Money Matters - Simplified

iPhone 4 Unapproved: Selling Trust Cheaply

One of the most stunning things I've observed over the past years is how companies tend to take their greatest assets for granted. They can work for years to establish an advantage, and then seem not to realize how important that advantage is, and miserably fail to protect it. For Microsoft (Nasdaq:MSFT), it was the relationship with PC OEMs, which has been unmatched and formed the basis for the company's dominance. Today, those same OEMs are aggressively moving to Google's platforms, because Microsoft did not treat them particularly well. 

For Apple (Nasdaq: AAPL), it is their loyal customer base. However, Apple appears to overtly treat this base more and more as [small-f] fools. The iPhone 4 problems are a striking example for that. People will tolerate a lot of things from a vendor they trust, but being made to look foolish is not one of them. Apple seems to be crossing that line more often of late.

In case you haven't been keeping up on recent news, the iPhone 4 has issues. People are complaining of poor battery life and an excessive amount of crashing (on a phone, "excessive" is [synonymous] with any crashing), but the big problem is the antenna. Apple tried to play this off as a software problem, but a number of folks have now tested it and proven that it is a design defect. While the first two problems can be addressed with software updates, and issues aren't uncommon with brand new phones, the antenna issue is a design defect and should force a recall. However, like the case with Toyota (NYSE: TM) and its accelerator problem, this would be a massive recall, and certainly one that could bring Apple to its knees financially.

As a result, Apple tried to pass the problem off as a software issue, and the fact that Consumer Reports is confirming that it wasn't a software issue is openly questioning Apple's honesty.

Breaching trust 
Back in the 80s, when I was working for IBM, I saw a similar mistake. This was before IBM had nearly gone out of business, while it was still the darling of publications like Forbes and Fortune, and the saying, "No one ever lost their jobs picking IBM" was at its peak. Customer loyalty to IBM was unmatched in the industry, but instead of being worthy of that trust, IBM increasingly used its position to take advantage of its customers, largely because they believed that customers could not afford the costs of switching to someone else.

In short, IBM took advantage of the trust they were given. Toward the end of the 80s, those unmovable customers moved in large numbers to alternatives. IBM has spent most of the last 30 years trying to rebuild a large portion of the trust the company so easily gave up. IBM never again reached the same levels of power and profitability that once defined the company.

Most recently, we saw Toyota try to avoid a recall by first appearing to cover up a design problem with its accelerators, and then trying to pass the problem off as a trivial issue with the car mats. It went so poorly that Toyota was called in front of Congress, and the company is likely to bleed substantial market share over the next four years as a result. I'm guessing Hyundai will be the big beneficiary.

Lessons not learned 
In every case, the lesson that should be learned is that if you are honest with your customers and work aggressively to correct the problem, those customers will generally ride the problem out. However, if you are dishonest with your customers and attempt to force them to use a defective product or live under unacceptable conditions, they will begin to distrust you. People don't buy products from companies they distrust, and Apple bled trust badly in the 90s. It took Steve Jobs nearly a decade to rebuild Apple's image and success. That image and success is, regardless of how much a phone recall would cost, substantially more valuable and strategic. If folks no longer trust Steve Jobs, who is going to rebuild Apple's image this time? Mistakes like this are potentially company killers, though it often takes time for the full impact to be felt.

The iPhone 4 is Apple's Windows Vista 
What is important here isn't that Apple is screwing up with the iPhone 4. It is that we can go down a long list of companies [...] that have worked for years to build up trust and loyalty only to sell it cheaply to protect quarterly revenues. How many of us no longer trust Maytag, GE, Toyota, GM, Jaguar, Samsung, and other firms who traded trust in order to hit a quarterly number?

In the end, this is an avoidable mistake, yet it is rarely avoided, and a company behaving like Apple is with the iPhone 4 generally doesn't do so with one product, but continues until it has done massive damage to the brand and image.

In many ways, the iPhone 4 is Apple's Window's Vista and, after making fun of Microsoft for mishandling Vista, it amazes me that Apple would repeat this mistake. Consumers may not always be that bright, but vendors, including Apple, should buy a clue and realize we are not that stupid.

© 2010 UCLICK L.L.C