07 Nov 2007  Views on News

How Marketing Hype Hurt Boeing and Apple

In his latest blog entry, professor John Quelch looks at the examples of Boeing and Apple to investigate why shareholders have little patience for companies that hype high but deliver low. Key concepts include:

  • The penalties for not delivering on marketing promises are fast becoming as significant as not meeting quarterly earnings targets.
  • Do not risk marketing hype unless you are sure of both your supply curve and your demand curve. Hype can hurt stock prices and investor confidence when expectations are not met.

 

Editor's Note: Harvard Business School professor John Quelch writes a blog on marketing issues, called Marketing Know: How, for Harvard Business Online. It is reprinted on HBS Working Knowledge.

Last month, Boeing stock went wobbly on news that test flights and initial deliveries of the Dreamliner would be delayed. Apple's stock, although it rebounded after a strong earnings report, dropped six percent when the company announced a $200 price cut on the iPhone only 8 weeks after the product launched.

CEOs, often dismissive of marketing, are discovering a dangerous reality: aggressive marketing and brand-building can boost stock prices by raising customer and investor expectations. But the penalties for not delivering on marketing promises are fast becoming as significant as not meeting quarterly earnings targets.

Boeing had banked over 700 orders from 50-plus airlines when a prototype 787 was showcased to the public from behind the hangar doors on July 8, 2007. Boeing marketers had done a terrific job of positioning the Dreamliner as a step change improvement in air travel, all but blocking out news around the rival Airbus 380.

The hype had brought forward demand from the Apple afficionistas who love all things Apple.

Slight problem: the 787 was already behind on its production schedule, with multiple parts suppliers falling short of their delivery targets. Should Boeing have backed off its much-hyped coming out party? Perhaps not. New airliners have typically experienced production delays (the Airbus 380 is two years behind schedule) and customers know this when they place their orders. They will simply operate their existing 747s and 777s a little longer. In addition, no airline manufacturer ever wants to be seen to be compromising safety by rushing a project.

And the delay to the 787 is not likely to give the equally-hyped (and delayed) Airbus 380 any competitive advantage.

The story at Apple is less benign and that explains why the stock was hammered harder. The iPhone was heavily promoted at the time of its June 29 launch, resulting in long lines and spot shortages at Apple and AT&T retail stores. Despite a retail price over $500, iPhones were quickly being offered on eBay for $100 extra.

Two problems then arose: First, the reviews were mixed. At that retail price and with that level of hype, the critics were going to be tough but a raft of concerns from delayed activation and sluggish email (AT&T's responsibility as the exclusive network provider) to feature shortfalls began to dampen marketplace enthusiasm.

The hype had brought forward demand from the Apple afficionistas who love all things Apple. But these loyal customers were the very ones caught short when Apple announced a $200 iPhone price decrease 8 weeks after launch. This suggested iPhone sales had slowed considerably below post-launch expectations and might not meet holiday season targets. The stock price was punished immediately.

More significant perhaps is the possible damage to Apple brand equity among its core customers. After heavy blogging complaints about Apple exploiting its loyal followers, Steve Jobs had to apologize publicly (after a curt "That's technology" response fueled the fire) and volunteer rebates of half the price difference to those who had already bought the iPhone.

The moral of the story: Do not risk marketing hype unless you are sure of both your supply curve and your demand curve. Hype can hurt stock prices and investor confidence when expectations are not met.

Join the discussion on Harvard Business Online.