AAPL - Apple Inc.

[txlaw]

Here is a pretty good response to your theory:

http://stratechery.com/2013/clayton-christensen-got-wrong/

 

While I disagree with your analysis, this is exactly my point. If the above rational beliefs are priced into AAPL (and will always be priced into AAPL), it is unrealistic to expect further (relative) multiple expansion. Any remaining discount to fair value (if it exists) will never close.

 

Last year, the market was pricing in a doom scenario. The doom discount is now gone. The easy money has been made. So, as you say, it is now a matter of handicapping. And while it is tempting to bet against those wall street bozos, as a disciplined investor, I prefer a bigger margin of safety.

 

Yeah, the Stratechery post is always the response I get to my posts about commoditization in the context of disruptive innovation theory. 

 

While I think that Thompson is right to note that consumer buyers behave differently than business buyers, he goes way too far to justify why there is no "commoditization" with consumer products and why Apple is different.  He relies primarily on the notions that Apple devices are indeed "superior" products, and that consumers tend to heavily weigh user experience over price, unlike business buyers (which I think is wrong, btw -- business buyers often care about UX and design, not just price).  That is, it's much harder to get to "good enough" with a consumer product. 

 

Thompson says the following: "Some consumers inherently know and value quality, look-and-feel, and attention to detail, and are willing to pay a premium that far exceeds the financial costs of being vertically integrated."  He also says: "Modular providers can not become 'good enough' on all the attributes that matter to the buyers."

 

This, of course, completely ignores the idea that modularization can, in many ways, improve the user's experience with a product (e.g., better keyboards and multiple screen sizes).  Or that modular products can actually have a look and feel, and attention to detail, for some attributes that are far superior to a vertically integrated solution.  People who are really into Apple always think that every single attribute in an Apple device is perfectly designed to optimize the user experience when, in reality, there are many inferior attributes to an Apple product because of the product teams' blind spots, unmovable opinions on how something ought to be designed, or simply lack of expertise.  Thompson is expressing design geek thinking that favors Apple's way of doing things in a way that appears to be objective, but really isn't.

 

Thompson even goes so far to state that "the idea that Apple is going to start losing consumers because Android is 'good enough' and cheaper to boot flies in the face of consumer behavior in every other market."  First, this is just demonstrably false -- there are countless examples of buyer behavior in consumer markets where "good enough" does occur, which does not mean that the "high end" disappears, as I've pointed out before.  Second, Thompson doesn't really address the true nature of the debate over AAPL valuation, which is not about losing an absolute number of consumers, but rather about how "commoditization" effects the size of the profit pool that can be captured on an annual basis and what Apple's run rate for capture will be going forward.

 

So, as you can see, I think Thompson's analysis is very flawed, but of course others will disagree with me on this.

[KCLarkin]

So, as you can see, I think Thompson's analysis is very flawed, but of course others will disagree with me on this.

 

In theory, what you say should be correct. In practice, the numbers don't back up your theory. Mac is a 30 year old product with a much weaker competitive position than the iPhone. Yet it generates almost half of PC industry profits.

 

 

[Liberty]

What are those modular things that Apple can't do?

 

They've just increased the flexibility of iOS tremendously with iOS 8 (while keeping the security, which Android lacks). Third party keyboards, extensions allowing all kinds of apps to inter-operate and new kinds of apps to be created, more cloud access for their developers and users, better and more flexible tools for their developers, etc.

 

Different screen sizes has always been something that Apple could do, even if they haven't chosen to do it so far. But that's likely coming soon. And I don't see 37 sizes as better than 2-3. In fact, worse for many reasons.

 

Services from third party companies run on iOS and OSX. In fact, they all want to be on this higher end platform because it's quite profitable. And the App store is the ultimate modular platform.

 

modular products can actually have a look and feel, and attention to detail, for some attributes that are far superior to a vertically integrated solution.

 

I had to read this one twice to realize the "for some attributes" clause. Yes, indeed, Apple isn't the best at every single thing. But it's the best overall, and that's what matters for most high-end customers in the real-world, and the control that they keep over the whole experience is necessary for them to be as good as they can be. They're not good because they're integrated, though. If they had bad taste and technology, being integrated would only allow them to screw things up worse. But when you're good, being integrated allows you to get the most out of your skills rather than handing off your half-finished baby to someone less talented so they can add their own touch to your work.

 

It's kind of tautological to say that the way to avoid commoditization is to differentiate yourself. But how can Android makers differentiate themselves if they all run the same software and a lot of the same hardware? How can the software be the very best if it's not designed with the specific hardware in mind? How can the hardware be the best if the hardware maker has limited control over the software that will be on its product (and probably doesn't even know what the software will be able to do by the time its hardware design cycle is over)?

[KCLarkin]

It's kind of tautological to say that the way to avoid commoditization is to differentiate yourself. But how can Android makers differentiate themselves if they all run the same software and a lot of the same hardware? How can the software be the very best if it's not designed with the specific hardware in mind? How can the hardware be the best if the hardware maker has limited control over the software that will be on its product (and probably doesn't even know what the software will be able to do by the time its hardware design cycle is over)?

 

The most likely outcome is a race to the bottom for Android. I see the gap between iPhone and Android widening not shrinking. This might still put pressure on AAPLs margins though.

