Apple – Upward mobility

Verticalisation remains the way forward for now.

• Apple’s verticalisation continues with its semi-acquisition of Dialog Semiconductor making a lot more to unravel when the iPhone bandwagon finally grinds to a halt.
• Apple has struck a deal with Dialog Semiconductor where it is paying $300m to acquire certain assets (the bulk of which must be intellectual property or perpetual licences to it) and taking on over 300 of its staff.
• Apple is also guaranteeing $300m in revenues over the next three years on other Dialog products such as audio subsystems, charging and mixed-signal integrated circuits.
• Dialog’s main business to Apple over the last 10 years has been power management and it is this piece that Apple appears to be bringing in-house.
• This is a ringing endorsement of Dialog’s product as Apple will have looked at whether it could design a better one itself to which the answer clearly, was no.
• Apple clearly did not want to acquire all of Dialog because there is more to it than just power management which was the piece that Apple wanted.
• Hence, it has gone the next best route in acquiring a perpetual licence to the technology and brought in-house the engineers that were working on its custom implementations.
• This is similar to its relationship with arm where it has an architecture licence and a lot of engineers take the arm’s technology off in Apple’s own direction.
• With the position that Apple is in today, increasing verticalisation makes a lot of sense.
• This is because it has the scale to spread the R&D costs of doing everything itself over so much revenue that it is much more profitable than to buy technology in on a unit times price basis.
• Furthermore, the more vertical Apple becomes, the more it can control how the hardware and software work together which it has clearly demonstrated is the way to make the best-performing products.
• However, as Nokia found, when things start to go wrong, verticalisation rapidly becomes a major headache as profitability and cash flow will fall hard and fast.
• In Apple’s case, the sky remains pretty clear as Google is showing no signs of being willing or able to take the kind of steps with Android that would allow it to close the gap on Apple and put pressure on its pricing.
• This has been the case now for 10 years and it increasingly looks like it will take a seismic shift in consumer electronics to upset the current status quo.
• To me this means consumers moving away from the current ubiquitous smartphone to another form factor such as AR glasses.
• This will be a very long time coming and so I think Apple’s position at the top of the industry looks secure for a while yet.
• Hence, I am still comfortable with holding a position as the valuation is not as challenging as some of its ecosystem peers both at home and in China and it is currently waving the privacy and security flag with all its might.