AAPL - Apple Inc.

[supertutti]

^agreed 100%. There are plenty of fan boys, both for Apple and Android, and they obviously are the most vocal ones. But you don't sell 40-50m phones a qtr to fan boys. That goes to the average consumer who appreciates the ease of use and quality of the product. Apple doesn't control 95% or so of the smart phone profits because of a cult, its because people are willing to pay for quality, and have made the decision that an iPhone is a better product than a Galaxy or any other phone, no matter the price.

[giofranchi]

Gio:

 

Are you saying that Google relies too much on search and Microsoft relies too much on windows or Facebook relies too much on facebook? :-)

 

Bing

 

Well, let’s put it this way: I have pulled the trigger neither with Google, nor with Microsoft, nor with Facebook… My bad… But always better safe than sorry! ;)

Nothing wrong with lots of cash from just one product and for a limited period of time… Provided I see a strong manager who I firmly believe will make shrewd use of that cash (see my investment in LMCA).

 

Cheers,

 

Gio

 

[giofranchi]

Thank you Liberty!

Great answer! :)

 

This tread is very long… Therefore, let me ask you one more question:

 

You have already convinced me it is very hard to compete with the i-phone. If I start reading the whole thread, will I find some convincing arguments about how they are using all their free cash to differentiate away from the i-phone?

 

It is one thing to have an incredibly competitive product, quite another to predict how long that product will keep growing: no one has replaced Windows yet, though Microsoft growth has ceased to be noteworthy for some time now…

 

Really appreciate your thoughts!

 

Cheers,

 

Gio

 

[Liberty]

I don't think you're asking quite the right questions, but keep reading and thinking and I'm sure things will clarify. Rome wasn't built in a day. ;)

[abyli]

I don't think you're asking quite the right questions, but keep reading and thinking and I'm sure things will clarify. Rome wasn't built in a day. ;)

 

Totally agree! :-)

[giofranchi]

I don't think you're asking quite the right questions

 

Well… Maybe… I know very little about Apple!

Even if it is the wrong question, would you mind answering it? ;)

 

Gio

 

[giofranchi]

I don't think you're asking quite the right questions, but keep reading and thinking and I'm sure things will clarify. Rome wasn't built in a day. ;)

 

Totally agree! :-)

 

Well, sincerely I don’t believe in an investment thesis 459 pages long… Those who know lots about any topic should be able to explain quite easily why a question is the wrong one… I might have asked the wrong question, but “go and read 459 pages” surely is the wrong answer! ;)

 

Cheers,

 

Gio

 

[DCG]

A majority of Coke's sales have been one product (Coke!) for over a century.

[giofranchi]

A majority of Coke's sales have been one product (Coke!) for over a century.

 

Ok, therefore you are suggesting:

 

No, they are not differentiating away from the i-phone, and I don't think they should! Instead, I would like to see them using their cash to keep improving the i-phone for the next 100 years!

 

Have I interpreted tour thought correctly? If so, was it such a difficult answer to offer? ???

 

Gio

 

[DCG]

A majority of Coke's sales have been one product (Coke!) for over a century.

 

Ok, therefore you are suggesting:

 

No, they are not differentiating away from the i-phone, and I don't think they should! Instead, I would like to see them using their cash to keep improving the i-phone for the next 100 years!

 

Have I interpreted tour thought correctly? If so, was it such a difficult answer to offer? ???

 

Gio

 

 

No, I was simply pointing out that it's possible for companies to be successful for long periods of time with one primary product.

 

 

I do share some of your concerns though, as technology is tough to predict.

[Liberty]

A majority of Coke's sales have been one product (Coke!) for over a century.

 

Ok, therefore you are suggesting:

 

No, they are not differentiating away from the i-phone, nor and I think they should! Instead, I would like to see them using their cash to keep improving the i-phone for the next 100 years!

 

Have I interpreted tour thought correctly? If so, was it such a difficult answer to offer? ???

 

Gio

 

That's not it either. It's also a weird question. You're asking if they're diversifying. Well, they have Macs, iPads, iTunes store, App store, Apple Pay, a music streaming service, Apple Watch, Apple TV (due for a major update), and they are rumored to be working on electric cars among other things, on track to spend over 10 billion on capex/year. If the iPhone was spun-off, the remaining company would still be one of the largest in the world. But diversification away from the iPhone is still the wrong way to think about it... Anyway, I wrote a book chapter above, sorry but I have other things to do this morning.

 

And every time you write "iPhone" with a dash, a kitten dies ;)

[giofranchi]

That's not it either. It's also a weird question. You're asking if they're diversifying. Well, they have Macs, iPads, iTunes store, App store, Apple Pay, a music streaming service, Apple Watch, Apple TV (due for a major update), and they are rumored to be working on electric cars among other things, on track to spend over 10 billion on capex/year. If the iPhone was spun-off, the remaining company would still be one of the largest in the world.

 

Ok, then the answer is: you are wrong, and they are quite diversified already!... Again, such a difficult answer to offer?

 

But diversification away from the iPhone is still the wrong way to think about it...

 

Then I am sure you could explain why it is the wrong way to think about it in just a few paragraphs.