[txlaw]

So, as you can see, I think Thompson's analysis is very flawed, but of course others will disagree with me on this.

 

In theory, what you say should be correct. In practice, the numbers don't back up your theory. Mac is a 30 year old product with a much weaker competitive position than the iPhone. Yet it generates almost half of PC industry profits.

 

And what has happened to the profit pool for the PC industry? 

[Liberty]

So, as you can see, I think Thompson's analysis is very flawed, but of course others will disagree with me on this.

 

In theory, what you say should be correct. In practice, the numbers don't back up your theory. Mac is a 30 year old product with a much weaker competitive position than the iPhone. Yet it generates almost half of PC industry profits.

 

And what has happened to the profit pool for the PC industry?

 

It's maturing, but a big part of the decline is because PCs are being cannibalized by tablets and smartphones. Two areas where Apple dominates profit-wise. It's similar to how Apple cannibalized its iPod business with the iPhone (people didn't stop wanting to listen to music, they just got their fix elsewhere -- people don't stop needing computing devices, they just get different ones).

 

Until something displaces smartphones and tablets, I'd say there's still a pretty good runway ahead of us.

 

The good news is that the replacement cycle is a lot shorter with phones than PCs (for a larger variety of reasons than why PCs are upgraded -- this isn't just about specs). I expect the iPhone 6 to show us the mother of replacement cycles, as people with iPhones 4 and 4s upgrade en masse.

[txlaw]

What are those modular things that Apple can't do?

 

They've just increased the flexibility of iOS tremendously with iOS 8 (while keeping the security, which Android lacks). Third party keyboards, extensions allowing all kinds of apps to inter-operate and new kinds of apps to be created, more cloud access for their developers and users, better and more flexible tools for their developers, etc.

 

Different screen sizes has always been something that Apple could do, even if they haven't chosen to do it so far. But that's likely coming soon. And I don't see 37 sizes as better than 2-3. In fact, worse for many reasons.

 

Services from third party companies run on iOS and OSX. In fact, they all want to be on this higher end platform because it's quite profitable. And the App store is the ultimate modular platform.

 

modular products can actually have a look and feel, and attention to detail, for some attributes that are far superior to a vertically integrated solution.

 

I had to read this one twice to realize the "for some attributes" clause. Yes, indeed, Apple isn't the best at every single thing. But it's the best overall, and that's what matters for most high-end customers in the real-world, and the control that they keep over the whole experience is necessary for them to be as good as they can be. They're not good because they're integrated, though. If they had bad taste and technology, being integrated would only allow them to screw things up worse. But when you're good, being integrated allows you to get the most out of your skills rather than handing off your half-finished baby to someone less talented so they can add their own touch to your work.

 

It's kind of tautological to say that the way to avoid commoditization is to differentiate yourself. But how can Android makers differentiate themselves if they all run the same software and a lot of the same hardware? How can the software be the very best if it's not designed with the specific hardware in mind? How can the hardware be the best if the hardware maker has limited control over the software that will be on its product (and probably doesn't even know what the software will be able to do by the time its hardware design cycle is over)?

 

Well, now we're starting to get into subjective discussion about design and user experience, which is something I wanted to avoid. 

 

But what I'm saying is that a consumer's choice re: Android vs. iOS is not about some vague notion of overall user experience being "better" with Apple's stuff.  The reality is that if you are a consumer that really values a large screen over most other attributes with a smart phone, you could easily find a particular Android device superior to an iPhone.  Plenty of people I know have made that very trade-off -- they used to be iPhone users, but they switched to a Samsung or Nexus device solely because of the large screen.  There are other Android device attributes that were clearly superior to iOS, and people went with those Android devices for those attributes.  Apple gets this, as there are a number of Android device attributes that will be cribbed by Apple for iOS 8.  No shame in that -- it's great that there is competition that is forcing Apple to better its products. 

 

So will Apple add attributes that the modular providers are already providing?  Absolutely yes.  But let me turn the question around: What's to stop Android manufacturers who are dealing with a modular (some would say, "fragmented") hardware solution from doing what Apple does?

 

The answer always seems to be that hardware and software integration is necessary to make a product that works optimally for people.  And that is true in the beginning stages of a hardware product.  It's why the Apple Macs were better than IBM and Wintel PCs.  But that changed over time.  Or at least, the modular solutions became comparable enough to the point where price became a huge determinant of consumer purchasing decisions. 

 

Or the alternative answer is that Apple is just flat out better in design than everyone else, and nobody else will ever be able to compete with that design-thinking moat.  Clearly, I don't agree with that. 

 

I happen to believe that the innovation gap between the more modular solutions and the integrated solutions is closing.  If you don't believe that, then there is just a fundamental difference of opinion there.  You'll never be convinced that the modular solutions can be good enough to change the way the profit pool is constituted for Apple.

 

In the interim, though, you will see manufacturers customizing and re-branding Android to create a very nice experience that is comparable to Apple, though not completely similar because modularity will still be baked into the solution to a large degree.  We know Samsung does this.  Xiaomi does this.  Amazon will probably do this with their smartphone.

 

We'll just have to see how this all plays out over time.  We're in the early innings right now.

