A friend of mine is a software engineer by training but has been a serial entrepreneur for decades. I met him when he built a financial publishing company.
It was an interesting business. While most publishing firms are built off individual gurus, he went the opposite way. He built algorithms for options trading services. Not only did he build out a robust platform for individual investors, but he also packaged it as a research tool for the trading desks at firms like Standard & Poor’s and Fidelity. Needless to say, it was a good business.
At one point we ended up living in the same town and would talk, watch football or meet with potential start-ups in the local community.
One thing he would always tell the start-up hopefuls was, “If you want to build an app or software package, check what Apple wants and build something they would buy.”
One of his first businesses was software — before the internet was around. And his first big score was building software that Apple and its clients were interested in. From that point on, Apple was the Holy Grail for tech-related businesses.
My friend is a very sharp guy and I completely get his view on Apple.
Iterator or innovator?
But I wonder whether Apple has stopped being the “it” company that it was 10 years ago. Now it seems like a typical huge tech firm that makes iterative rather than innovative products. Gone are the days of the iPod and iPhone being new. It’s now more a cult of personality.
Sure, I get it. Tech for designers and design pros that’s easy enough for semi-computer literate people to use and pretend they’re “creators.” It has certainly worked, up to now.
There’s no doubt that, right now, Apple is too big to fail.
The same banks that built themselves up have done the same to Apple. Among Wall Street firms, banks, hedge funds and members of Congress, Apple is a top five holding. These are people with a vested interest not to see it fail. And that can be a good thing.
Too big to fail
For example, its recent earnings report shows earnings up and sales a bit slower than expected. For most companies, when their sales drop on their key product, the market buries them. Not Apple.
The stock sold off slightly and is now back on its way up.
The reason? Most analysts are saying the lack of sales is a good thing because Apple is coming out with its 10th Anniversary iPhone 8 in the fall. People are waiting until then to buy new phones, so sales are slack now.
There’s also a lot of expectation for a huge Q4 because of this new launch.
We have always believed Apple to be one of the top tech innovators out there. The challenge has now been laid out for Apple.
Putting it all on the line
A big launch for the iPhone 8 will put Apple back in the driver’s seat and buy it some more time to figure out what sector it wants to disrupt next. And, while Tim Cook is no Steve Jobs, he continues to deliver for customers and shareholders.
But the stakes are high.
The most recent concerning story from the Apple empire is the fact that it has stopped paying one of its main vendors, Qualcomm.
Qualcomm makes the chipsets that are in virtually every mobile phone in world today. You don’t buy the chipsets, Qualcomm sells them to you with a licensing fee on top so that when they’re used Qualcomm gets a cut. You see, Qualcomm also sits on scores of patents related to mobile telecom and you have to license that technology to make your phones work. Its patent portfolio brings in about a third of Qualcomm’s revenue according to TechCrunch.
While Apple is the first company to fight back, the Chinese and South Korean governments have gone after Qualcomm’s licensing structure previously. Qualcomm settled with them.
The difference here is Apple is company, not a country, where Qualcomm wants to keep its business. This is different ballgame entirely.
What’s more, Apple is continually using similar tactics with its smaller, more vulnerable partners, cutting production or walking away completely with little notice, leaving the companies shattered.
Apple advocates say it’s simply the cost of business, and if you want to win, you have to use your elbows.
Sharp products vs. sharp elbows
But being tough with your vendors isn’t what is going to keep Apple on the top of the hipster heap. It’s cool devices.
Apple needs a new “thing” to keep its empire healthy. Apple TV is nowhere to be seen. A driverless car is years away. The iWatch was a diversion.
The answer might be Apple Services which includes iTunes and Apple Music, the App Store, iCloud, Apple Pay and so on. This business generated $7 billion dollars just last quarter. Most Fortune 500 companies aren’t as big as just Apple’s services business. $28 billion a year in revenue puts it almost in the Fortune 100, ahead of entire companies like John Deere, DuPont, Philip Morris, McDonald’s, Raytheon and Halliburton.
How much Apple continues to grow its services business depends on device sales, which for the iPhone 8 might be blockbuster. The question is whether Apple is a mature tech firm that will throw off 14 percent a year (which it has averaged over the past five years) or if it is still an innovator and best-in-class consumer tech firm.
If it’s the former, it’s going to have more rather than less competition in coming quarters. If it’s the latter, it’s time to show us the goods.
There’s no reason to throw in the towel. Apple will remain a dominant consumer tech firm for decades to come. But Q4 is going to be a point of inflection.
— GS Early