How to Share the Light of a Cult Product's Halo

Financial Times, April 18, 2005, by Simon London

What is the correct market valuation for Apple Computer? The question is one of the hottest on Wall Street. The answer turns on the extent to which Steve Jobs, Apple's founder and chief executive, can convert the phenomenal success of the iPod music player into sales of computers, which account for the majority of the company's revenue.

Bulls are counting on a "halo effect". Under this scenario, consumers will be so impressed by the cute design and intuitive interface of their iPods that they buy Apple desktop and laptop computers, thus reversing the long-term decline of Apple's PC market share. At the last count, the California-based company held a mere 2 per cent share, the rest going to makers of PCs running Microsoft's ubiquitous Windows operating system on microprocessors mass-produced by Intel.

But what exactly is a halo effect? And under what circumstances have companies been able to exploit the warm glow created by one product line to transform the fortunes of others?

The good news for Apple shareholders is that the halo effect is a bona fide scientific phenomena. Edward Lee Thorndike, a US psychologist, in the 1920s asked army officers to rate their subordinates on traits such as intelligence, physique, leadership and character. He found an unexpectedly high cross-correlation: individuals who scored highly on one trait tended to score well on others, too.

Thorndike, who died in 1949, concluded that outstanding traits tend to colour our broader perception, creating a halo around an individual. The effect can also work in reverse. Attractive blondes have to fight the prejudice in some western cultures that they are stupid; discrimination on grounds of race can be rooted in a negative halo created by skin tone or bone structure.

For social psychologists, the halo effect can be a problem. Data collected from individuals will be skewed if there is carry-over from one judgment to another. For marketers, however, the it opens up a world of opportunity. Branding is based on the notion that a product carrying a brand name and logo will benefit from a halo of positive associations. A substantial proportion of all advertising is founded on the halo created by the models and athletes who endorse everything from brassieres to Budweiser.

But while Apple is hardly breaking new ground by trying to take advantage of this effect, it faces an unusual challenge.

The Apple brand is already well known. The trouble is that it has been seen increasingly as a niche brand, appealing to a loose coalition of "insiders" - graphic designers, educationalists and anti-Microsoft zealots. It a prime example of what Douglas Atkin, a US advertising executive and author, has characterised as "cult brands" - those that inspire customers to become evangelists who want to spread the word.

Until recently, Mr Jobs and his team seemed happy with this positioning. Apple computers remained premium products, priced at a healthy premium to "Wintel" alternatives and promoted mainly to the cognoscenti. Now they want to use the iPod's halo to broaden the brand's appeal, but without losing cult status.

This could be a difficult balancing act. Douglas Holt, marketing professor at Oxford university, points out that "insiders" have the power to bestow or rescind the authenticity of iconic brands. He writes: "Astute marketers of icons work to assure that insiders are at least tolerant of, if not fully supportive of, the brand's claims on the populist world."

How will the graphic design crowd feel about Apple's mass-market ambitions?

Moreover, most companies use the halo effect to lend exclusive or high-quality connotations to an already mass-market brand. Thus Ford Motor Company created its alluring GT sports car to remind the world that the old Detroit war horse can still break into a gallop. The 205mph GT was advertised as "the pace car for an entire company" - the halo effect writ large.

Mr Jobs would doubtless bristle at the comparison. He prefers to compare Apple to BMW, a purveyor of premium products that has made good profits from slender market share. But even Bavaria's finest has used the halo effect from the top down. Its luxurious 7- and 5-series saloons create the warm glow of exemplary automotive engineering that helps sell lesser cars such as the 3- and 1-series. Using the iPod to try to sell Apple computers is akin to trying to use the halo created by the Dollars 20,000 new Mini (a stylish, mass-market BMW product) to sell Dollars 70,000 sedans.

None of this is to deny the quality of the iPod's strategic marketing - not only the distinctive promotional campaigns but also the product development strategy that spawned the iPod Mini, iPod Shuffle, iPod Photo and more. As a case study in what marketers call "versioning", this takes some beating.

To this already impressive mix, Apple has even added "experiential marketing", delivered via the company's now extensive chain of minimalist Apple retail stores.

Nor is it to deny that up-market brands - even iconic brands such as Apple - can be steered successfully into the mainstream. BMW did it. Harley-Davidson did it. Nike did it. As Dave Aaker, emeritus professor of marketing at Haas School of Business at Berkeley, has pointed out, the trick is finding a brand identity that works at a wide range of prices. With its hipness, design flair and ease-of-use, Apple may have done just that.

Even so, can Mr Jobs move fast enough to satisfy impatient investors? The worry is that Apple's stratospheric valuation - the stock trades at more than 30 times this year's forecast earnings - reflects the halo of its charismatic founder as much as the money-making potential of the enterprise.