[Liberty]

The reality is that if you are a consumer that really values a large screen over most other attributes with a smart phone, you could easily find a particular Android device superior to an iPhone.  Plenty of people I know have made that very trade-off -- they used to be iPhone users, but they switched to a Samsung or Nexus device solely because of the large screen.

 

True (if they really value the screen size over "most other attributes"), but what I said is that nothing prevents Apple from having larger screens. It's only a temporary advantage for these Android makers. Apple's advantages are a lot harder to replicate, unlike what you seem to think. You wrote:

 

"What's to stop Android manufacturers who are dealing with a modular (some would say, "fragmented") hardware solution from doing what Apple does?"

 

Nothing. But as I said, it's not the approach that makes them good. It's necessary, but not sufficient. If Samsung started to design its own software and services, it wouldn't magically be good at it. That stuff is incredibly hard to get right. Google tried more hardware with Motorola and they quickly dropped that (some will say they only wanted the patents, but if the Motorola phones had been a big hit, Google would've kept them)...

 

And that is true in the beginning stages of a hardware product.  It's why the Apple Macs were better than IBM and Wintel PCs.  But that changed over time.  Or at least, the modular solutions became comparable enough to the point where price became a huge determinant of consumer purchasing decisions. 

 

What? Macs were only better at the beginning but now they are competing on price with comparable enough stuff? So why are Mac sales going up while the industry declines despite Macs only selling in the higher price points and consistently making a massively disproportionate portion of profits in the industry? Could it be because they are better and people are ready to pay more for them? Why would people pay more if they could get something comparable more cheaply? Could it be because OSX is only available on Macs, differentiating them from the zillion Windows machines, and the hardware is better designed too?

 

Or the alternative answer is that Apple is just flat out better in design than everyone else, and nobody else will ever be able to compete with that design-thinking moat.  Clearly, I don't agree with that. 

 

I don't agree with that either. Ever is a long time. But I think they're clearly the best at designing consumer computing devices right now. Whether that changes over time or not, that requires monitoring the company and the competition, but that doesn't happen overnight. And in fact, I see the competition becoming weaker lately (the Galaxy S5 was very 'meh'), Android looks dated since iOS 7 came out, most others are moving to the lower end and losing money, which makes it hard to attract the best people, reinvest and be competitive in the profitable, differentiated higher end.

 

In the interim, though, you will see manufacturers customizing and re-branding Android to create a very nice experience that is comparable to Apple, though not completely similar because modularity will still be baked into the solution to a large degree.  We know Samsung does this.  Xiaomi does this.  Amazon will probably do this with their smartphone.

 

Experience comparable to Apple? Samsung does this? Amazon will do this? When's the last time you owned an Apple phone? Have you ever owned a Mac computer?

 

In any case, the point of my last post was not to talk about design, it was to show that what you call "modularity" is something that Apple has in its toolkit. You didn't give me any examples of things that an Android maker can do that Apple can't do. It's not really an advantage for Android, but it can be disadvantage when it turns into fragmentation (in many ways -- during the design-integration process, for developers, for carriers trying to keep things up to date, etc).

[rkbabang]

 

Or the alternative answer is that Apple is just flat out better in design than everyone else, and nobody else will ever be able to compete with that design-thinking moat.  Clearly, I don't agree with that. 

 

I don't think that is the case either, but there is also brand value involved.  Let's face it the difference in taste between Coke and other brands isn't all that much. The difference quality between a Walmart bargain running shoe and a Nike Air shoe aren't all that great. For most non-athletes the Walmart shoe would be just as comfortable, perform just as well, and last just as long.    Part of the reason Mac sales are increasing is that there is a certain segment of the population that wants that Apple logo visible on the other side of the laptop screen when they have it open in Starbucks while sipping their latte.  The same is true for iphones, some people just wouldn't be seen with a Samsung phone anymore than they would wear the generic running shoes from Walmart.  These brand moats can be quite sticky. Coke has been running on nothing but this for more than a century. It may be wearing off a bit for Coke, but its been quite a run.

 

[txlaw]

True (if they really value the screen size over "most other attributes"), but what I said is that nothing prevents Apple from having larger screens. It's only a temporary advantage for these Android makers. Apple's advantages are a lot harder to replicate, unlike what you seem to think.

 

Right, and I agreed with that.  But, remember, we're talking about the notion that Apple's overall user experience is so superior that "good enough" doesn't really come into play, as we're talking about a consumer product.

 

Well, first, it does come to play -- particularly with the least profitable customers.  Second, I am pointing out that the decision is not based on a binary assessment of user experience, where Apple supposedly provides the best experience for the most discerning/high end customers.  There are plenty of people on the "high end" who decide whether or not to go with Android based on particular attributes that matter the most to them.  It's a weighing of factors that goes into the decision to buy a smart phone -- price, screen size, openness, integrated software/services, UI choices, brand, etc.

 

For example, if someone really likes Moto X's Active Display functionality and thinks that the price is right, they may choose that phone over an iPhone.  To them, the Moto X is the right choice, weighing all the factors.

 

When "price" is the most heavy-weighted factor, that's when I think it makes sense to say that we're talking about a "good enough" situation.

 

You wrote:

 

"What's to stop Android manufacturers who are dealing with a modular (some would say, "fragmented") hardware solution from doing what Apple does?"

