Apple is likely to hit serious headwinds rolling out two innovations

Update: as of Monday morning, October 27, 2014, Bloomberg reported CVS had joined Rite-Aid is nixing Apple Pay

Apple doesn’t appear to have a lot of history successfully accomplishing change management campaigns, but, in this writer’s opinion, two recently debuted Apple iPhone and iPad innovations — a software reconfigurable SIM card, and Apple Pay ™ — will need change management to deliver on their promise.

It’s only been a a couple of weeks since the last of Apple’s big annual events, the presentation of new iPads in advance of the holiday buying season, but negative industry feedback has already hit the press for both of the above mentioned innovations. Rite-Aid corporation, which, currently, maintains a US network of 4.6K retail locations recently announced its intention to block consumers from using Apple Pay at the check out counter. AT&T also just announced its intention to stop its mobile smartphone subscribers from using the SIM reconfigurable feature built into the iPhone 6 family of smart phones and the iPad Air ver 2 mobile-connected tablets.

But both of these features are truly innovative, right? So what’s the problem? Perhaps adding some definition to the worn-out abstractions “innovative” and “innovation” helps here. Arguably products, services and even solutions cannot be judged to be “innovative”, or examples of “innovation” if they fail to streamline what this writer would refer to as the “total 360 view” of how they might be applied, implemented, and even planned for.

Apple’s software reconfigurable SIM card, and its NFC Apple Pay ™ hardware actually amount to a stake in the ground into two markets product marketing may not have planned for Apple to enter — mobile telecom, and retail point of sale (POS). But neglecting to plan for these points of entry can lead up to the kind of abrasion the public is witnessing, given the press announcements from AT&T and Rite-Aid. The phenomenon is a bit like Tesla’s changing fortunes as it finds itself dealing not only with issues familiar to automobile manufacturing, but the broader issues of employment, and the actual sales structure for satisfying consumer needs for the automobiles produced through the manufacturing effort. Tesla’s issues arose when it decided, and publicly announced its intention, of selling automobiles direct to the public, leaving out the car dealer middlemen used by every other automobile manufacturer.

In this writer’s opinion, the apparent holes in Apple’s product plan for these two new features of both its smart phone and tablet offers represent a breakdown in innovation. The holes should be filled in before Apple proceeds further. Disrupting industries and supply chains requires a lot of change management. If nothing else, these issues point to a big, new, opportunity for adoption champions to help Apple fill in the above mentioned holes.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Apple Apparently Plans on Acquiring Beats Electronics

According to an article written by Ryan Faughnder and Chris O’Brien, titled Apple may be buying Beats Electronics for $3.2 billion, which was published on the LA Times web site on the evening of May 8, 2014, on May 8, 2014, the Financial Times published a report of talks between Apple and Beats Electronics. The driver for the report amounted to a strong likelihood Apple intends to acquire Beats Electronics. A sale price of $3.2 billion is included in the LA Times article.

In a short video clip titled ‘Apple: Can-Kicking’ Alan Livsey and Joseph Cotterill of the Financial Times opine on the merits, or lack thereof, of Apple proceeding with the acquisition.

Joseph Cotterill sums up what will likely prove to be a popular investor concern about the deal: “Where else could [Apple] have spent the $3 Billion?”

Messrs Cotterill and Livsey go on to delineate why the deal fails to make a lot of sense:

  • iTunes, which back in 2008, according to Mr. Cotterill, amounted to a $16.00, per subscriber, business, is now just a $1.00 per subscriber business. He sees the Beats subscription service as, essentially, more of the same
  • Mr. Livsey characterizes Apple as the quintessential brand, and wonders why it makes sense for them to buy another heavily branded business — Beats Electronics
  • Finally, Cotterill notes Apple will not be buying the Beats Electronics hardware business, just the subscription engine they have developed, which though highly regarded, still has far fewer subscribers than Spotify

Is this Apple’s attempt to build its own SaaS, cloud offer? In other words, is the Beats Electronics subscription service Apple’s attempt to cobble together their own version of Microsoft’s highly successful Office 365 cloud SaaS offer? Certainly the target market is entirely dissimilar (SMBs and enterprise businesses on the Office 365 side, vs music lovers with a credit card for Apple/Beats side), but the recurring revenue, low maintenance, presumably high margin business is very much the objective of both attempts. Presumably we will all know a lot more about the rationale behind the deal if Apple makes a formal announcement about it.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


