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Apple's Deal With IBM Should Strengthen Its Narrow Moat

The firm’s growth with enterprise and education customers has reinforced our view that switching costs are a key component of Apple’s moat, says Morningstar’s Brian Colello.

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Tuesday after the market close,  Apple (AAPL) and  IBM (IBM) announced an exclusive partnership to further promote and deliver iOS to the enterprise customer. The partnership plans to bring IBM's Big Data and analytics to iOS, develop over 100 industry-specific enterprise apps and solutions built solely for iOS devices, and allows Apple to leverage IBM's salesforce and enterprise customer relationships into additional iPhone and iPad device sales to corporations. For Apple, we think the partnership can only strengthen Apple's narrow economic moat, and we will maintain our moat rating and $87 fair value estimate.

We continue to base our moat thesis on switching costs around the iOS ecosystem that should allow a good portion of Apple's user base to stick with the platform for years to come. Although most iOS device sales are likely made for personal use, Apple's growth with enterprise and education customers has been encouraging. As corporations and schools build native applications and customized services around iOS, we tend to view this portion of Apple's customer base as especially likely to stick with iOS for future products. The IBM partnership should accelerate Apple's growth in the enterprise, thus expanding this stickier user base and potentially reducing the risk of Apple's tying its revenue hopes to a single product.

Beyond incremental iOS device sales, we also suspect that Apple will profit from the deal by collecting a portion of any high-margin service revenue earned by IBM on these customized native iOS apps. Finally, we view Apple's assistance in building "made-for-business" apps in the same vein as recently announced HealthKit and HomeKit for iOS 8, where Apple hopes to make the iOS ecosystem the central hub customers use to manage a variety of software, services, and other outside devices.

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Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.