 

Nothing. But as I said, it's not the approach that makes them good. It's necessary, but not sufficient. If Samsung started to design its own software and services, it wouldn't magically be good at it. That stuff is incredibly hard to get right. Google tried more hardware with Motorola and they quickly dropped that (some will say they only wanted the patents, but if the Motorola phones had been a big hit, Google would've kept them)...

 

I think that the Motorola acquisition was for the patents as well as the ability to push the hardware envelope.  They got out of it because I think they decided that it would make far more sense to just keep a small core of the design team at Google and have the business in the hands of someone with far more scale.  That's why they're taking Lenovo stock in addition to cash.  It makes a lot of sense to let a hardware company in China who wants to spread those products everywhere to take control. 

 

Let’s see how Motorola does under the leadership of a real hardware company.

 

And that is true in the beginning stages of a hardware product.  It's why the Apple Macs were better than IBM and Wintel PCs.  But that changed over time.  Or at least, the modular solutions became comparable enough to the point where price became a huge determinant of consumer purchasing decisions. 

 

What? Macs were only better at the beginning but now they are competing on price with comparable enough stuff? So why are Mac sales going up while the industry declines despite Macs only selling in the higher price points and consistently making a massively disproportionate portion of profits in the industry? Could it be because they are better and people are ready to pay more for them? Why would people pay more if they could get something comparable more cheaply? Could it be because OSX is only available on Macs, differentiating them from the zillion Windows machines, and the hardware is better designed too?

 

Nope, that's not what I'm saying at all.  I actually think that OS X has been way better than Windows for the last couple of years.  In fact, I think that the differential between OS X and Windows is far greater than between iOS and Android.  For me, the main thing about OS X that was amazing enough for me to switch from being a lifelong PC guy to a Mac was the multi-touch UI. 

 

No, what I'm pointing out is that in the heyday of the PC, the winner was Wintel, not Apple.  The value proposition of relatively cheap, modular Windows PCs was simply better than that of Macs for the vast majority of people when MSFT and INTC were at their peak.  The main point of that part of the post was that the modular solution was superior at that time. 

 

Things have changed now, but that's because the entire market has changed.  More and more people who went with the modular solution, with price as a main factor, are going with thinner clients, rather than “PCs," that are both cheaper and very well designed.  In a sense, the “good enough” winner is now tablet interface devices rather than full-fledged desktop UI PCs.  The remaining PC buyers who are more than willing to drop a lot of money on a “truck” (as Steve Jobs would say) are increasingly going for higher end solutions like Macbooks.  (I'm one of them, btw.)

 

Or the alternative answer is that Apple is just flat out better in design than everyone else, and nobody else will ever be able to compete with that design-thinking moat.  Clearly, I don't agree with that. 

 

I don't agree with that either. Ever is a long time. But I think they're clearly the best at designing consumer computing devices right now. Whether that changes over time or not, that requires monitoring the company and the competition, but that doesn't happen overnight. And in fact, I see the competition becoming weaker lately (the Galaxy S5 was very 'meh'), Android looks dated since iOS 7 came out, most others are moving to the lower end and losing money, which makes it hard to attract the best people, reinvest and be competitive in the profitable, differentiated higher end.

 

iOS looked outdated compared to Android when iOS 7 came out.  Have you seen some of the Android manufacturers' mods to Android?  They look very modern.  Take a look at some of the Xiaomi phones or the newest HTC phones to see what I mean.

 

But, again, we’re just going to disagree on the comparability of iOS and Android devices.

 

In the interim, though, you will see manufacturers customizing and re-branding Android to create a very nice experience that is comparable to Apple, though not completely similar because modularity will still be baked into the solution to a large degree.  We know Samsung does this.  Xiaomi does this.  Amazon will probably do this with their smartphone.

 

Experience comparable to Apple? Samsung does this? Amazon will do this? When's the last time you owned an Apple phone? Have you ever owned a Mac computer?

 

I own a Retina screen Macbook, an iPhone 5, and I used to have an iPad 3 (I sold it because I wasn’t using it that much and am opting to trade down to a cheaper Android tablet — the Nexus 8, probably, when it comes out).

 

As incredible as it seems, yeah, I do think there is an experience comparable to Apple with some of the Android devices.  The Nexus 7 is pretty damn good.  Gets the job done, but I really want an 8” form factor device.  So I’m waiting for that. 

 

And I actually bought a Nexus 4 to test it out.  Again, that was also a very nice experience and was superior to my iPhone 5 in many ways.  However, I returned that phone because my car infotainment system wasn’t compatible with Android (and no Bluetooth audio either).  Damn Apple lock-in.

 

In any case, the point of my last post was not to talk about design, it was to show that what you call "modularity" is something that Apple has in its toolkit. You didn't give me any examples of things that an Android maker can do that Apple can't do. It's not really an advantage for Android, but it can be disadvantage when it turns into fragmentation (in many ways -- during the design-integration process, for developers, for carriers trying to keep things up to date, etc).

 

I think you might be confusing Apple’s ability to add attributes to its products that are comparable to Android attributes with modularity.  Modularity simply means that there are a multitude of vendors who can add all sorts of features to the total solution because of the platform being “modular” in nature.  That in and of itself means that there will be greater variation in solutions available to consumers. 

