The debate runs deep on whether Apple (NASDAQ:AAPL) still innovates. On whether it still leads or now follows Android. Even while Apple smashes yet another sales record with the iPhone, the doubts still linger.
These doubts can never be put away. Design quality is subjective. And comparing specs does not capture everything that a smartphone is. Saying iOS is the better ecosystem is not enough, either. After all there are now more than 1 billion Android devices out there, and that's sure to capture at least some attention from the developing community.
Yet Apple enjoys another advantage regarding which few if any talk about. An advantage forged over the years, and which some other prestige non-smartphone brands also enjoy. This is the advantage I will be covering in this article. It will rapidly become evident why, as long as it last, it infuses Apple with a tremendous ability to retain its giant margins.
Apple's Insane Advantage
I can describe Apple's insane advantage with just two words: Resale value. Apple's products have extremely high resale value. And this produces a situation that's likely even more mechanical than its ecosystem in attracting and retaining customers.
Take for instance the iPhone 4S. Someone might have bought an iPhone 4S two years ago on a 2-year contract. He would have paid $199. Now, 2 years down the road and with the iPhone 5S in the market, this phone would be free of the contract obligation. The customer could thus sell it and use the proceeds towards buying the new iPhone 5S also at a subsidized $199 price. How much would the customer get for it?
According to Appleinsider.com, which put together a table of the resulting resale values, he could get anywhere from $205 to $253, and this from at least 6 different entities, some of which would even buy back the phone for cash. Indeed, he probably would be able to get even more, if he decided to try and sell it through Ebay (NASDAQ:EBAY) or Amazon.com (NASDAQ:AMZN). Even Apple itself would be in line to buy back the phone if needed, through its new trade in program, however it would offer only around $175 as per my tests.
This ability of the iPhone to retain so much value is massive and gives Apple a tremendous advantage. It gives customers the confidence to pay a higher entry price, knowing that a lot - if not all, as pictured - of that price will be retained.
Indeed, in the example above the customer would actually be able to get more from the phone than the subsidized price he paid. This leads to a very simple phenomenon: it's incredibly cheap for the customer to trade up to the new iPhone 5S, because ALL of the subsidized price can be paid simply by reselling the old model. Naturally, this greatly increases both the upgrade movement, and brand loyalty.
This is something that's also seen with other brands in other markets, for instance automobile brands such as BMW and Mercedes, where customers are not as put off to pay initial premium prices because they are aware that when reselling they'll be able to recoup most of the premium. But here this is taken to a whole new level by the fact that the retained value actually exceeds the value the customer needs to pay for the new unit, up to 2 years into the future.
This resale value is something that's pretty rare in electronics, and especially rare in smartphones. Take for instance the Galaxy Nexus, a phone launched 2 months later than the iPhone 4S. Gazelle also lists it as something it rebuys. But the price it quotes? $40.
Also from 2011 (the year of the iPhone 4S), Gazelle doesn't even list the Samsung Galaxy SII. The same goes for Usell.com, which also lists the Galaxy Nexus for even less than $40. $40 aren't going to get you new high-end phones even at subsidized prices.
In short, for smartphones, this Apple advantage is unique and massive. Other brands cannot replicate it at this moment, and as long as Apple doesn't put a foot wrong with its quality and design, this advantage is likely to endure.
The difference here
Each of Apple's advantages (quality, innovation, the ecosystem) can over time be attacked by competitors. And has been. Hence the continuing debate about Apple even while it trades at low earnings multiples.
But the resale value is an advantage that's harder to fight. There is preciously little competitors can do to increase their resale value short of offering to buy the devices themselves like Tesla does with its cars.
With there being no clear path to target this Apple advantage, this means that the advantage has more staying power. And thus that Apple's high margins are more sustainable than they look just from considering its other advantages.
We saw as much in the launch of the iPhone 5S and 5C. Yet again there were lines, yet again Apple managed a new sales record. A great deal of this was helped by its resale value advantage. After all, its loyal customers got to buy the new iPhone version for basically nothing. The benefits are clear - at the same time Apple sells an expensive high margin device, the customer expends nothing to get it. Obviously the customers are not going to try out a device where they don't expect this dynamic to exist. And they're not going to refrain from upgrading with it costing nothing, either.
While many analysts fawn over Apple's quality, brand strength and ecosystem advantages, few ever talk about another massive advantage Apple carries: The resale value of its devices. This advantage is so powerful that for many customers upgrading 2 year old devices is basically free. This ensures both a massive take up of upgrades and unbeaten brand loyalty.
Disclosure: I am short AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.