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Yesterday, Apple announced its next generation iPad, The New iPad. In true Apple fashion, it presented a cascade of new features that ultimately distinguished The New iPad from the iPad2...and the competition. The stock dropped initially because investors were seemingly disappointed, but they should not be. Here is why, and it is more than The New iPad:
First, the features of The New iPad are alluring. The New iPad leverages all the enhancements offered by the iPhone4S into a bigger form factor and further sets itself apart from competition. The New iPad features retina display (2048x1536) with 3.1M pixels. The iPad is based on the new A5X quad core graphics chip, features a 5 megapixel camera, 1080p video recording, and voice dictation. It is the only tablet to run on 4G. In true Apple fashion, Apple has piled on enough new features to entice an upgrade cycle for iPad2 and iPad1 users. And for the relatively cost-conscious, consumers can buy the iPad2 at a $100 discount to The New iPad, broadening the iPad community to a bigger audience.
As an aside, look at the tech features again. It is truly amazing that the features set in The New iPad exceed what was available in consumer computers or cameras less than ten years ago. Yet now, they are available in a touch-screen tablet and are pervasive. Moreover, it is substantially changing consumer behavior. Anecdotally, I attended my 13-year old daughter’s (School of Rock) concert two weeks ago with the bevy of proud parents “video-taping” the performance…the majority of “video cameras” were iPads and the minority were iPhones. There were a couple Samsung Galaxies but not one video camera. The iPad offers the convenience and a large screen the makes capturing the exact image easier than on a small camera or smartphone screen. With the enhanced photo/video capabilities of The New iPad, one would expect to see this even more.
Second, the competition needs to be worried. Initially, Apple’s iPad occupied the high end of the price spectrum and competitors attempted to attack at lower price points. Again, out of Apple’s playbook, Apple set the standard for what consumers should expect in a tablet, then it began the annual upgrade cycle, lowered the price on previous models and is squeezing competition at the lower end. And, recall, that Apple’s profit margins exceed the rest of the industry such that competition cannot afford to match Apple’s price drops, and the price differential is narrowing.
Forrester Research came out this week and said that by 2016, one in three Americans would own a touchscreen device within five years. It went on to say that there was an enormous gap between the iPad and the next competitor. Apple created a market, is riding the growth in the market and is dominating the market.
Third, The New iPad is part of Apple’s “Post-PC” strategy. Back in 2002, everyone considered Apple a computer company and the analysts who followed it also covered IBM, HP, Dell, etc. But Apple wasn’t really a “computer” company. It has always been a software company that leverages its software into great form factors to create great consumer experiences. Its first shake-up was the introduction of the iPod, and later the iPhone, but these devices required syncing to a computer primarily for software updates and content storage. However, today, with iCloud/iOS5, Apple created a new ecosystem that doesn’t require a computer sync any longer and takes the concept of “untethered” to a new level. Not only does one not need to be connected to a computer, one does not even need to sync to a computer at all.
Users of the new iOS5 also may notice that by using iMessage, their text messages are blue, whereas going through a carrier, their texts are green. With iMessage, they stay on the Apple network and they can see immediately which of their friends and colleagues are also within this Apple network. Think about the possibilities for Apple to leverage their image of “gotta have it” to their own network. Since June 2011 when Apple introduced iCloud, 100M users have adopted iCloud.
Fourth, there was news release earlier in the week that did not get much attention but points to the possibility of Apple disrupting another industry: payments. On Tuesday, as reported on Seeking Alpha, “Apple reportedly may have gained another key patent: a new iWallet patent which reviews credit card transaction rules and shows us that the credit card companies will be sending statements directly to your iTunes account." The patent allows for the control of a subsidiary account in employer-employee or parent-child relationships.” According to DigiTimes in November, Apple committed to adding NFC (near field communication) support to its iPhone platforms starting in 2012. Both of these indicate that Apple is making headway into mobile payments.
A mobile payment app could be hugely successful, should Apple move in this direction. Look at Starbuck’s experience: From January to the beginning of December 2011, the Starbucks mobile card app accounted for 26M transactions and $110M card reloads. “This is the first and largest consumer of adoption of mobile payments to date which is absolutely significant,” said Denée Carrington, a senior analyst at Forrester Research. And Apple has the reach to pull it off. Consider this: As of March 2011, Apple had over 200M active iTunes accounts. That compares to 50.6M American Express card holders, 176M MasterCard credit card holders, and 261M Visa credit card holders (all as of year end 2011).
Lastly, Apple announced it has surpassed 25 Billion downloads on its devices. Over 585K apps are available in iTunes with over 200K customized for the iPad. The significance of app downloads is this: a native app means a user can go directly to that content without searching. This means that Apple earns revenues for payments and ads embedded in apps, and that Google or other search engines would not earn revenues on ads in search. This subtle war between native apps and web-based mobile search that has significant implications for revenue models of the large tech firms and indicates another area in which Apple could be disruptive, particularly as more people access the internet via a mobile device.
Apple is an inexpensive growth stock trading, even today, at 9x next year’s earnings less cash. And, it continues to offer new products with indications of other disruptive ideas in motion. As Tim Cook, CEO, concluded the press event yesterday, "2012: There's a lot to look forward to."