 

The negative spin on that is the “fragmentation” of the market.  The positive spin on that is the “multitude of choices” available for consumers who are looking for attributes not present in iOS devices.  So I disagree with you that modularity is not really an advantage for Android.  Android has both advantages and disadvantages.

 

But FWIW, I do happen to agree that Android does have a problem with fragmentation.  I think they should have had two separate forks where there was Android OS available to everyone and then a Google-branded OS that was much more heavy handed with manufacturers who wanted to use it.

 

[txlaw]

 

Or the alternative answer is that Apple is just flat out better in design than everyone else, and nobody else will ever be able to compete with that design-thinking moat.  Clearly, I don't agree with that. 

 

I don't think that is the case either, but there is also brand value involved.  Let's face it the difference in taste between Coke and other brands isn't all that much. The difference quality between a Walmart bargain running shoe and a Nike Air shoe aren't all that great. For most non-athletes the Walmart shoe would be just as comfortable, perform just as well, and last just as long.    Part of the reason Mac sales are increasing is that there is a certain segment of the population that wants that Apple logo visible on the other side of the laptop screen when they have it open in Starbucks while sipping their latte.  The same is true for iphones, some people just wouldn't be seen with a Samsung phone anymore than they would wear the generic running shoes from Walmart.  These brand moats can be quite sticky. Coke has been running on nothing but this for more than a century. It may be wearing off a bit for Coke, but its been quite a run.

 

No doubt that brand plays a part in the equation.  Indeed, in many emerging markets, the "high endness" of the Apple brand is a pretty big factor in sales growth. 

 

I just don't think the brand value necessarily means that Apple will generate an ever increasing run rate of profit going forward.  It's like when KO clearly became overvalued and WEB didn't sell out.  KO the company continues to be fantastic, but did he make the right decision when the valuation went out of whack and he did not sell down his stake?  Probably not, IMO.

[Liberty]

Right, and I agreed with that.  But, remember, we're talking about the notion that Apple's overall user experience is so superior that "good enough" doesn't really come into play, as we're talking about a consumer product.

 

Well, first, it does come to play -- particularly with the least profitable customers.  Second, I am pointing out that the decision is not based on a binary assessment of user experience, where Apple supposedly provides the best experience for the most discerning/high end customers.  There are plenty of people on the "high end" who decide whether or not to go with Android based on particular attributes that matter the most to them.  It's a weighing of factors that goes into the decision to buy a smart phone -- price, screen size, openness, integrated software/services, UI choices, brand, etc.

 

For example, if someone really likes Moto X's Active Display functionality and thinks that the price is right, they may choose that phone over an iPhone.  To them, the Moto X is the right choice, weighing all the factors.

 

When "price" is the most heavy-weighted factor, that's when I think it makes sense to say that we're talking about a "good enough" situation.

 

I don't see what you're trying to get at here.

 

No, what I'm pointing out is that in the heyday of the PC, the winner was Wintel, not Apple.  The value proposition of relatively cheap, modular Windows PCs was simply better than that of Macs for the vast majority of people when MSFT and INTC were at their peak.  The main point of that part of the post was that the modular solution was superior at that time. 

 

That's not primarily why Wintel won. They won because they had all the software, and the software wasn't compatible with the Mac or anything else (making them a non-starter for like 90% of people). The only thing that loosened that grip is the internet; it's now the primary platform for what people do, not the local OS.

 

If Apple hadn't been locked out of the larger developer ecosystem by the Microsoft monopoly, they likely would have had a much bigger market share at the high end. They also weren't always as good as they are now, so that didn't help either (they lost focus for a long while in the 1990s).

 

I own a Retina screen Macbook, an iPhone 5, and I used to have an iPad 3 (I sold it because I wasn’t using it that much and am opting to trade down to a cheaper Android tablet — the Nexus 8, probably, when it comes out).

 

I guess the modular approach isn't good enough for you to fully live with, eh?

 

I think you might be confusing Apple’s ability to add attributes to its products that are comparable to Android attributes with modularity.  Modularity simply means that there are a multitude of vendors who can add all sorts of features to the total solution because of the platform being “modular” in nature.  That in and of itself means that there will be greater variation in solutions available to consumers. 

 

Exactly. All kinds of people can build on Apple's platform, because it's open in many ways.

 

I'll grant you the greater hardware variation available. But quantity doesn't equal quality. Apple has never been about making the most models. As long as they make products that are most desirable to a large fraction of the profitable end of the market, they'll do just fine.

 

The negative spin on that is the “fragmentation” of the market.  The positive spin on that is the “multitude of choices” available for consumers who are looking for attributes not present in iOS devices.  So I disagree with you that modularity is not really an advantage for Android.  Android has both advantages and disadvantages.

 

It's not about spin. When most of your users are 1-2 versions behind (and many with recent phones can't upgrade even if they want to), and a large fraction are 3-4 versions behind, that's not choice, it's a problem. When developers have no idea how their stuff will run on a lot of devices, that's a problem.  When users have to deal with a crapload of duplicated software because the hardware maker wants to differentiate and so there are two photo apps and two setting apps, it's a problem.

