Business Matters: The Importance of Apple's Ecosystem

It's no secret that Apple's ecosystem is vital to the company's success. Now two of the three ratings agencies agree. Because Apple plans to access the debt markets (it will allow the company to return cash to shareholders without repatriating profits), Moody's and Standard & Poor's have rated the company's debt and assessed the valuable factors. When the agencies take a bondholder's long-term view of Apple -- not the short-term view usually taken by commentators and watchers of Apple's stock -- they see a company that differentiates itself through innovation, great products and a strong product-service ecosystem.

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In the note to its Aa1 rating (one level below the top-tier AAA rating enjoyed by the U.S. government), Moody's says Apple's rating partially reflects "the quality of the company's products and a unique cohesion of hardware and software around its Mac OS and mobile iOS operating systems have engendered stronger customer loyalty than has been typical in this sector in the past." Moody's went on to say the "stickiness" of Apple products creates "an effective annuity revenue stream" and creates a large group of users who will be more likely to try to company's products and services.
Also noting Apple's ecosystem in its AA+ rating (also a step below AAA rating), Standard & Poor's said the company "generates sustained customer interaction through an expanding array of content and service offerings, and benefits from significant customer loyalty. We believe that this, along with its track record of innovation and successful new product development, distinguishes Apple from other consumer device and electronics firms that were unable to sustain their market leadership positions in these rapidly evolving markets."
Apple's ecosystem is in good shape as the iTunes Music Store celebrates its 10th anniversary this month. Although the iPhone has received strong competition from Samsung's mobile phones, Apple is a leader in app and media downloads and its combination of hardware, software and services -- from iTunes to iCloud -- put Apple's ecosystem ahead of the ones offered by Google, Amazon and Microsoft. The effectiveness of Apple's ecosystem can be seen in the way iOS apps outperform Android apps. According to MoPub, iOS beats Android in click-through rate, share of mobile ad spending and CPM.
Apple's decision to tap the debt markets and return capital to shareholders came after criticism it was holding onto excess cash. The idea seemed to have stalled last month after shareholder Greenlight Capital withdrew its lawsuit against Apple that aimed to increase the amount of cash the company returned to shareholders. In its earnings call Tuesday, Apple announced a 15% increase in its quarterly dividend and an expansion of its share buyback program to $60 billion from $10 billion. The decision to take on debt is rooted in geography: about $100 billion of Apple's $157 billion in cash reserves is overseas and would face U.S. taxes if returned to shareholders.


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