Apple's Misunderstood Advantage

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I think Chris Baines is wrong. Apple (Nasdaq: AAPL  ) is a better buy than Microsoft (Nasdaq: MSFT  ) . Price isn't the issue. Nor is shareholder-friendliness. On each of these fronts, Mr. Softy is unquestionably the better buy. But Apple is the better innovator of these two, an advantage that Chris erroneously dismisses as transient.

"Apple must continue to innovate to fend off competitors, but history says that its odds of doing so indefinitely are next to none," he writes.

Really? How do we know Apple has to keep innovating? And, what's the context? What, precisely, does "innovating" mean? Does it mean bettering existing products? Or does it mean creating entirely new product categories? Without answers to these questions, there's no basis for claiming that Apple will one day stop pleasing customers.

What innovation at Apple looks like
Let's begin by looking at history. Tune-ups are what have transformed the Mac maker into a full-fledged iEmpire. MP3 players existed before the iPod. Smartphones existed before the iPhone. And tablet computing as a concept not only predates the iPad, but was also around when Sony was still making the Walkman.

To see how innovation works at Apple, take a look at the iPod. What really changed? Sure, the scroll wheel added elegance to the interface and the iTunes Store made buying music by the track simple, but are either of these breakthroughs in the classic sense? I'm not so sure.

For a more recent example, consider the iPad. Size is what really differentiates it, and the bigger form factor has put competitors on the defensive. Dell's (Nasdaq: DELL  ) Streak was the New Tablet Thing in May, only to become the Old Tablet Thing a quarter later.

We've no specifics for Dell's planned successor to the Streak -- all we know is that it's coming, which tells me Dell knows the Streak was never much of an iPad killer. You know what else it tells me? That Apple understands usage and experience better than its rivals, including Microsoft.

Hey, kettle! It's me, pot ... you're black.
Yes, I know, now I'm the one engaging in platitudes. Allow me to introduce some anecdotal evidence to support my point.

Months ago, I wrote that my 2G iPhone was dead. Turns out it's anything of the sort, thanks to a surprising replacement program Apple has put in place.

Specifically, Apple will replace a dead battery in a 2G iPhone by giving you ... a new 2G iPhone. I had no idea this was even possible. But according to my local Apple Store representatives, it's not only possible, but it's also the best choice economically for the company.

They say it's cheaper to use spare parts to construct a new 2G handset for me than it would be to fish out and replace the battery in my old one. Ordering the new model took minutes; getting it took two days. I paid a little more than $80 for the new iPhone, and it's been working great since.

Does anyone else see this as an innovation? I do. For $80, I can wait and see what Verizon (NYSE: VZ  ) comes up with when it introduces an iPhone for its network. I also have time to examine Google's (Nasdaq: GOOG  ) planned improvements to Android. Apple has given me choices, including the option to wait for the right moment to ditch AT&T (NYSE: T  ) .

This idea isn't new. Press reports say Apple has been toying with creating its own SIM card and is negotiating with Verizon over the cost of not doing business with Sprint Nextel (NYSE: S  ) and T-Mobile.

In each case, Apple is doing what it has always done: get closer to users, address their fundamental needs, and then freeze out partners and competitors. Mobile carriers could suffer dwindling profits as a result.

The Foolish bottom line
When it comes to Apple, innovation is a relative term. CEO Steve Jobs and his team have demonstrated a knack for innovating throughout his years at the top. Their secret has been to divine a better way for users to interact with electronic products.

So to say that Apple can't keep innovating is to say the company will, at some point, stop paying attention to what customers want. Maybe. But Paris Hilton could also one day be president of the United States. It's possible; I just wouldn't bet on it.

Now it's your turn to weigh in. Would you buy Apple or Microsoft right now? Let us know what you think using the comments box below.

Interested in more info on the stocks mentioned in this story? Add Appleor Microsoftto your watchlist.

Apple is a Motley Fool Stock Advisor selection. Google and Microsoft are Motley Fool Inside Value picks. Google is also a Motley Fool Rule Breakers recommendation. Motley Fool Options has recommended that subscribers purchase a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple and a stock position in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Apple, Google, and Microsoft and is also on Twitter as @TheMotleyFool. Its disclosure policy is irreplaceable.

Read/Post Comments (11) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 11, 2010, at 6:53 PM, bsimpsen wrote:

    This same tired argument has been trotted out before every new Pixar film. "They can't keep this up forever!"

    Well, as it happens, they can.

  • Report this Comment On December 11, 2010, at 6:55 PM, techy46 wrote:

    Sold 1000 shares of Apple at $317 (30 days ago); bought equal $$$ of Intel 7100s @ 21 and Microsoft 5600s @ 26.70; so far 155561 + 153104 = 308665 +18318 (cash pocketed) = 326,983. So far I'm 10k ahead. Plan on holding and selling half into earnings and waiting until end of Q1 to see what to do with other half.