 

I still don't see how Apple is locked out of doing good things that are available to modular players. The beauty of smartphones is that a lot of the time, it's not either/or, you can have everything. Screen size is one of those either/or things, but for a lot of the rest, you can pile on. If a new sensors is added on the android side and everybody loves it, Apple can add it, so it's not truly an advantage. No need to create a new fork of the iPhone with the sensor and one without.

 

Apple's platform is already open enough to get the benefits of modularity (open to third party services, apps, a lot of the plumbing is now flexible, etc). The only thing they don't have - and it's a plus - is a zillion different product. But focus matters.

 

But FWIW, I do happen to agree that Android does have a problem with fragmentation.  I think they should have had two separate forks where there was Android OS available to everyone and then a Google-branded OS that was much more heavy handed with manufacturers who wanted to use it.

 

Your solution to fragmentation is a new fork? That's original :)

 

The problem with that is that users would want the Google version but manufacturers all want their own thing to try to differentiate and not give all the branding value to Google. There's always been a tension there. So soon Samsung will push Tizen more unless Google keeps twisting their arm, etc

 

In any case, your fork wouldn't solve the version fragmentation and device feature fragmentation and such mentioned above. It would just allow you to get a less crappy experience by bypassing the crappy software that hardware makers insist on putting on their phones.

 

I just don't think the brand value necessarily means that Apple will generate an ever increasing run rate of profit going forward.  It's like when KO clearly became overvalued and WEB didn't sell out.  KO the company continues to be fantastic, but did he make the right decision when the valuation went out of whack and he did not sell down his stake?  Probably not, IMO.

 

When Apple sells at the multiples that KO was selling, you can believe me that I'll be selling too. In the meantime, Apple still sells for less than the SP500 and they're about to release many major updates (the non-S years are always bigger) and new categories, after showing us some pretty amazing work on the software side.

[Liberty]

A doctor's perspective on HealthKit:

 

http://www.quora.com/What-do-doctors-think-of-HealthKit

 

I've seen similar things to this from many developers/tech people:

 

http://daringfireball.net/linked/2014/06/09/the-next-five-years

 

This is also interesting:

 

http://daringfireball.net/linked/2014/06/09/ios-8-webkit

 

Because of the new XPC infrastructure, all webviews will now benefit from the faster javascript engine in Mobile Safari without compromising security. Cool side benefit of Extensions. This means that all apps that show you a web view that aren't safari will now be faster (twitter, chrome, RSS readers, whatever).

 

Looks like Costco will start carrying iPhones and iPads (that can't hurt):

 

http://www.macrumors.com/2014/06/09/costco-iphone-ipad/

[Viking]

I think most people are completely missing the size of Apple's moat today. And with what they announced at WWDC, Apple will be increasing the size of it's moat dramatically.

 

Apple is once again growing its leading market share in the premium smartphone segment. They have an even larger more dominant share of the premium tablet market. They have the largest market share of the premium lap top market. They also have the largest share, which they are growing, of the premium PC market. So when we look at only the the premium segment of the market, the 20% of the market that is most affluent, that has cash to spend on hardware, software and apps, Apple has the leading position in smartphones. And tablets. And lap tops. And PC's. To own the leadership position in any one of these segments is a major accomplishment. The fact that Apple is the leader in all 4 is simply amazing.

 

And the story gets better. Apple will be launching a wearable device, likely in October. I think they also will be releasing a much improved TV offering, likely before Christmas. This would give them leadership positions in 6 separate massive electronic categories; given what we have seen at WWDC, all of these products are going to get more and more integrated every year from today moving forward (all the devices will work with each other). We can also include accessories as seventh category (headphones and speakers are two examples).

 

Moving forward, more and more families are going to buy more Apple devices (phone, tablet, lap top, PC, watch, TV, headphones) when their old device needs replacing. Apple's hold on the premium segment, the top 20% of the global market, is going to slowly continue to increase.

 

Apple has strong competitors, but a different one in most of the hardware categories. And beginning with WWDC in 2013, the fall 2013 hardware launches and WWDC in 2014, it looks like Apple is actually once again increasing it's lead over its competitors. It took Apple decades to perfect their business model; no one is copying them. When you look into the next year or two, it is pretty clear that Apple will be posting record total sales, record total profit (eclipsing 2012) and will be earning record earnings per share, likely in excess of $7.15/share ($50) in fiscal 2015, which starts Oct 1. A slight premium to the market, like 17, is not a crazy multiple to attach to these earnings given the size of Apple's moat. This points to a stock price of about $121.43 ($850) over the next year.

 

I watched WWDC with my 11 year old son. As a family, we own iPhones, iPads, iPods, an Apple TV puck and an old Windows computer. At the end of the WWDC presentation my son looked at me and asked when we were going to buy a Mac desktop, given how well it would work with all of our other devices. The bottom line is with everything that I see, Apple is going to keep its existing customers, who are going to continue to buy more devices, and they are going to attract more new customers into the ecosystem than ever before.

 

As an aside, we are going to buy a Mac later this year. One of the important reasons for me is my kids use Apple devices (iPad and old Macs) at school and therefore Apple software; I want my kids to be very proficient with productivity software so as they get older (and hit high school and university) they have this skill set mastered. My bet is the Apple platform (iOS/OSX) will be the leading platform for at least the next 10 years so I would be foolish to not INVEST in Apple devices moving forward. I am a middle aged former Microsoft guy; we made the decision to move to Apple products about a year ago and I am very happy with that decision. I am sure I am not alone.

