Apple – Housekeeping

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A housekeeping event that refreshed the older end of its offering.

• Apple released new products and software that inched the evolution if the ecosystem forward, but there was nothing that will kill the impact of the end of the massive iPhone 6 upgrade cycle.

iPhone SE

• This is best described as an iPhone 6 in the body of the iPhone 5s at a cheaper price.
• The device will be available for $399 for the 16GB version and $499 for the 64GB version.
• Apple sold 30m of its older 4” devices over the last 12 months and there are a significant number of users still using these products.
• Furthermore, around a third of these sales (two thirds in China) were to first time iPhone users and it is to this segment that Apple is targeting this product.
• The iPhone SE is essentially Apple’s second attempt at cracking the mid-range but I think that the price has not come down nearly enough (iPhone 5c was $450 at launch) to make a real impact on the mid-range of the market.
• Consequently, this is a good upgrade for the old iPhone segment but it is unlikely to trigger a market share gain or a sudden increase in size of its ecosystem.

iPad Pro 9.7”

• This is an exact replica of its big brother except that it has a 9.7” screen and consequently comes at a slightly lower price.
• This device now starts at $599 for the 32GB and goes up to $899 for a 256GB version.
• Apple is targeting the 600m PCs that are in use today that are over 5 years old and in that regard the new screen size is a good idea.
• This is because the critical application for a PC is the productivity suite Microsoft Office.
• iOS and Android have touch optimised versions of the Office programs which are good for reviewing documents and basic editing but quickly reach their limits when in depth content creation is required.
• With a screen size below 10”, these apps will be free to download and use (within certain limits) which will be a big draw to anyone considering the switch.
• However I think that Apple will still struggle to attract this segment for two reasons.
  • First. Almost all content creation outside of design is much easier and much more productive with the use of a mouse which iOS still does not support.
  • There is no reason why this could not be added to iOS and it is something that I will be looking for at WWDC in June as a sign that Apple is taking productivity seriously.
  • Second. The iPad Pro is still too expensive at $749 for the 128GB version.
  • The equivalent Surface 3 product from Microsoft with a 10.8” screen, mouse support and capable of running the full version of Office (and every other legacy application written for Windows) is $448 some 40% cheaper.
  • This means that as a laptop or desktop replacement, the iPad Pro is going to fall short as no user that really cares about Office is likely to choose it over the Surface.
  • I continue to believe that the vast majority of the use case for the iPad Pro will remain content consumption as every device I have seen in the wild has been used exclusively for this purpose.
  • This is where this product really excels with its best in class user experience and third party app ecosystem.
• Hence, I do not see the owners of the 600m old PCs flipping to this device but I do see older iPad users upgrading to this new product in time.

Watch, TV and iOS9.

• Incremental upgrades were announced to these products with new watch bands, a lower price (indicative of lower than forecast volumes) as well as improved functionality for the TV and a new version of iOS 9.

Take Home Message

• This was a housekeeping event for Apple where it updated parts of its offering that were a little tired as well as picking up a few loose ends.
• It was not an event that will have everyone scurrying off to their spreadsheets to increase their estimates.
• Consequently, the main issue that besets Apple remains its lack of growth.
• There is very little that Apple can do about this as it is now paying the price for the huge growth that it experienced from the iPhone 6 product cycle.
• This is why the shares are valued at such a low level despite being a cash generation powerhouse that is second to none.
• This makes the shares offer extremely good value for anyone that is not concerned with growth as the cash returns are excellent.
• However, those that are looking for capital appreciation in the short term are likely to get more joy from Samsung, Microsoft or Google.