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Morningstar | Apple’s iPhone Takes a Backseat at Firm’s WWDC Event, Though Remains Central to Narrow-Moat Rating

Apple’s competitive advantage stems from its ability to package hardware, software, services, and third-party applications into sleek, intuitive, and appealing devices. This expertise enables the firm to capture a premium on its hardware, unlike most of its peers. Despite its admirable reputation, loyal customer base, and bevy of unique products, the consumer hardware space can be unforgiving to firms unable to consistently satiate the customer’s appetite for more features. Given the short product cycles of Apple’s products and army of firms targeting its dominance, we do not believe Apple has a wide economic moat.Switching costs and intangible assets support Apple's narrow moat. The firm enjoys stellar returns on its devices by offering a unique user experience with its iOS ecosystem. Contrary to its peers in PCs and smartphones that rely on relatively open operating systems, Windows and Android, respectively, Apple’s walled garden approach for its popular iOS allows it to charge a premium for relatively commoditized hardware not too different from that sold by Samsung, Dell, and others. Customer switching costs are elevated for Apple users as a non-Apple iOS experience does not exist, unlike computing platforms for the Windows or Android ecosystems that boast PCs and smartphones from a multitude of firms.We view the iPhone as a revolutionary product that created the smartphone ecosystem and transitioned computing habits away from the PC. The robust app store helped foster iPhone adoption and grow Apple’s user base, with applications ranging from productivity, social media, gaming, music, etc. We foresee Apple's ongoing business coming from existing customers versus new smartphone adopters. With hardware becoming increasingly commoditized and replacement cycles potentially elongating in the long term, we expect Apple to focus on newer software and services to augment the user experience and retain customers. The firm’s additional products and services (Apple Watch, iCloud, HomePod, AirPods, Apple Pay) act as both supplemental revenue opportunities and, more importantly, critical enhancements to the iOS ecosystem that support Apple’s crown jewel: the iPhone.