 

Regarding the stock split, it will be interesting to see if it results in more stock purchases by small retail investors. If it does, this may also help sales of Apple hardware products. Human psychology is an interesting thing!

[ni-co]

I think most people are completely missing the size of Apple's moat today.

 

Yes. This is the question this all boils down to: Has AAPL a moat? And, if yes, how large is it? I think it definitely has one. I don't know how large it is but it's larger than the market prices it today. People are discussing AAPL as if it were trading at 60x earnings only because it is a large company. It's not dirt chip like it was 12 months ago – but not expensive at all.

 

By the way, 12 months ago, the discussion was exactly the same one – while AAPL was trading at 7x FCF (which Greenblatt called nuts back then, and deservedly so).

[txlaw]

I don't see what you're trying to get at here.

 

I was reiterating why I think the Stratechery post is dead wrong. 

 

1.  "Commoditization" occurs with consumer products, including smart phones.  Products can get "good enough" to the point where price becomes a very big factor in making a purchasing decision.  And "commoditization" can get to the point where the "high end" product starts having sales pulled away by the cheaper product.

 

2.  The notion that an Apple device is superior in overall user experience and, therefore, will always get a certain amount of the "high end" ignores the idea that people will give different weight to different attributes to a product. 

 

On point 2, I can point to myself as an example.  I am a "high end" consumer, but I plan to swap out my Apple tablet for an Android tablet because I think the experience is comparable (and better in many ways), and it is way cheaper.  Also, I mentioned I wanted an 8" form factor.  I would not swap my OSX device for a Windows device or Linux device or iOS/Android device or Chromebook because all of the attributes in my OSX device make it far superior to anything else (for myself).  It's subjective. 

 

No, what I'm pointing out is that in the heyday of the PC, the winner was Wintel, not Apple.  The value proposition of relatively cheap, modular Windows PCs was simply better than that of Macs for the vast majority of people when MSFT and INTC were at their peak.  The main point of that part of the post was that the modular solution was superior at that time. 

 

That's not primarily why Wintel won. They won because they had all the software, and the software wasn't compatible with the Mac or anything else (making them a non-starter for like 90% of people). The only thing that loosened that grip is the internet; it's now the primary platform for what people do, not the local OS.

 

If Apple hadn't been locked out of the larger developer ecosystem by the Microsoft monopoly, they likely would have had a much bigger market share at the high end. They also weren't always as good as they are now, so that didn't help either (they lost focus for a long while in the 1990s).

 

Well, that is all debatable.  I think the fact that the Mac was an integrated rather than modular system had a lot to do with why Windows was adopted by more people than the Mac.  And then the monopoly factor came in later after Windows won against Apple on the merits.

 

Also, until recently, I don't think Mac OS was superior to Windows -- that's just my opinion.  I only switched to Mac when I thought that OSX left Windows in the dust.

 

I own a Retina screen Macbook, an iPhone 5, and I used to have an iPad 3 (I sold it because I wasn’t using it that much and am opting to trade down to a cheaper Android tablet — the Nexus 8, probably, when it comes out).

 

I guess the modular approach isn't good enough for you to fully live with, eh?

 

Haha, can't win on this one, can I?  ;)  Either I know nothing about Apple products and how much superior they are than everything else or I am someone who talks about modularity beginning to occur for hardware (and the OS layer) but doesn't walk the walk.

 

But, in any case, I do make purchasing decisions on multiple factors, including price.  For desktop UI, I need/want OSX.  For tablet form factor, I will switch to Android.  For phone form factor, I'm debating upgrading from an iPhone 5 to the latest Android device.  For TV, I use Chromecast but might get a Kindle Fire TV.

 

I think you might be confusing Apple’s ability to add attributes to its products that are comparable to Android attributes with modularity.  Modularity simply means that there are a multitude of vendors who can add all sorts of features to the total solution because of the platform being “modular” in nature.  That in and of itself means that there will be greater variation in solutions available to consumers. 

 

Exactly. All kinds of people can build on Apple's platform, because it's open in many ways.

 

I'll grant you the greater hardware variation available. But quantity doesn't equal quality. Apple has never been about making the most models. As long as they make products that are most desirable to a large fraction of the profitable end of the market, they'll do just fine.

 

The modularity I'm talking about is the experimentation and modification in hardware and OS functionality that we are seeing with all the device manufacturers.  Samsung devices are good examples of this.  Same with HTC.  Or take a look at a Kindle Fire, which runs a highly customized version of Android that makes it seem like it's not running Android at all. 

 

You don't get that same variation with Apple.  And if you do use iOS, there is certain Apple-built functionality integrated into the system that you must use, rather than superior 3rd party providers, because of the way Apple designs its systems. 

 

As to whether Apple will do just fine, perhaps they will.  But why go overboard and argue that the Android ecosystem is inferior because of modularity?  In many ways, Android is superior because of the modularity baked in. 

 

It's not about spin. When most of your users are 1-2 versions behind (and many with recent phones can't upgrade even if they want to), and a large fraction are 3-4 versions behind, that's not choice, it's a problem. When developers have no idea how their stuff will run on a lot of devices, that's a problem.  When users have to deal with a crapload of duplicated software because the hardware maker wants to differentiate and so there are two photo apps and two setting apps, it's a problem.

