Apple’s Weakness: Customer Loyalty Has Its Limits

Xconomy National — 

If you’re ever forced to read a public company’s annual report, turn first to the “risk factors” section, which is always the most entertaining. This is where companies are required to disclose all of the things that could go terribly wrong with their businesses. It’s a Wall Street version of Edward Gorey’s Gashlycrumb Tinies (“A is for Amy, who couldn’t pay debt, B is for Basil, by unions beset”).

Take Apple’s most recent annual report. The 11-page risk factors section lists every imaginable hazard, from recession and natural disasters to the fluctuating dollar, supply chain snafus, flubbed product launches, product quality problems, lawsuits, the loss of key people, and competition from Windows and Android.

But there’s one major pitfall you won’t see described in Apple’s report—or anyone else’s, for that matter. It’s the risk of gradual decline if managers don’t sense customer dissatisfaction and respond appropriately. To my mind, this is one of the most common yet underestimated dangers faced by big, successful companies, and it’s one of the main ways they end up ceding their leadership positions to competitors. It’s what happened to Microsoft, it’s happening right now to companies like Comcast and AT&T, and it could easily happen to Apple.

Why pick on Apple in this regard, at a time when the company is generally performing well? Two reasons. First, I’m a loyal Apple customer. I get a lot of value out of my Apple devices—an iPhone, an Apple TV, a company-owned MacBook Pro, a brand-new iPad Air—and I’d like to believe that there are many generations of great Apple hardware yet to come. So it’s useful to lay out the worst-case scenarios now, in the hope that doing so will help prevent them from coming about.

Second, I’m concerned about signs that Apple is inattentive to its base. It often seems that the company would rather have buyers than actual customers. By speaking up now, I hope to do my small part to call attention to the problem before it gets out of hand.

The truth is that Apple (NASDAQ: AAPL) is in an extremely competitive business; whatever laurels it has, it can’t afford to rest on them. While Apple’s smartphone business continues to grow—it shipped 33.8 million iPhones in the third quarter of 2013, up 26 percent from the same quarter of 2012—it’s now dwarfed in this market by Samsung, which shipped more than 88 million Android-based smartphones in the same period.

The Korean electronics giant is also poised to surpass Apple in tablet shipments by the end of the year. And judging from the presentations I saw at a recent developer summit in San Francisco, Samsung has a lot of ambitious ideas about how to stitch together devices in the home, particularly phones, tablets, and TVs.

Investors seem to have a growing appreciation of the challenges Apple faces. From 2009 to early 2012—as the iPhone and iPad gained ground against a range of relatively feeble competitors—the company’s share price was on a steady upward march, quadrupling in value from $100 to about $400.

In a fit of enthusiasm in early 2012, investors then bid the price rapidly upward, driving it to a peak of $700 by September 2012. Since then, as Samsung has surged, Apple shares have settled back into the $500 range, suggesting that whatever special optimism investors were feeling about the company a year or two ago has dissipated. I think they’re right to be a little more cautious.

My vague but longstanding worries about Apple took firmer shape this week as I read a classic economics text called Exit, Voice, and Loyalty, by the late Albert Hirschman. Published in 1970, the book is about the choices available to a firm’s customers when its products or services decline in quality or increase in price. In a robust market, quality-conscious customers can express their dissatisfaction by switching to a competing product—that is, exiting. But if there aren’t any high-quality alternatives, or if the switching cost would be too high, they may decide to make some noise, in the hope of getting the company to change course. That’s voice.

One of the questions that interested Hirschman was whether loyalty—which he defined as “a considerable attachment to a product or organization”—can nudge customers toward using voice instead of exit, leaving an ailing firm more time to fix things.

I couldn’t help thinking about Apple as I read Hirschman’s analysis. The company isn’t ailing, but it certainly has a large number of highly quality-conscious customers, who are willing to pay a premium for products that they believe to be superior. As Hirschman points out, this group is often the first to protest or defect if they think quality is decreasing. And Apple, despite its reputation for perfectionism, doesn’t have a spotless quality record.