  • Report this Comment On December 11, 2010, at 10:33 PM, ConstableOdo wrote:

    The consumers that I know are low-tech types that just love Apple's customer service. They go on and on about that. Wintards and Droidtards always say that Apple products are too expensive and certainly not worth the price, but good customer service requires a lot of overhead. After saying Apple products are simpler to use, many consumers say that customer service is some of the best they've ever had. For those that are clueless when it comes to tech, that help means a lot.

    When you're a tech-nerd, that sort of hand-holding doesn't mean much. A tech-head just buys the cheapest stuff he can and takes care of it himself. That certainly works fine, but very few consumers are tech-heads. Good customer service will keep customers coming back and as word spreads more consumers will purchase Apple products. It's really not that hard to please consumers.

  • Report this Comment On December 12, 2010, at 12:28 AM, iamtellingu wrote:

    @techy46, You should have held on to AAPL until the middle of 2011.... It'll go up to $400 a share!

  • Report this Comment On December 12, 2010, at 4:38 AM, kbear2 wrote:

    I 'foolishly' sold 1000 shares of Apple at 238 last spring after the one day market meltdown and fears of Greek insolvency. Am kicking myself though I had a purchase price of $17 each on those shares so the profit was substantial.

    Am really glad I held on to the other 1500 shares. Not planning on selling anytime soon.

  • Report this Comment On December 12, 2010, at 10:22 AM, techy46 wrote:

    @ConstableOdo - Very good analysis - The price paid for service is also why med-large enterprise that are cost sensitive tend to pick solutions that can be maintained more economicaly and are compatible with their enterprise architecture.

  • Report this Comment On December 12, 2010, at 11:45 AM, Henry3Dogg wrote:

    Apple and Mr Softy both had the option of putting Blu Ray into their machines, but could only do so if they provided a level of content security required by the content owners.

    Any good techie could have, and would have, told the management that - a) that level of content security was impractical and that b) it's implementation would cripple the OS.

    Mr Softy's marketing people would never accept that sort of nonsense from techies, and drove ahead creating Vista. The ultimate downgrade.

    Apple had the vision to not make the same mistake. Steve Jobs describes Blu-Ray as a bag of pain. But most of that pain landed elsewhere.

    The bottom line is that Apple are superb at making the right call on what to include, and at least as important, on what to exclude.

    That culture, plus an obsession with both design and build quality, and an attention to user interface that is quite unique, will ensure that Apple continue to produce products that delight customers, for many years to come.

  • Report this Comment On December 12, 2010, at 11:56 AM, techy46 wrote:

    @iamtellingyu - I think there is more % upside to Intel and Microsoft. Basically, normalize price is Apple $32/s vs Intel 22 and MS 27. Also, I wanted the 3% dividend on $300k worth $2250 per quarter.

  • Report this Comment On December 12, 2010, at 12:54 PM, westechm wrote:

    All companies eventually screw up and lose their way. So will Apple, eventually, but not for a long time. meanwhile I will continue to make money on its stock, and more importantly, enjoy its products.

    Microsoft has lost its way. It reminds me of GM in the eighties. It will stay around a long time and generate some cash for its investors but its glory days are past.

    Although Google will continue to grow and make advert money, the people who make Android phones will make lots of them but will struggle to make a profit.

    The service providers are struggling to recapture their momentum, but the genii is out of the bottle. They will no longer be able to control the market by manipulating their phine suppliers, but will have to learn to compete on the quality of their pipes.

  • Report this Comment On December 12, 2010, at 1:50 PM, xmmj wrote:

    "Steve Jobs and his team have demonstrated a knack for innovating throughout his years at the top."

    they have not "demonstrated a knack" This trivializes what they have done. They have built a corporate culture dedicated to quality, simplicity of usage, and elegance at every level. The culture is pervasive. They do not compromise their principles to some immediate, fleeting end or outside criticisms.

    In the end, so much of the criticism comes from people who do not understand passion.

    THIS is why they will continue to innovate. It is what they do.

  • Report this Comment On December 12, 2010, at 2:00 PM, xmmj wrote:

    @ c-odo

    "When you're a tech-nerd, that sort of hand-holding doesn't mean much. A tech-head just buys the cheapest stuff he can and takes care of it himself. "

    Not necessarily true. There are tech nerds who love to tinker. There are other who prefer to get their work done.

    I once documented a highly technical API by reading the code. I think that would qualify me as a techie (if not a full nerd). But I like to get my work done, not mess with the machine. I mess around in the wood shop. Much more satisfying tinkering to me. On the computer I what to edit my photos and videos, write, program, etc. I do not want to waste my time "fixing" it.

    Macs are not perfect and I have screamed at mine many times. But given my experience with MS Windows I will never even consider switching. Besides, I love the attention that Apple gives to every detail of design. Even a tech nerd can appreciate beauty.

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