The March, 2014 Quarter Doesn’t Look Rosy for Apple

Kate Huberty of Morgan Stanley opened the Analyst Q&A for the Apple Q1, 2014 Conference Callwith a big one: “Revenue guidance embeds a sequential decline that’s bigger than the decline in the March 2013 quarter and, I think, implies iPhone units may not grow [year over year]” (quoted from the Apple Q1 2014 webcast, a link to which has been provided here).

Peter Oppenheimer, Apple’s CFO answered Huberty’s question as follows: “The biggest reason for the largest sequential decline in revenue relates to changes in channel inventory, and I’ll go through some detail, but let me, actually, go through somethings about the underlying [assumptions] about our guidance to indicate that our business is stronger than the guidance would imply”. (ibid)

Oppenheimer goes onto explain how Apple’s iPhone channel partners, AT&T Wireless, Verizon Wireless, T-Mobile, Sprint, etc, all “overstocked” inventory in the prior quarter. I think this topic is a big deal and indicative of the lackluster performance of high speed wireless data services, as a product, for wireless carriers.

Of course there is another reason at work here, as well, namely intense competition within Apple’s target market segment for smart phones — the high end. Nokia wants this business, as does Samsung, and Motorola.

The intensity of the competition for this market segment is so high as to, in my opinion, prompt Google to rethink its interest in 1) hosting the Android O/S, while 2) also playing the role of a major Android OEM.

So Apple’s guidance is fairly forecasting a substantial drop in revenue for iPhone sales for the March, 2014 quarter.

Let’s get back, for a moment, to the question of the actual profitability of wireless data services for carriers. Indicators including this forward-looking guidance from Apple’s Q1 2014 webcast, AT&T’s recent announcement of a decision to drop pricing on family pooled data plans, etc, all point to two important factors investors might want to keep in mind:

  1. Carriers like the recurring higher dollar revenue model of long term smart phone subscribers. They each have built versions of the same product model, subsidizing the cost of smart phone purchases, for consumers, in exchange for long term service contracts. Consumers are very challenged to break these contracts (largely as the result of contract features built in by the carriers), but, as of late, are going the distance to break them, as they require, to pursue better deals
  2. But the giveaways, service discounts, etc., which are required of each of the carriers, to prod consumers to move forward on offers, are quite pricey. These incentives have taken a toll on carrier profits. Per this quarterly webcast, evidently a number of them are pulling back on their enthusiasm and cutting orders for smart phones.

I hope the changes in the net neutrality ruling will change this picture, as carriers gain the freedom to charge higher fees of services requiring faster pipes. But recent comments from the present administration indicate a determination to revisit the ruling.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Are App Stores a Looming Cash Machine?

Consumers opting to buy a Microsoft® Surface 2 will receive a $25.00 coupon in the box, along with some other promotional offers. This coupon can only be used to purchase an item offered in the “Store” feature of the Surface 2 Start Screen. But using this coupon can be a challenge. My review of the Apps offered didn’t produce much in the way of productivity. I noted lots of games, and lots of free Apps.

So why is Microsoft including the coupon in the retail customer product package? Anyone listening to Apple’s Q1 2014 webcast Earnings Call will hear Peter Oppenheimer sum up a very large business for Apple — it’s App Store. Oppenheimer estimates “[t]he App Store now offers 1,000,000 Apps in 24 different categories, and cumulative downloads have surpassed 65 Billion”. (quoted from the Apple webcast, a link to which has been provided in this post)

These numbers are not insignificant, especially for a company like Microsoft, which, historically, has always maintained a healthy developer ecosystem. Indeed, one can argue much of Microsoft’s success across the early days, following the launch of Windows, depended almost entirely on the third party developer community and the applications they brought to the public for the platform.

Oppenheimer goes on to present an even more important number: “Our App developers earned $2 Billion from sales of Apps for the quarter”. With an annual run rate of $8 Billion, any 3rd party business simply building Apps for Apple’s App Store might be looking forward to a very promising future.

