I normally confine my comments to top-down analysis and I normally don`t make my personal opinions on legal and political issues like the current case of Apple vs. the FBI, but a comment by John Oliver makes many of the issues much less black and white (via Barry Ritholz).
I know that Apple (AAPL) has made various legal arguments about why they shouldn’t be compelled to help the FBI crack the code on that iPhone in question, but the commercial stakes for AAPL are much higher than that. Cooperating with the FBI would breach the Apple’s competitive moat and has the potential to spell the downfall of the company.
Here is one aspect of the AAPL moat that I have not heard any analyst raise. When you buy an Apple device, you are not just buying an iPhone, iPad, etc., you are buying into an enclosed ecosystem with security features.
One of the reasons why I have stayed with iPhones is the implicit strength of the Apple moat. There is no doubt that a number of competing smartphones have superior features, but I know that if my iPhone, which is operated according to manufacturer specifications (not jailbroken, updated with the latest software), gets hacked, Apple will move heaven and earth to fix the problem and make me whole at any cost. If it costs them $1 billion, they’ll spend $1 billion. If it costs them $5 billion, they’ll spend $5 billion. Otherwise, Tim Cook et al knows that they might as well kiss the entire Apple franchise goodbye.
Now imagine if a Samsung Android phone got hacked. Responsibility is far more diffuse. There will be lots of finger pointing. The problem isn’t Android, it’s Samsung, or the wireless carrier and so on.
No doubt Tim Cook remembers the cautionary tale from back in 2013 when Blackberry relented and gave India’s security services its codes so that the could read messages on its BBM messaging system:
According to leaked Indian government documents seen by the Times of India, “the lawful intereception system for BlackBerry Services is ready for use”.
Once implemented, the system will allow the Indian government to track emails and email attachments in real time; to see when BBM messages have been delivered and read; and to intercept web browsing data, according to the report.
Crucially, the Indian government appear to have dropped previous demands to have access to BlackBerry’s Enterprise servers, which carries BlackBerry’s corporate email services. Instead, BlackBerry will have to notify the authorities about which companies are using the Enterprise service.
At that time, Apple was strong in iPhones in the consumer product segment, but Blackberry was still strong in the enterprise space. That Blackberry decision turned out to be a momentous error as it willingly allowed its moat to be breached. If you are willing to give your codes to India, how many other country will you give your code as the price to gain access to that market?
It marked the beginning of the end for Blackberry as a device maker.
I have my opinions as to whether AAPL should cooperate with the FBI, but that’s not what’s at stake here. What’s at stake is the future of the AAPL franchise itself.
If the US government wins its case, it will mark a long-term sell signal for AAPL stock.