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Antitrust Issues Pose No Threat to Apple's Performance

For Apple (AAPL) the world of mobile is poised to get very interesting, very soon. Soon the days when mobile networks, such as Verizon (VZ) and AT&T (T),in an effort to attract customers, offer deep-discount subsidies on Apple products will be gone. These subsidies have proven to be very expensive since smartphones seem to require upgrades more often than feature phones. Therefore, in an effort to continue to make a profit, many mobile providers will begin leveling off iPhone sales. Some may even stop selling the iPhone altogether. In fact, AT&T has already begun its effort to level off iPhone sales by rolling out a $150 million marketing campaign for the Nokia (NOK) Lumia 900.

I believe that Apple’s branding and innovative technologies will protect it, however, especially because many competitors’ products, including the Nokia Lumia, do not have the apps and other amenities the iPhone provides. Therefore, consumers are likely to purchase their iPhones directly from Apple, an inconvenience when compared to buying it at your mobile service provider, perhaps, but a relatively small one when compared to the many amenities, such as apps and top of the line technology, that the iPhone offers.

Reviews on Apple rarely have a negative word in them. “Innovative,” “aspirational” and “amazing” are words you’re likely to hear when you ask about the brand. Apple has certainly skyrocketed to fame and fortune, and has taken investors with it. In the fourth quarter of 2009 the company reported a profit of $17 million; two years later, in the fourth quarter of 2011, the company reported almost three times as much profit, almost $44 million. The company’s growth and innovation is thanks in large part to a stellar management team of highly qualified employees. Apple’s employees seem to have tapped in to a critical vein in the consumer market, creating branding and marketing strategies that portray products not only as pragmatic items, but rather lifestyle choices.

Despite mobile networks waning support of the iPhone, Apple stock isn’t going to go anywhere but up anytime soon. One share of Apple is currently selling at approximately $634 with a 37% return on investment and estimates for this year forecast a similar ROI.

One major reason for Apple’s success: Competitors are really few and far between. Apple’s largest competitor, Google (GOOG), reported a 25.4% revenue growth in the fourth quarter. Google’s Android system has a large app selection and good tech specifications. Android phones, which are made by a variety of companies including LG and HTC, are also cheaper than the iPhone. Other competitors are struggling. Research In Motion (RIMM) and Hewlett Packard (HPQ) both reported losses last quarter, as compared to Apple’s 73.3% quarterly growth. Both companies are struggling to remain relevant in a world dominated by apps, high-tech specs and branding that portrays products as part of a lifestyle rather than simply a convenient item.

Despite Apple’s increasing success in both technology and business innovation, there are legal complications that could mire the company’s reputation. In mid-April, the United States Department of Justice filed an antitrust suit against Apple. The European Commission soon followed suit, filing a suit with the EU court tribunal. The DOJ alleges that Apple engaged in price fixing e-books, making deals with publishers including Simon and Schuster, HarperCollins, Hachette, Penguin and MacMillan. The claim details how Apple allegedly inflated prices for digital books, agreeing to sell e-books at a price set by the publisher, receiving 30% of the sale price. This pricing model is very different from agreements publishers have with other e-book purveyors, such as Amazon, which sells most e-books for a flat $9.99. In addition, part of many agreements included a most-favored nation clause, which requires that publishers cannot sell books more cheaply to Amazon or other e-book rivals. As expected, it is the most-favored nation clause that the DOJ takes issue with most.

Three of the five publishing companies involved in the case, Simon and Schuster, Hachette and HarperCollins, have reportedly accepted deals offered by both the European Commission and the DOJ. Apple may also be able to strike a deal with the European Commission pending negotiations. However, Apple may not be signing a deal with the DOJ so soon. Signing a deal with the European Commission wouldn’t be as damaging, in terms of reputation, to Apple. More importantly, however, any agreements made would probably not impact Apple too much, considering that Apple products make the EU large sums in VAT and import tariffs. But a deal with the DOJ could negatively impact profit margins and business practices, depending on what the DOJ requests.

Apple has very deep pockets — deep enough to battle the federal government with relative ease, unlike the other companies involved in the suit — the company may just take the case to court rather than run the risk of signing a deal that could prove detrimental to business. Apple lawyers would even have a good start to the case: They could reasonably argue that the most-favored nation clause in fact increased competition, allowing e-book purveyors to take back the 90% market share that Amazon had amassed prior to the agreements between Apple and other publishers. Whether judges find this argument compelling, of course, remains to be seen.

Despite mobile and antitrust issues, there seems to be no indication of Apple’s impressive and consistently good performance slowing. The company just released a new iPad and continues to develop new hardware for its other products, including the iPod, MacBook and iPhone. By diversifying the products and technologies offered, along with Apple’s stellar branding skills, Apple is a tech giant; its star is still on the rise and, once it has reached its zenith, will rest there for the foreseeable future.

About the author:

Dividend King
I am primarily an investor interested in creating passive income streams through dividends. I focus on finding and analyzing dividend paying stocks, MLPs and REITs that are a good fit for income investors.

I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.

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