Certainly Microsoft has not been slow to learn this lesson. The $25 box stuffer coupon makes sense as a means of driving customers to pump up the Store feature of the Surface, and the Windows Phone user experience. There are challenging impediments to Microsoft successfully kick starting this business, not the least of which being the small footprint of Microsoft’s mobile devices across the broad market when compared to Apple’s iOS. So a rapid, successful ramp up in phone and tablet units sold is a mandatory requirement of launching the Windows store App effort.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Comments on Apple Q1 2014 Earnings Report

Peter Oppenheimer’s lengthy presentation at the start of Apple’s Q1 2014 Earnings Report left me with some thoughts perhaps worth consideration by some readers:

  1. Mr. Oppenheimer’s remarks, from a rhetorical perspective, are built to argue for Apple to be seen by the investment community, not as a niche player looking for the very top of the available consumers in the smart mobile device market, but, rather, as the leader in the North American market for smart mobile devices
  2. Numerous examples of enterprise business customers, and Apple customers from comparatively sized organizations in the public and the not for profit sectors are included in the preface remarks by Mr. Oppenheimer. Are they included to convince the analyst community to take Apple seriously as a vendor to the same enterprise customer base once owned by Blackberry? I think so. Readers should also note how Mr. Oppenheimer included IBM® in his remarks, much like an appeal to an authority. Perhaps IBM should take a look to ensure rigor mortis hasn’t kicked in, and the continued presence of “fire in the belly”.
  3. His remarks included comparative statements about Apple competitors, but included no mention of Microsoft® within the first 14 minutes of the webcast. Rather, his comparison about contenders in the smart phone and tablet markets were focused on Android
  4. Mr. Oppenheimer cited the IDC mobile device market report, which was published coincidental with Apple’s quarterly report. Nevertheless, the news about the IDC report (I’ve not read the report as of the publishing date of this post) includes some points at variance to the dominant position Mr. Oppenheimer claims Apple “owns” in his remarks

Here are some quick thoughts on each of the above points:

  1. In response to point 1), above: Perhaps Mr. Oppenheimer’s remarks are correct today, January, 2014 as far as the reach of Apple devices into the mainstream of the North American market for what I refer to as “small, smart, mobile devices”, But I don’t think we will listen to Mr. Oppenheimer make the same claim a year from now. From what I’ve read of the IDC report, Android devices are the fastest growing segment of the worldwide mass market for smart phones. The ultra competitive price point for Google’s Moto G smart phone, together with Microsoft’s soon to close acquisition of Nokia (and the changes in strategy and likely new attention to the lower end of the world wide market for smart phones) will certainly have a negative impact (the extent of which will have to be determined over time) on Apple’s claim.
  2. In reponse to point 2), above: Certainly Apple must be taken seriously as a vendor of choice for enterprise business customers — but only for small, smart, mobile devices. As far as the software they now ship to enable enterprise customers to manage large communities of mobile device users, I would keep my eye on Blackberry (as Citron Research has pointed out) as a real contender in this space, with the footprint required to perhaps deliver a crushing blow to Apple’s aspirations to control this market.

    I would also neither count IBM out of the market for MMS requirements, nor scoff at the improvements in market share Microsoft has likely achieved with the new Surface 2 products and the high end Nokia Lumia smart phones.

  3. In response to point 3), above: I refer, once again, to the IDC report, which notes a very strong force behind small, smart mobile devices powered by Android, world wide. I’m certain Mr. Oppenheimer has not fudged his numbers, or inflated his claims, but the future doesn’t look as promising as some of his audience might think.

    I also think Google’s Moto G is a very strong contender to both Apple and Microsoft products in the same category. The price point is “too good to be true”. I eagerly await some word from Google as to how this product is selling in the North American market.

  4. In response to point 4), above: I have more confidence in what I’ve read about the IDC report than I do in the importance of the points Mr. Oppenheimer has framed around his reading of the results. I don’t think it makes much sense to argue for Apple as the leader in the mass market for these devices. All of the steps the company has taken (at least as written about in the news) are to fortify a position as the dominant device in the very high end of the market, which makes more sense, especially over the long term, at least to me.

Disclaimer: I have no position in Apple, but am long Microsoft.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved