According to a recent Bloomberg feed, Apple Inc. (AAPL) is offering refunds to Australian iPad customers, after the company was accused of misleading customers regarding the device’s fourth generation (4G) compatibility with the local network. The Australian Competition & Consumer Commission alleged that iPad advertisements suggested that it was compatible with the 4G network run by Telstra Corp. (TLS).
The new iPad, which released on March 16, 2012, across 12 countries including Australia, comprises some exciting new features and has been touted as the biggest catalyst for driving Apple’s growth story this year. The new iPad features a state-of-the art Retina display, a faster processor with the new A5X chip, quad-core graphics, five mega-pixel camera, high quality video display with 1080p HD video and 10-hour battery life.
Most significantly, the new iPad supports 4G LTE or Long-Term Evolution connectivity, which delivers approximately 10 times faster Internet speed than the 3G networks. The 4G LTE iPad is currently available from carriers such as Verizon Communication Inc. (VZ) and AT&T Inc. (T) in the US and from Bell, Rogers and Telus networks in Canada.
However, the new device, which runs both on Wi-Fi and 4G in the US and uses 700 and 2100 megahertz frequencies, is not technically compatible with the Telstra network, which operates on 1800 megahertz frequency. The commission has asked for a court injunction, which induced Apple to offer refund to its customers. Although the company has denied the allegation, the refund offering is a major setback, in our view.
This is not the first time that Apple has been blamed for misleading customers. In late 2011, Italian anti-trust authorities slapped a fine of $1.2 million (EUR 900,000) on Apple for misleading consumers regarding assistance services and guarantees for its products. Italian authorities also found Apple guilty of violating Italian customer laws. However, we believe that Australia is a much bigger and strategically important market compared to Italy, as the company intends to expand its business in the Asia-Pacific region. Hence, an injunction will not bode well for Apple’s sales, in our view.
We believe that Australia along with China is an important market for Apple. However, Apple is currently facing legal issues in the both the countries, which may hurt its growth prospects going forward. Apart from the injunction lawsuit in Australia, Apple is facing a legal dispute in China pertaining to the “iPad” trademark. We believe that any adverse ruling will not only hurt future sales, reputation and market share, but will also increase regulatory concerns going forward.
We expect Apple to forge partnerships with local telecom providers in order to increase its penetration in the Asia-Pacific region going forward. The partnerships will help it to provide devices compatible with local 3G and 4G networks, thereby boosting its subscriber base going forward. Moreover, we believe that Apple’s ability to innovate and grow in the region, where the market is more cost-sensitive, will determine the company’s fortunes over the long term.
We have an Outperform recommendation on Apple over the long term. Currently, Apple has a Zacks #2 Rank, implying a short-term Buy rating.
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