According to the great Oracle of Omaha Warren Buffett, in order to have a business that is successful in the long term, you must have a moat. This moat is one aspect of your business castle that protects and differentiates you from the knights, catapults and even trebuchets of the competition. This moat can be a variety of things, ranging from distribution networks to simple cost. For instance, according to Mr Buffett, rapper and fellow businessman Jay-Z is an exemplification of…
According to the great Oracle of Omaha Warren Buffett, in order to have a business that is successful in the long term, you must have a moat. This moat is one aspect of your business castle that protects and differentiates you from the knights, catapults and even trebuchets of the competition. This moat can be a variety of things, ranging from distribution networks to simple cost. For instance, according to Mr Buffett, rapper and fellow businessman Jay-Z is an exemplification of talent as a moat.
Like Jay-Z, Apple (NASDAQ: AAPL.US) had humble beginnings, but is now extremely successful and has been for quite some time, defending its castle from the mages at Google and dragons at Samsung to become the largest company on earth, with a present market capitalisation of around $460bn. But what magic Apple juice runs through its moat to make it so successful?
For perspective, Apple only makes 7% of its revenue on iTunes and the App Store. 60% of their revenue comes from iPhone and iPad sales, while the remaining revenue comprised sales from Mac computers and accessories.
Although Apple recently invested $100m into a US manufacturing plant, most of its devices are built by multiple contractors in Asia. In order to become a shiny new iPad Mini, a device must pass through the hands of companies like Foxconn, Guangdong Real Faith Pingzhou Electronics and even competitor Samsung. It’s a well-known fact that these original equipment manufacturers (OEMs) are not exclusive to Apple and most likely built at least part of the device you’re reading this on. It follows that hardware, or at least manufacturing, is not what differentiates Apple from the competition seeing as anyone with a dollar and a dream has access to their sourcing.
Apple does not make a lot of money on software. It does, however, pump a lot of money into proprietary software development. Why? Because that makes its devices more appealing. A glossy, well stocked App Store and Intuitive iTunes make for an appealing user experience with its exclusive devices, where it makes most of its money. Unique to Apple is the level of hardware to software integration in which each operating system and official app is 100% optimised for an Apple device. This allows for much simpler development of software less bugs caused by hardware discrepancies.
Apple software faces intense competition. If you were to search ‘Windows vs OSX’ or ‘Android vs IOS’, you would come away slightly traumatised by the intensity of the opinions of some people on the matter. I’m not going to try to tell you to buy either one, but I am going to tell you that there are pros and cons to both. Neither is perfect and neither is the end of mankind, as some forums would have you believe. That being said, Windows and Android are both dominant in their respective fields, and steep competition caused by various hardware companies push the price of a mid-range Windows PC or Android smartphone below what you would pay for an iPhone or MacBook.
Apple fans are known by many names: fanboys and sheeple are just a couple that come to mind. Indeed, the launch of a new iPhone can sometimes seem akin to the launch of a blockbuster movie title, with zealots lining streets to get their hands on that smooth Brazilian aluminium iPhone 5. Apple offers customers many opportunities to buy its products, with its many fine retail establishments lined with ‘Geniuses’ ready to go beyond the call of duty to ensure that you too can play Angry Birds.
In this Fool’s opinion, Apple’s moat is exclusivity. Taken individually, each aspect of an Apple product is not all that impressive. Its software is slick and its devices are well built, but they are in the same league with other top-tier manufacturers — and more expensive to boot. The exclusive combination is what matters.
Apple distances itself from other consumer electronics companies because no one else can offer its proprietary software. Apple is the one and only Apple. Samsung and HTC have to compete with a slew of other Android manufacturers. The level of fandom that Apple has achieved is telling of their success as it indicates that many buyers view an Apple purchase as a special experience, not just another phone purchase.
Foolish final thought
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> The Motley Fool owns shares in Apple.