Here's the second article on Apple and the narrative. Richard Waters: "Apple flitchs the wrong switch", Financial Times, January 29, 2016
Sometimes, giving investors extra insight into a promising new line
of business works wonders with Wall Street. But sometimes it does not —
as Apple has found to its cost this week. Getting the trick right is of
special concern in the technology sector, where established businesses
often mature quickly. Having a new story to tell can help investors look
beyond a company’s plateauing fortunes. When
it comes to using extra financial disclosure to change perceptions,
Amazon has become the tech world’s gold standard — somewhat ironically,
given its reputation for secrecy. Since it first revealed details last
April about Amazon Web Services, its cloud computing sideline, the
company’s stock market value has risen by nearly $100bn. Amazon waited
until the business was both sizeable and unexpectedly profitable before
lifting the lid.
Alphabet, the holding company for Google, has
achieved a similar effect with the promise to break out its non-search
businesses with its next results on Monday. The purpose here is
different: to show off the strength of its core search operation and to
demonstrate greater discipline by not shielding the losses of its other
activities. But when it comes to Apple,
the magic has worn thin. The company’s attempt to draw attention to its
services business — which, at $6bn in the latest quarter, produced more
in revenue than Amazon Web Services for the first nine months of last
year — did nothing to prevent a near-7 per cent slump in the share price
on Wednesday. Much comes down to timing. Amazon and Google
prepared Wall Street carefully, stoking anticipation for months. Apple,
by contrast, dropped its news unexpectedly on a wary investor base. It
was hardly surprising that Wall Street chose to see the extra,
unexpected disclosure as an attempt to distract attention from what is
set to become the first contraction in iPhone sales.
The
data presentation also seemed halfhearted. Apple executives sought to
compare their services business with that of a sizeable, freestanding
internet company. But they made little attempt to explain a grab bag of
businesses that make up what the company calls its “installed base
related revenue” (IBRR). These range from the net revenue on App Store
sales to supplying replacement iPhone screens and licensing its brand to
accessory makers. But Apple declined to lay out a bigger vision
for how the services business was likely to evolve. It also did little
to counter perceptions that glitches in areas such as its maps app and
iCloud back-up and syncing service showed it had yet to match a pure
internet company such as Google in terms of quality and reliability.
In
the absence of a clear explanation, investors have therefore chosen to
view Apple’s service business in the same light as those from hardware
makers such as Xerox: a potentially profitable supplement to the core
business, but not something likely to grow into a major revenue source
that justifies a premium valuation. Despite the shortcomings,
services are likely to remain a high-growth bright spot for Apple, not
just in the rest of 2016 but for a considerable period of time. That is
partly because of slowing hardware growth. Global smartphone shipments
will rise at an average annual rate of around 7 per cent in the medium
term, according to research firm IDC. Falling prices will put a lid on
overall revenue growth, and economic uncertainty threatens the premium
end of the market. With little sign that products such as television
set-top boxes and smartwatches will become sizeable new hardware
categories in their own right, the attractions of services will loom
ever larger.
The gatekeeper status conferred by the App Store is
already significant. Apple paid more than $14bn last year to app
developers and companies selling content through iTunes, an increase of
36 per cent. If it takes around a 30 per cent commission on these sales,
then the App Store and iTunes accounted for more than a third of the
money it made last year from selling things to its installed base, and
virtually all of the growth. This income source will loom larger as it
grows, eclipsing other businesses with less potential. It looks
like a promising sign of what could grow into a meaningful source of
profits. But the reaction to Apple’s disclosures this week suggests that
investors do not believe the company is ready to move decisively beyond
its hardware business model.
_________________
No comments:
Post a Comment