 

I agree that it is a problem, so "spin" is the wrong term.  What I don't agree with is failing to acknowledge that there are benefits to this so-called "fragmentation" and that is variation in solutions that fits many customers' needs in ways that iOS devices do not.

 

Apple is not locked out of doing good things available to the modular players, but they will never be able to do everything well at the right time.  To the extent that Android devices become superior in certain important attributes due to the experimentation and modification going on, you begin to have devices that are truly competitive to even the "high end" folks that Apple focuses on.

 

But FWIW, I do happen to agree that Android does have a problem with fragmentation.  I think they should have had two separate forks where there was Android OS available to everyone and then a Google-branded OS that was much more heavy handed with manufacturers who wanted to use it.

 

Your solution to fragmentation is a new fork? That's original :)

 

The problem with that is that users would want the Google version but manufacturers all want their own thing to try to differentiate and not give all the branding value to Google. There's always been a tension there. So soon Samsung will push Tizen more unless Google keeps twisting their arm, etc

 

In any case, your fork wouldn't solve the version fragmentation and device feature fragmentation and such mentioned above. It would just allow you to get a less crappy experience by bypassing the crappy software that hardware makers insist on putting on their phones.

 

It would make the "fragmentation problem" less of an issue because then you would have one fork where the OS and hardware specs would be set forth for a more optimized experienced, yet the overall solution would still be modular in nature. 

 

And then you would have a wild west fork where people could do pretty much whatever they want.  There would be no need for Tizen because everyone would just use the core OS that is being developed and highly modify it.

 

That would really spur innovation, IMO.

[Liberty]

txlaw, I think we're reaching the point of diminishing returns with these long back-and-forths. I think our respective positions have been made clear. I respect your arguments, but I'll just say that I disagree to varying degrees with each section of your latest message and leave it at that. Thanks for the conversation! :)

[KCLarkin]

txlaw, I think we're reaching the point of diminishing returns with these long back-and-forths. I think our respective positions have been made clear. I respect your arguments, but I'll just say that I disagree to varying degrees with each section of your latest message and leave it at that. Thanks for the conversation! :)

 

Sorry guys, I think I started this debate. I didn't mean for this to evolve into a bull vs bear discussion. Rather, I was trying to work out an exit point for the stock (for those of us who are long). My thinking is that we are unlikely to see anything significantly better than a 15x or 16x multiple because of the perceived risk of disruption. I believe it is worth more, given the balance sheet, but the upside may be capped.

 

For tax reasons, I would prefer to let it ride for a bit longer but think the current momentum might bring an attractive selling opportunity.

[txlaw]

txlaw, I think we're reaching the point of diminishing returns with these long back-and-forths. I think our respective positions have been made clear. I respect your arguments, but I'll just say that I disagree to varying degrees with each section of your latest message and leave it at that. Thanks for the conversation! :)

 

I agree. 

 

The good thing about such conversation, though, is that the substance on both sides comes out, whereas when people start posting about market sentiment changing or how wrong the Street is, there tends to be a bit more hyperbole than substance.

 

Anyways, I do think it is important to note that I'm not really a bear on AAPL, so to speak.  I think Apple is a fantastic company and has a great business, and it will likely make huge absolute profits going forward.  I just wanted to provide a counterpoint to some folks' assessment of its valuation and potential downside risks.

[rkbabang]

"Investors have been waiting for a new product to push shares higher, but on Tuesday, investors may have gotten a different catalyst, a possible deal in Washington that would unlock billions in money that is trapped overseas. This deal would help all companies that have a lot of money trapped like QCOM, CSCO, and GOOG, but AAPL with its truly outsized cash position would be the prime beneficiary."

 

http://seekingalpha.com/article/2263163-rand-paul-could-push-apple-past-100

[Palantir]

I really doubt that will happen politically. Taxes for regular people, but tax breaks for the mega corporations....yeah politically feasible.

[ni-co]

I really doubt that will happen politically. Taxes for regular people, but tax breaks for the mega corporations....yeah politically feasible.

 

They did it before, didn't they? I can see it. If they frame it as "winning" a one time 10% special tax, instead of losing out on the 35% (they wouldn't have got anyway).

[rkbabang]

I really doubt that will happen politically. Taxes for regular people, but tax breaks for the mega corporations....yeah politically feasible.

 

They did it before, didn't they? I can see it. If they frame it as "winning" a one time 10% special tax, instead of losing out on the 35% (they wouldn't have got anyway).

 

That is how it needs to be framed.  It isn't a tax break if the money would otherwise simply stay offshore.

 

[Liberty]

http://daringfireball.net/2014/06/only_apple

 

Good read on Apple's position and how, in many ways, it has improved itself under Cook as CEO.

[Liberty]

Apple TV as HomeKit hub rather than have each smart home device try to communicate separately and be managed with separate apps? Makes a lot of sense.

 

Wouldn’t it be better if each home had a small, power-efficient, always-on, platform-agnostic, Wi-Fi-enabled computer that could talk to your devices both remotely and over a local network?

 

http://www.macworld.com/article/2364315/apples-homekit-hub-may-already-be-in-your-house.html