 

Anyway, I wrote a book chapter above, sorry but I have other things to do this morning.

 

Ah! Ok… Sorry to bother you then!

 

And every time you write "iPhone" with a dash, a kitten dies ;)

 

Ahah!! ;D ;D... But you are a smart guy… And you surely understand what an unworthy Apple novice like me means! ;)

 

Gio

[Liberty]

That's not it either. It's also a weird question. You're asking if they're diversifying. Well, they have Macs, iPads, iTunes store, App store, Apple Pay, a music streaming service, Apple Watch, Apple TV (due for a major update), and they are rumored to be working on electric cars among other things, on track to spend over 10 billion on capex/year. If the iPhone was spun-off, the remaining company would still be one of the largest in the world.

 

Ok, then the answer is: you are wrong, and they are quite diversified already!... Again, such a difficult answer to offer?

 

I'm sorry, I thought you knew that they had other products already, so I thought your question was "why don't they build something to replace the revenues from iPhone".

 

Then I am sure you could explain why it is the wrong way to think about it in just a few paragraphs.

 

That's what I'm afraid of, I don't think I can do it quickly without leaving a bunch of holes that I'll then have to explain... But I suppose the short answer is that they're not making siloed products, but they're building an ecosystem that is self-reinforcing. People who buy one thing are much, much more likely to buy others, and once you have a bunch you are very unlikely to switch to a different ecosystem... Barriers to exit, in other words.

 

Ah! Ok… Sorry to bother you then!

 

If it was a bother I wouldn't post, but it did feel a bit like "I want more, give me all the answers immediately right now even though you just wrote a thousand words about it that wasn't enough!".  :-[

 

Ahah!! ;D ;D... But you are a smart guy… And you surely understand what an unworthy Apple novice like me means! ;)

 

You were single-handedly hurting the brand  ;)

[Jurgis]

Investing in AAPL is very simple:

 

1. You buy stock now

2. You hold until I capitulate and buy an AAPL product.

3. You sell

4. Profit!

 

 

I promise to let you guys know when I buy an AAPL product. You can be sure that at that time there will be no one else left to buy their products and that their brand will be in a ditch.

 

You can donate part of the profit to my and your favorite charity.

 

There.

[giofranchi]

I'm sorry, I thought you knew that they had other products already, so I thought your question was "why don't they build something to replace the revenues from iPhone".

 

Mmm... Nothing to add! ;)

 

But I suppose the short answer is that they're not making siloed products, but they're building an ecosystem that is self-reinforcing. People who buy one thing are much, much more likely to buy others, and once you have a bunch you are very unlikely to switch to a different ecosystem... Barriers to exit, in other words.

 

Ok! This is good! Was it so difficult to give me the short answer?... Usually, this is how I proceed: first the short answer, if it convinces me, and only if it convinces me, then I am willing to read 459 pages! ;)

 

but it did feel a bit like "I want more, give me all the answers immediately right now even though you just wrote a thousand words about it that wasn't enough!".  :-[

 

No, you misunderstood my intentions!

 

Gio

[Liberty]

Ok! This is good! Was it so difficult to give me the short answer?...

 

Yes, because it wasn't clear what you were asking and what was implied by the question. I mostly just picked one of many possible answers out of a hat because it was short and it seemed to satisfy you, so all ends well! ;)

[abyli]

To explain to a non-iPhone user the experience of Apple products is like explaining to the fish what is life like on land... :-)

 

I wish I bought my first iPhone earlier...

[giofranchi]

Yes, because it wasn't clear what you were asking and what was implied by the question. I mostly just picked one of many possible answers out of a hat because it was short and it seemed to satisfy you, so all ends well! ;)

 

I was asking why it is not risky to have such a large percentage of revenues derived from one single product. Wasn’t it clear?

The answer: because, if you buy that single product, you get access to an entire ecosystem which offers much more than that single product and from which it is very difficult to exit.

If true, it is a good answer indeed!

One of many possible answers?! Ah! Come on! You must be kidding me! ;D

 

Gio

 

[Liberty]

Just for fun, here's another direction that my answer to your diversification question could have gone:

 

When you have a fantastic business, you don't want to dilute it by diversifying in lesser businesses (Buffett's diworsification). Visa and Mastercard shouldn't use their FCF to turn into banks, because banking is an inferior business to their core businesses.

 

Apple's main goal should be to protect the iPhone, strengthen it, and make sure it is a durable franchise. I've already explained the barriers to entry in the higher end phone market. Who's going to come in and compete toe to toe with the iPhone?

 

Then to strenghten it you can have other very good businesses (though not as great as the iPhone, because nothing on Earth is) that are complementary. So Macs make iPhones better. So do Watches and iPads and Apple TVs. It all works together, and once you've bought a bunch of apps and your family photos are synched in iCloud and such, you are a very sticky customer.

 

We know that almost everybody on Earth will have a phone, and there will always be a segment (15%? 25%? 35%?) that is ready to pay a bit more for quality. A phone (which is a misnomer, it's basically a pocket computer) is so important to everybody's life nowadays, and prices are so low compared to the value that you get, that paying a couple hundred dollars is nothing to that segment (unlike paying tens of thousands of dollars more for a top quality car -- absolute prices matter, not just % differences).

