Apple (AAPL): Why Brands Matter

As the executives at Apple (AAPL) were passing around the Dom Perignon, their counterparts at other companies which design and manufacture smartphones were putting all sharp objects out of reach. In a recession, there is only so much air in any room. Smart phone sales are suffering like all consumer electronics. If the iPhone is doing extraordinarily well, others are doing badly.

What almost no one saw coming in Apple’s results for the quarter that ended in March was that the company would sell nearly 3.8 million iPhones. Most educated guesses were around 3.1 million. In a world where securities analysts send spies to Apple stores and bribe hardware component suppliers in Taiwan for data on iPhone parts shipments, experts are not supposed to be off that much. It makes them look bad, but it makes Apple look good, both for its ability to keep things secret and for building a handset that is expensive, making it a real aspirational product for many of the people who buy it. Some of the consumers walking into A&T (T) stores don’t have $299 for the iPhone and the money for the exorbitant calling plan that goes with it. They go anyway, like junkies to a dealer.

Apple netted over $1.2 billion on revenue of almost $8.2 billion last quarter. Investors must have sensed that good things were coming. The firm’s stock is up 42% this year which is unfair to people who have invested in almost any other company. The NASDAQ has only inched higher by 3% during the same period.

For investors who like to keep score. Apple’s iPhone sales likely come at the expense of Research-in-Motion (RIMM) which makes the iconic business tool, the Blackberry, and struggling also-ran Palm (PALM) which is about to release its Pre, the company’s last shot at viability. The fact that the Pre will be sold by Sprint (S) which has lower customer satisfaction rating than most short order take-out restaurants makes the future of the little company look bleak. RIMM’s stock, on the other hand, has traded up even more than Apple’s has this year. That can be attributed to either hope over reason, or the fact that a second smartphone company is doing well, which leaves even less room at the top of the handset market during hard economic periods.

RIMM is doing well enough that its revenue rose 25% in the last quarter to almost $3.5 billion. That means it is less than half Apple’s size in terms of sales, but RIMM does not sell Macs or iPods. RIMM added 3.9 million handsets in that quarter.

What does not make sense, at least at first blush, is that the financial results of all of the other major handset companies from Sony Ericsson to Nokia (NOK) to Motorola (MOT) were down. These firms can hardly give handsets away, much less sell them. Each of these operations said that global cell phone unit sales will be down in 2009. What is even more puzzling is that large handset companies don’t just make smart phones;  they make a lot of cheap phones for people in emerging markets and consumers who don’t want a handset that acts as a TV, PC, personal assistant, and objects d’art. Apple and RIMM are doing remarkably well selling products into the high end of the market.

It is usually a bad idea to try to explain things that do not make sense. It is counterintuitive that expensive phones should sell well when the economy is shrinking, the credit markets look like a dust bowl, and people are losing jobs.

The Apple and RIMM results are an example of why brands matter and why companies are willing to work to develop them by making huge investments which can stretch over decades. Apple wasn’t much of a brand until it introduced the iPod in 2001, but the firm was around for a long time before then. RIMM and the Blackberry are young in the brand Hall of Fame, a group that is dominated by Coca-Cola (KO), IBM (IBM), Microsoft (MSFT), and GE (GE). Interbrand, the Rolls Royce of global brand research, has Apple and Blackberry on its list of the 100 Most Valuable Brands. The list is not infallible; it includes Xerox (XRX), which should have left for “brand heaven” a long time ago.

A lot of people think that consumers who buy brand are suckers, the kind people WC Field used to mock in old movies. Samsung builds a smartphone that looks and works a lot like the iPhone. It is called the Instinct and Apple owners think it is junk.

A lot of experts claim to know why people buy branded products, but there are probably as many reasons as there are people. All Apple cares about is that their customers have enough money to buy an iPhone, iPod, or Mac. Suckers have money, too

Douglas A. McIntyre