Apple – A stern test

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The iPhone 7 is a stern test of Apple’s brand. 

• Removing the headphone jack will be a tough test of whether Apple’s brand is strong enough to wean consumers off a connector that they have loved for over 100 years.
• Apple launched two new products and one new accessory at its annual launch event on September 7^th.
  • First: iPhone 7.
  • The new device no longer has the 3.5mm headphone jack but comes with an adaptor in the box.
  • Users wanting to use traditional headphones will no longer be able to listen and charge at the same time.
  • The device also sports a brighter display, much improved camera (with wide angle and telephoto cameras on the 7+), a new home button as well as water resistance to 1m of immersion.
  • With the exception of the headphone jack, there is not much here that does not already exist on competing products although I suspect that when it comes to the camera, Apple’s combination of software and hardware will create a top notch experience and image results.
  • The iPhone 7 doubles the capacity of previous versions with the top size now being 256GB but the price is staying the same as the previous generation.
  • Second: AirPods
  • These are wireless Bluetooth headphones that automatically pair with the iPhone and Apple Watch with some very nice features that should create a great experience when used with Apple’s products.
  • They will also work with non-Apple products meaning that it the AirPods are using standard Bluetooth and so it will be important to see how well the audio quality measures up to wired headphones.
  • The AirPods also allow use of Siri with a double tap as well as voice calls and easy device switching.
  • The AirPods are very expensive at $159 and I expect them to sell only to the real top end of Apple’s fan base.
  • At the same time, Beats is incorporating the new technology into a range of its devices at more reasonable prices giving consumers more choice.
  • Third: Apple Watch 2.
  • Apple updated the Apple Watch adding water resistance to 50m making it good for swimmers as well as adding GPS to allow full activity tracking without the iPhone being present.
  • These went hand in hand with a nice new ceramic case and a version of the device which has Nike running software embedded at the factory.
  • However, what Apple did not do was provide an answer to the most asked question at the Apple Watch tables which remains: “Why should I buy it?” not “How much is it?”.
  • Hence, I do not see the Apple Watch 2 lifting the smart watch market out of its current decline and I remain very cautious on the outlook for wearables in general.
• Apple is certainly taking a step forward in removing the headphone jack but at the same time it has given competitors material for marketing their products.
• It also makes the device even more proprietary than it already was which is likely to anger some users.
• The biggest risk here is not whether Apple will lose users to Android but whether users looking for a new phone will buy the 6s which is almost as good and still has the beloved 3.5mm jack rather than the 7.
• If all goes well then I expect ASPs and gross margins to hold steady but should users shun the 7 for the cheaper 6s then ASPs, revenues and profits will come under pressure.
• This is the big gamble that Apple is taking where clearly it is hoping that its brand is strong enough to force the industry and users to move on from something they have been using for many years.
• I do not think that there is nearly enough here to drive a real replacement cycle (like the iPhone 6) but there should be enough to keep the ship steady while Apple searches for the next revolution.
• Hence, I continue to think that Apple is a great long term investment as it offers great value but there is nothing from these launches that is going to drive revenues back to growth.
• Samsung, Microsoft and Baidu are my top short-term picks.