 

Some people claim that competitors will on day become "good enough" and that people will just be satisfied with the cheapest phones and that there won't be demand for anything more, but I believe that for consumer products (where the buyer is the user, unlike in corporate world), there's no such thing as a "good enough" experience. "best" is always "best" even if the low end is better this year than it was 5 years ago.

 

So then Apple has this fantastic business that is very hard for new entrants to compete with, and so far they've been defending it very well, as can be seen from growth and consumer sat ratings and switcher rates both ways and where developers still put their efforts first and such. They are returning massive amounts of FCF to shareholders via buybacks because their business is not nearly that capital intensive, and the buybacks are basically re-investing in the iPhone business because that's what they're mostly buying when they are buying shares (same as Visa and Mastercard doing these big buybacks-- they couldn't deploy that in M&A or organic growth without diluting the core).

 

Anyway... This continues, but I'll stop here.

[Liberty]

Yes, because it wasn't clear what you were asking and what was implied by the question. I mostly just picked one of many possible answers out of a hat because it was short and it seemed to satisfy you, so all ends well! ;)

 

I was asking why it is not risky to have such a large percentage of revenues derived from one single product. Wasn’t it clear?

 

 

My first answer addressed that in part. Is it risky? Well, it depends how stable the iPhone business is. Then I looked at barriers to entry, table stakes, and then added barriers to exit. Things aren't risky just because they aren't diversified. Visa and Mastercard are quite secure even if they don't have 10 equally sized business lines, same with Coke or WD40 (all very different dynamics from iPhone, of course)..

[Jurgis]

To explain to a non-iPhone user the experience of Apple products is like explaining to the fish what is life like on land... :-)

 

I wish I bought my first iPhone earlier...

 

You presume that non-iPhone user has not used/tried iPhone.

 

You presume way too much.

[giofranchi]

When you have a fantastic business, you don't want to dilute it by diversifying in lesser businesses (Buffett's diworsification). Visa and Mastercard shouldn't use their FCF to turn into banks, because banking is an inferior business to their core businesses.

 

Apple's main goal should be to protect the iPhone, strengthen it, and make sure it is a durable franchise. I've already explained the barriers to entry in the higher end phone market. Who's going to come in and compete toe to toe with the iPhone?

 

Yes! That’s what I said before: you don’t want them to diversify away from the iPhone (have I written it right this time? Ahah!!), instead you want them to concentrate on making it ever better. To this add the ecosystem stuff and you get a wonderful short answer!

 

Why all the "mystery" to get here I still don’t understand… doesn't matter! ;)

 

Cheers,

 

Gio

 

[giofranchi]

My first answer addressed that in part. Is it risky? Well, it depends how stable the iPhone business is. Then I looked at barriers to entry, table stakes, and then added barriers to exit. Things aren't risky just because they aren't diversified. Visa and Mastercard are quite secure even if they don't have 10 equally sized business lines, same with Coke or WD40 (all very different dynamics from iPhone, of course)..

 

Couldn't agree more! :)

 

Gio

[Liberty]

To explain to a non-iPhone user the experience of Apple products is like explaining to the fish what is life like on land... :-)

 

I wish I bought my first iPhone earlier...

 

You presume that non-iPhone user has not used/tried iPhone.

 

You presume way too much.

 

Apple products aren't for everybody. It's absolutely fine if you prefer something else..

 

I don't really care about market share past a certain point (need critical mass). I care more about the fact that they make something like 90% of the profits in a growing industry.

 

Profit share > market share

 

In fact, a low market share just means there's more upside potential. If they had something like 80% market share, the runway would be a lot shorter and they might more easily get in trouble with governments :)

[Viking]

I used to call on a restaurant chain in Western Canada called Boston Pizza. I thought it's business, as a restaurant chain, was selling pizza (food and drink) to consumer. I came to realize over time that their core business was attracting very wealthy individuals as franchise owners. If you got the right individuals as owners, treated them well and made them money then they would pull in their other wealthy friends to own franchises. A strong franchise group is the starting point for a successful restaurant chain. Boston Pizza has been a very successful restaurant chain.

 

What if Apple's core business is not iPhone, iPad, Mac, Watch, Apps, Music etc. What if Apple's core business is building a club of wealthy consumers and businesses? Once in the club these groups tend to be VERY loyal and tend to purchase (over time) many different devices. They also tend to upgrade devices over the years. The value of new members could be calculated with a fair bit of accuracy (discount the future revenue stream likely once they join the club).

 

Apple has a virtual monopoly in smart phones, tablets, and pc's. They will likely have a monopoly in smart watches. When I say monopoly I mean a monopoly on profits. Profits allow them to reinvest in the business, buy innovation and buy back shares (shrinking the company).

 

If I have an immediate concern with Apple it is regulatory bodies coming after them and feeling compelled to break up the company's monopoly position in profits, starting with phones. I see Apple widening the gap versus the competition (total company ecosystem) and at some point this will likely get regulators attention. I don't see other competitors as the risk in the near term (the next 3-5 years).