Can You See Apple's Long-Term Competitive Advantage in Its New Product Event?
09/09/2014 9:20 am EST
Everyone is eager to find out what comes from this smartphone giant's product event today, so MoneyShow's Jim Jubak looks at the company's competitive advantage and what truly matters to the investor over the long haul.
Speculation will swirl around what new products Apple (AAPL) will introduce today until, well, until Apple introduces them and the techsters have had a chance to tear them down to see who makes what that goes inside each one.
But on the morning of the event, I'd like to take a step back and offer you my thoughts on where Apple is headed and the nature of the company's current competitive advantage.
"Competitive advantage" is one of the most useful concepts I've found for long-term fundamental investors. It's not a new method of analysis-the key texts, Michael Porter's books, Competitive Strategy and Competitive Advantage, date back to 1980 and 1985, respectively. But the effort to discern where a company's advantage over competitors lies and how long it might last-if it indeed has a competitive advantage at all that will outlast today's dew-goes a good way toward telling a long-term investor where to put his or her money for that long haul. And watching a company's management to see if they can formulate and then execute a strategy built on competitive advantage is, in my opinion, one of the best tests of exactly how smart, savvy, and focused a CEO and a company's management team is.
There's tendency to analyze Apple as if its competitive advantage was its ability to turn out a stream of killer consumer products. That, according to this read of Apple, was the great strength of Steve Jobs, super showman and obsession worrier about details. And, again, according to this read, it's the biggest disappointment with Jobs' successor, the current CEO Tim Cook.
I think this is a basic misunderstanding of Apple's competitive advantage as constructed by Jobs and as now being applied by Cook. Apple's key advantage over Microsoft (MSFT), and Samsung (SSNLF), and Amazon.com (AMZN), and Google (GOOG) lies in its unique control over both hardware and software in the Apple ecosystem. And I think that control over both hardware and software is going to become even more critical as a competitive advantage in the next generation of products, customers, and technology for Internet-based uses.
In July, Apple signed a partnership deal with IBM (IBM). IBM will use its massive sales force to sell Apple-based apps into the corporate market. Workers in big companies want to use smartphones and tablets to access the Internet (there's even an acronym for this trend-BYOD, bring your own device) and they want to use cloud-based software and storage to get their work done. The first of the 100 MobileFirst apps out of this partnership are expected in early 2015 and will be powered by IBM's back-end services (read tighter security, and enterprise-wide device management that will include 24/7 AppleCare support on site provided by IBM).
Apple already has a huge advantage in market share over Google's Android platform in the enterprise market-Apple smartphone activations in the enterprise market accounted for 50% of all activations against Android smartphones' share of around 25% in the fourth quarter of 2013. iPad activations in the enterprise market accounted for almost 20% of activations while Android tablets accounted for less than 5%.
The deal with IBM gives Apple a shot a locking down this market share advantage in smartphone and tablet sales in the enterprise market just as growth of device sales in that market, a long-term PC bastion, take off. For instance, according to Forrester Research, the percentage of tablets sold to businesses will climb to 18% of the market in 2017 from 12% in 2013. And this surge in corporate ownership comes as tablets and smartphones are expected to leave PC ownership in the dust. By 2017, only 13% of connected smart devices sold will be either desktop or portable PCs, according to IDC. 87% will be smartphones and tablets. And that market share growth (from 79.7% today) will come as total units shipped goes from 1.56 billion in 2013 to 2.46 billion in 2017.
Why does Apple dominate the enterprise market while Android devices claim the majority of the consumer market for smartphones and tablets?
I think we're looking at Apple's big competitive advantage. Because Apple controls the hardware and the software, all phones running Apple's operating system are running the same software. Not so with Android phones, where Samsung's version of the Android operating system is different from Amazon's is different from.(and, of course, Apple doesn't face the problem of a hardware maker, like Samsung, going rogue and trying to introduce its own operating system to replace Android).This isn't much-if any-of an issue in the current consumer market where, as long as my device hooks up to Verizon or AT&T or whatever provider I use, any differences in the operating system largely don't matter, and if an Android app doesn't work quite as well on my Samsung as it might, I'd probably never even know. In the enterprise market, however, the apps that the company uses, the software the company runs on, the way that a smartphone hooks up to the company network, and the ability of the corporate IT staff to make sure that the network is secure and that it can provide help across all the devices on the network (and update all the devices to a new app or generation of software) matters.
In the corporate market, Apple's control of the hardware and software makes it easier to connect devices to the larger network and to make sure that everything that is supposed to work together does indeed, work together. That edge just got bigger with the IBM partnership.
And that competitive advantage will get even more advantageous as smartphones and tablets become devices on distributed networks with many entry points where those individual devices need to connect to a wide variety of other devices and other networks.
It will be easier for Apple's highly controlled hardware and software to work as part of an e-payment system where the user at the consumer end, and the user at the merchant end, and the payment system vendor all want to reduce those awkward moments where a smartphone or tablet almost connects with a network-or where the number of nearly, but not quite, identical operating systems makes it harder to control network security.
It will be easier to connect personal health data from a smart watch, to data at a healthcare provider, to a smart device in a physician's office in a more standardized hardware/software operating system environment.
And it will be easier to build out the Internet of things for the developer who's writing code for a refrigerator to "talk" to a smartphone, to "talk" to an Internet grocery delivery system, to "talk" to a recipe blog, to "talk" to the pantry and refrigerator again to see if the required ingredients are in the house, if the devices on the network are using the same hardware/software system.
This doesn't mean that Apple will gain huge share in any of these markets. Android isn't about to disappear or become irrelevant. And I think we can count on smart companies, such as Google, to look for their own partners to match the Apple/IBM partnership.
But this does argue that Apple has a competitive strategy that goes beyond "Roll out a steady stream of cool new devices."
A "cool device" strategy puts Apple in the volatile fashion market with all its ups and downs as this year's product works or doesn't. It's not especially sustainable. And it should command a premium multiple on earnings per share.
A strategy that's based on the advantage that a uniquely, tightly-integrated hardware/software economy system, however, is sustainable, especially since the market-in corporations, in e-payments, in the Internet of things-looks to be moving in a direction that makes the integration more valuable. And it should command a premium, assuming that the company's management can take advantage of that edge.
Now, to see if Apple can execute, watch the September 9 event and announcement today for clues.
Apple is a member of my Jubak's Picks portfolio.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. (Please don't read a market call into that cash position. It's simply taking time to wind down the management company behind the fund.) I anticipate putting those funds to work in the market over the next few months and when I do I'll disclose my positions here.