity I wrote about this week on another site.
In a nutshell, Apple is placing itself in the position to get micropayments from billions of online and retail transactions by authenticating the user for purchases, facilitating location-based marketing and replacing the cash register with Bluetooth-based point-of-sale.
The breathtaking fact about all this is that Apple has first-mover advantage, even though Apple is not the first-mover. They did this by building the system on Bluetooth Low Energy, a technology that has been in Apple laptops since 2011 and in all phones since the iPhone 4S. They simply throw a switch, and 200 million users are good to go — no waiting for NFC chips.
Wall Street downgraded Apple on the news this week. But that’s not because they understand something Apple does not. It means that they don’t understand Apple’s direction at all.