You don’t have to reach back to ancient flops like the Lisa computer, the Newton handheld, the round USB mouse, and the Power Mac G4 Cube for examples of missteps. The two most public cases in recent years were Antennagate in 2010 and … Next Page »

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8 responses to “Apple’s Weakness: Customer Loyalty Has Its Limits”

  1. morgy says:

    Solid article… one glaring mistake you made was on #3 in the customer service department… you couldn’t be more incorrect. Smug genius apple employes are far from liberal in their customer care.. in fact I will never by another apple product as long as I live and I currently have 5 apple products in use… the iPhone is a very cool device but is years behind android technology…

    • Wade Roush says:

      This probably varies by location. I’ve never had a bad interaction with the Genius Bar people — they usually just give me a new whatever-it-is.

      • starsandbeyond says:

        I wish my experiences ended that way! I’ve been to a half-dozen Genius Bars and pretty much always leave with either (a) a bill for 25-50% of the cost of the item to repair it, or (b) a still-broken whatever-it-is because I wouldn’t pony up hundreds of dollars for a repair.

        I was interested to see a comment from someone with a defective 2011 MacBook Pro, because that exact device has been my most frequent headache at the Genius Bar. $600 and three logic boards later, I’m hoping that my woes are behind me… but thousands of other affected users make that unlikely. I’ve been horrified by the way that Apple treats users with a problem that may stem from faulty hardware – it’s “user error” or “a unique issue they’ve never seen before” even in the face of ever-growing evidence that it’s endemic to the line.

  2. cynicwithtaste says:

    One element of “loyalty” that’s largely overlooked here is the lock-in associated with Apple products (or competitors like Android, for that matter). A person sets up his or her phone or tablet with desired apps, may have music on iTunes, etc. A person will move to a competing platform if that platform is sufficiently better – but there’s definitely, taking even just the apps on one’s iPhone/iPad as an example, an element of having to go to a fair amount of effort just to download and configure all of the same apps on one’s Android phone or tablet. My point being that it raises the bar on how much better a competing device needs to be, because most people won’t go through this effort for a slightly better or slightly less expensive device.

    Apple itself encourages this lock-in. The less consumer-friendly way is that it ties iTunes to iOs devices. The more consumer-friendly way is that Apple makes it extremely easy to transfer settings – including apps and how they’re organized – from an old iPhone / iPad to a new one.

    • Wade Roush says:

      I agree with your overall point that Apple tries to be a monopoly, and that lock-in is one of its tools. I think it’s a hazardous tactic to rely on, for all the same reasons I outlined in the article: it’s lazy, and it’s about imposing something on customers rather than listening to see what they really want. I’d have a difficult time with the logistics of leaving the Apple ecosystem too (I’m a Mac, iPhone, and iPad user), but if somebody came along with an alternative ecosystem where I felt more listened-to, I’d switch. Alas, I’m not sure Android has reached that point yet. And in a fragmented Android world I’d probably miss the seamless connections you get in the Apple world.

  3. Kassie says:

    I am a loyal Apple fan. Well…I was. I own every Apple device you can think of. About 4 moths ago my early 2011 MBP 17″ started acting very strange. After a visit to the Genius bar they said it could be the RAM so I replaced it. Nope…not it. Now I have an expensive logic board replacement staring me in the face. Turns out, thousands of people are having the exact same problem I have and Apple has been sitting on their hand. See the response to this thread:
    People have had logic boards replaced multiple times only to have the same problem crop up soon after. Not to mention the ios7 upgrade on my iphone has left a bad taste in my mouth too. As a result of all this I have started looking at my options outside of Apple. And I know I am not alone. I see a slowly shifting trend away from Apple unless something groundbreaking happens.

  4. alpha says:

    Another area where I see Apple manipulating its customers is by continuing to sell product that is essentially obsolete while discontinuing superior product because it no longer fits in their three-level product tiers. For example, Apple continues to sell the iPhone 4S, now over two years old, while discontinuing the superior iPhone 5. Even worse, the ancient iPad 2 is still being sold new over 2 1/2 years after its introduction.

    I can see why Apple does what it does. But come on, how long before a guy who paid $400 for a new iPad 2 is going to realize he got suckered?