A recent forecast by Cisco Systems projects that by the end of 2013, the number of cellphones, tablets, laptops and other wireless devices (such as those connected to smart sensors) using global spectrum will exceed 7 billion devices, about equal to the world's population. This, in our opinion, is one of the elephants in the room. Now, let's move on to Apple before we return to our main theme.
According to the technology research team at Credit Suisse, Apple shipped 33.8 million iPhones in their recently reported FY13 4th quarter, up 26% yr/yr. By fiscal year 2015, CS projects that the iPhone will account for 55% of sales and about 62% of its profits. The company now has $91 billion in net cash. Is there a problem?
A minor one is Carl Icahn's absolutely loony idea to drain the cash to buy back shares, take on debt and create "shareholder value." Wall Street Journal "High Definition" columnist Farhad Manjoo puts it very aptly,
"Mr. Icahn doesn't seem to realize that Apple, like all tech companies, is ephemeral. It is a giant perched atop an ever-shifting mountain of silicon, a behemoth whose success is as tenuous as it is fantastic. To the extent that Apple can guarantee any future for itself, its salvation is in its cash. It needs to spend its money on its future."This is spot on, but the problem is "How will consumers use technology in the future?" Apple is increasingly positioning itself in the high end, meaning smartphones with ASPs of $400 or more, according to CS. This will protect profits, but will also cede market share to Samsung, HTC, and other Android manufacturers. It is however a conventional strategic direction.
But, Apple is number one in tablet computing, with a 40% market share, according to CS. Its tweaking of the prices points for the most popular iPad Mini should expand its market share, when taken together with its its new iOS which promises the same user experience across Apple phones and over iMac notebooks and laptops. Apple quotes a statistic that says with 39% market share of tablets, 81% of web traffic from all tablet Web traffic comes from iPads.
Spectrum rationing through different price plans will eventually rear its head again. As we've said before, most tablet users we've seen are taking, uploading and emailing photos, downloading and viewing videos of television, sports and movies, and doing routine web based queries for restaurants and amusements, along with reading email, online publications. None of this seems to be productivity-related work for an employer's enterprise, the area where Microsoft dominates with its Office franchise.
Microsoft continues to plug away at its phone franchise through Nokia. It's financial impact on the company is and will be de minimus in the near term. Their efforts with Surface and Windows 8.1 has a similar aim to Apple, though. That is, a Windows 8 user should have a similar user interface experience from desktop, to mobile, to laptop/tablet. Microsoft is trying hard to converge the laptop and tablet into one. Its price points are probably still off, and Microsoft's relationships with developer communities in mobile are evolving very slowly.
Google, meanwhile, is showing that it can create relatively lower priced products in smartphone and tablets, with the Nexus lines. These, in our opinion, are controlled experiments rather than an effort to seize significant market share. Android is too fragmented and fractured an operating system to migrate across the traditional computing platforms. However, Google may be looking at essentially leapfrogging the shorter term moves of Apple and Microsoft. I can't recall the name of the presenter who said that Android is a perfect system for computing without a traditional user interface; he showed the example of a mirror at home. The user, using hand gestures, could access broadcasts or find information on something as mundane and ubiquitous as a mirror, so no dedicated, battery draining display.
Apple does have some choices to make to ensure its future growth, remembering that it is an extraordinarily profitable company with an 8% effective tax rate or so. Microsoft has made some decisions for now, but its fate is far from clear, given its institutional and leadership uncertainties.
Consumers, on the other hand, will wake up one day and realize that they have too many devices and are paying too much, even with hidden subsidies, for news and entertainment. For U.S. companies, the worldwide middle class in developing countries will be effectively closed off to them because of their relentless focus on protecting their developed market franchises.
Technology companies have always been ephemeral, as Mr. Manjoo observes, and it remains to be seen which ones can successfully navigate the consumer technology future.