To be honest, I’ve never found myself too enthusiastic over Apple’s (NASDAQ: AAPL) highly-covered iPhone reveals.
Not only are there far more exciting/profitable technology companies on the public market to invest in, but the obsession over an upgraded phone has always seemed a bit melodramatic to me.
For the most part, we keep looking at the same phone, in a different package, with a few extra bells and whistles on the side.
Yes, the iPhone is very nice, but is it really worth all the hype?
This Tuesday Apple CEO Tim Cook got up on stage in front of a cult-like crowd filled with enthusiastic Apple fan boys (and girls) to reveal the company’s latest products.
The room was lit with a dim purple hue — the kind you might normally see in a posh New York City nightclub. Tim was wearing his trademark dark blue, untucked button-up with a mismatched pair of pants — the kind of outfit you normally wouldn’t see in a posh New York City nightclub.
“We are launching,” Tim takes a very dramatic pause “…the biggest advancement in the history of iPhone!”
Gasps!
Awes!
The crowd erupts into excitement!
But for the most part there’s nothing to really be all that excited about. Bigger screens? Yeah, that’s cool, but Samsung did that already. So did HTC, so did Huawei, and so did LG.
A new smartwatch? Again, you’re late to the game, Cook.
“The most beautiful screens” in all of mobile? Yeah, well, that’s just, like, your opinion man.
Playing Catch Up
The truth of the matter is that Apple’s Tuesday reveal, more than anything, highlighted how much the company needed to catch up with its competitors, and why it should no longer be viewed as an innovative player in tech.
Investors still looking at Apple in this light need to err on the side of caution. Yes, the company is still relatively cheap with a P/E around 14, but don’t expect the bull market to continue forever.
Apple’s entire success has hinged on its ability to establish two things: The first is innovative products, and the second is a dominant brand name.
The company still maintains the latter, but brand recognition can only carry you for so long. Ultimately you need to offer a better or more exciting product than your competitors, or that recognition will fade away.
Just think about all the iconic brands that were once idolized but have faded into the background: Quiznos, MTV, Blackberry, JC Penny, Nokia, Abercrombie and Fitch. The list could go on for pages.
The reality is a name does not make a company great — its products do — and at this stage of the game, Apple is becoming just another basic player in the mobile market.
Other companies are offering comparable devices and selling them at better prices. The consumer market doesn’t catch onto this overnight, but it does over time. When you take into account the rapidly falling price of smartphones, you realize just how much trouble Apple is in.
Credit: Kleiner Perkins
Apple’s management knows very well that growth in mobile isn’t coming from premium products anymore. The company even admitted in 2013 “Consumers want what we don’t have,” referring to the non-premium smartphone market.
This is why Apple tried its hand at lower-margin phones with the release of the iPhone 5c, but the success of that launch remains in question. With no iPhone 6c revealed this Tuesday, it seems that the company is abandoning the strategy.
Unfortunately for Apple, the majority of growth in mobile is coming from first-time users and sub-$300 products taking advantage of Android’s open platform. This is is why the global market share by mobile platform has trended as follows:
Credit: IDC & BI Intelligence
In just five years, Android has been able to take over approximately 80% of the global smartphone market. Apple has been able to maintain its place, but the growth just isn’t there. From a price standpoint, Apple simply can’t compete with players like Samsung, Lenovo, and Huawei.
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Money Goes Mobile
If Apple revealed anything on Tuesday that could possibly represent a bullish case for the company then it’s the introduction of mobile payments. Again, this is nothing new (Samsung unvelied mobile payments for the Galaxy S5 back in February in conjunction with PayPal), but Apple did a pretty decent job building its online wallet, AKA Apple Pay.
Apple Pay allows users to make purchases by holding their phone near a sensor, and is expected to be accepted at more than 220,000 merchants on the product’s launch. Apple will collect swipe fees from banks for Apple Pay transactions.
This is the right direction for Apple to be moving, considering that money spent through mobile proximity payments increased 115% last year to $1.6 billion, according to eMarketer.
The mobile payment market has plenty more room left for growth too, with just 8% of U.S. smartphone owners using mobile payments last year. The introduction of Apple Pay will definitely add some additional fuel to the fire.
The main hurdle though is convincing users that they can completely replace their wallet with their iPhone. These payments require proximity sensors, and the reality is that not everywhere is going to be outfitted with the appropriate technology right away. What use is Apple Pay if you still have to carry around your regular wallet anyway?
The primary benefit of a mobile wallet is convenience, and Apple is only partially providing that. Arguably, it’s easier to swipe a card than having to verify a payment on your iPhone, so other than the novelty of it all, there seems to be little incentive to use the application. Additionally, having your payment information transmitted through radio waves can feel a bit insecure.
Over time though, retailers and the public will eventually warm up to these payment methods, just as they did with the adoption of credit cards. When that happens, there will be no more need for wallets in the vast majority of transactions.
Players like Apple and PayPal will benefit from this trend, but the real winners will be NFC (near field communication) chip makers and biometric authentication companies.
Currently, the major manufacturers include Texas Instruments (NASDAQ: TXN), STMicroelectronics (NYSE: STM) and NXP Semiconductors (NASDAQ: NXPI). There are also several small caps in the field worth keeping an eye on, but we won’t mention those today.
Until next time,
Jason Stutman
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