Apple has a sterling brand, strong product pipeline and ample opportunity to gain share in many end markets. However, short product life cycles and intense competition will prevent the firm from carving out a wide economic moat, in our view.
Today, we assign Apple a narrow economic moat, thanks to switching costs related to the iOS platform. Current iOS users may be more reluctant to stray outside the Apple ecosystem for future purchases. Much of Apple's exponential growth in recent years has been the result of building the first truly revolutionary smartphone--the iPhone--that integrated hardware and software, as well as a robust app store and ecosystem that attracted new users to the platform. Although Apple's first-mover advantage and "easy growth" from new smartphone users is over, the company should retain its existing premium customer base and could still attract some Android users over time.
We've also assigned Apple a positive moat trend. The company's iCloud offering should raise switching costs associated with iOS devices, as more customers use native Apple iOS services and Apple-only media and applications on their iOS devices and choose to upload this content to iCloud. Switching costs are also increasing as Apple enjoys strong sales of second and third hardware devices. Customers who own multiple devices would be less likely to look for alternative devices that would be incompatible with these products. Plus, these customers may be more inclined to buy even more Apple devices, including Macs, Apple Watches and Apple TVs.
That said, we don't think the switching costs are overwhelming. The short product life cycles associated with Apple's products will prevent the firm from gaining a wide economic moat. And if Apple were to ever launch a buggy, frustrating flop of a product or operating system, or if a device were to lose a significant aspect of functionality, customers might not continue to pay premiums for Apple products.
