Apple – Jack lives.

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The 3.5mm jack survives the attempt on its life. 

• With the launch of the iPhone 7 approaching, the chatter is once again focusing on the headphone jack, with consensus now having decided that the 100 year old design will stay.
• This makes complete sense to me as I have long been of the opinion that getting rid of the headphone jack would create more problems that in would solve.
• The main reason to get rid of the headphone jack would be to free up space in the device for more battery or to make the device thinner.
• I think that making the iPhone thinner is not a priority for Apple as:
  • First: I believe that the iPhone is already thin enough and making it thinner is unlikely to generate the kind of returns that would justify the investment to make it so.
  • Second: A thinner device would also have less structural rigidity meaning that it would be even more susceptible to being bent than its predecessors.
• Furthermore, battery life is no longer a major issue for the iPhone although the required budget for power is likely to continue increasing as the device continues to add functionality.
• I see significant risks in getting rid of the headphone jack as it will have to be replaced with either the existing lightening jack or Bluetooth.
• Bluetooth headphones can have radio issues, are more expensive and need to be charged making them less appealing to average users and some airlines will force users to stop using their headphones at certain times during a flight.
• Lightening jack would force all headphone manufactures to qualify with Apple’s MFI accessory program adding costs and headphones would no longer be universally compatible which I think is something that users will hate.
• In the worst case, losing the 3.5mm jack could have a negative impact on the upgrade cycle where users are inclined to keep their older Apple devices for longer because of a feature that they love and investments they have made in accessories.
• There would of course be adaptors but users tend to find these to be very inconvenient and I think they would hamper the ease and fun of use that is so important to iPhone.
• Hence I continue think the 3.5mm headphone jack, whose initial design is over 100 years old, is here to stay a little while longer.
• I still think the iPhone 7 will be an incremental upgrade to the iPhone 6s and as a result will not result in the huge upgrade cycle that the iPhone 6 did in 2014 and 2015.
• Hence, I think it will be enough to keep revenues chugging along but will not return the company to growth.
• I do not necessarily see this as a problem as even in steady state Apple is a cash machine without equal.
• Apple still represents superb value for a long term income based investors but the problem the company faces is the lack of a growth catalyst.
• Consequently, Baidu, Microsoft and Samsung offer a better capital growth opportunity in the short term.