Apple FQ2 17– New normal

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These days, Apple looks like an industrial. 

  • Apple reported reasonable results and in increasing both the dividend and the share buy-back program, ushered itself squarely into a new normal of pedestrian growth.
  • FQ2 17A revenues / EPS were $52.9bn / $2.10 broadly in line with consensus at $52.9bn / $2.02.
  • Gross margins were 38.9% at the high end of the guided range and slightly above consensus at 38.7% as the iPhone 7+ was a stronger contributor to the mix than anticipated, lifting profitability.
  • Unit shipments were:
    • 50.8m iPhones vs 51.4m expected with an ASP of $655 compared to $666 expected.
    • Note that a higher than expected inventory adjustment (1.2m units) more than accounts for the difference.
    • 8.9m iPads and 4.2m Macs also shipped with Macs faring a little better than expected.
  • Services continued to be very strong with $7bn in revenue growing by 18% YoY with Apple stating that it now has a total of 165m paid subscriptions.
  • This includes Apple Music, iCloud and the subscription services of others that it offers on the Apple App Store.
  • There is obviously a degree of double counting going on here where for example, Spotify subscribers who pay through the App Store are also included here.
  • In my opinion, this renders this number virtually meaningless as Apple is counting subscriptions of its competitors as its own although it will still be making some money from these subscribers.
  • This combined with both an increase in dividend and the share buyback program, indicate very clearly that there is no growth in this company unless it can conquer a new segment.
  • Having (rightly, in my opinion) given up on making a car (see here), there is no new segment in sight, and so I see Apple, by and large, growing in line with the world economy.
  • I suspect that it will swing above and below that average as new products drive replacement cycles but the long-term outlook is industrial in its nature.
  • The next swing is likely to come from the iPhone 8 for which speculation and anticipation is already at fever pitch.
  • This means that Apple has to come up with something pretty special to see another cycle that will push its revenue growth above its new long term average, albeit temporarily.
  • Fortunately, the valuation of the company is not too demanding with a PER of 13.0x but the buy case based on valuation has now evaporated.
  • I see very little upside other than income coming from the shareholder return programs.
  • I would prefer Microsoft, Baidu and Tencent for those looking for capital appreciation.

 

Apple vs. Qualcomm – Proxy war

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Apple’s intransigence plays into Qualcomm’s hands. 

  • Qualcomm has been forced to adjust its guidance for the coming quarter after being informed by Apple that it would not be receiving any royalties for the foreseeable future.
  • According to Qualcomm (as Apple has made no statement), Apple has ceased payment as it finds the contract terms unacceptable even though it does acknowledge that some payment is warranted.
  • Qualcomm’s new FQ3 16 guidance is for revenues / EPS that will be $500m – $800m (midpoint $650m) and $0.15 – $0.30 lower than the guidance given at the recent FQ2 16 results.
  • Although the issues that Apple has with Qualcomm’s business model are very similar, if not the same as the issues that Nokia had back in 2006, the circumstances are completely different.
  • These are:
    • First Contract validity: The dispute that arose between Nokia and Qualcomm in 2006 occurred because Nokia’s contract had come to an end and the companies were unable to reach agreement on terms for the renewal.
    • Nokia stopped paying Qualcomm as it had no idea how much to pay and instead accrued an estimate of the cost in its balance sheet.
    • The contracts upon which Apple has ceased payments have not expired and I can’t see any real contractual grounds upon which to cease making payments.
    • As a result, I do not think that it will not be difficult to show to a court that Apple is acting in bad faith and to win an enforcement order.
    • Second: Third party suppliers. Apple does not pay Qualcomm directly as the payment is made by its manufacturing partners who make its products.
    • This means that Apple is getting involved in contracts that are in place between entities that have nothing to do with Apple other than it is the end buyer.
    • I do not think it will be difficult to argue that Apple has no real grounds to be involved in these contracts and is acting in bad faith.
  • Apple’s intentions are clear in that wants a lower rate from Qualcomm and unlike Nokia, is not prepared to wait until current contracts expire before launching its proxy war via its suppliers.
  • Apple’s royalties are calculated on the wholesale price of the device which in this case will be the price at which the supplier sells the finished device to Apple.
  • I calculate that the supplier is paying Qualcomm 2.8% of the price of the device from making the below assumptions:
    • Qualcomm’s FQ3 17 royalty revenues from Apple would have been from calendar Q1 17 as royalties tend to paid one quarter in arrears.
    • Apple shipped 52m units in calendar Q1 with an ASP of $650 giving iPhone revenues of $33.8bn upon which it made gross margins of 45%.
    • This means that suppliers sold the devices to Apple with an ASP of $448 for a total revenue of $23.3bn
  • There are a number of caveats to this assumption:
    • First price cap: There is a price cap above which no royalties are paid.
    • This cap was originally meant for products like laptops with modems, but premium smartphones are now so expensive that they often hit this cap.
    • I have estimated that this cap is somewhere around $500 but if it is as low as $400, then the rate I calculate paid by Apple goes up to 3.1%.
    • Second pay up front: There is a pay-up-front option (which Nokia took advantage of) which allows the vendor to pay a lower rate going forward.
    • It is not clear whether contracts with the iPhone suppliers have made use of this option or not.
  • The net result is that I calculate that Apple is paying somewhere around 3% to Qualcomm which I think is at least on par with many other vendors.
  • The problem with patents as there is no real way to determine what should be paid to for them.
  • I have long believed that patents are worth either:
    • First: what an entity is prepared to pay for them or
    • Second: the present value of the cash flows that the patent generates.
  • This is why historical precedent is so important when it comes to patent licencing and here Qualcomm has a huge advantage.
  • Qualcomm has hundreds of agreements and more than 20 years of history as evidence that its agreements have not damaged the mobile industry, in fact, quite the reverse.
  • Furthermore, I think Apple’s intransigence on this issue and ceasing payments that it has already agreed to in writing, plays enormously to Qualcomm’s advantage.
  • Courts look poorly upon a refusal negotiate and acting in bad faith and I think that Apple has done more harm than good to its case here.
  • Hence, I think Qualcomm’s chances of prevailing against Apple are better than they were against Nokia which is all the more reason why it should fight tooth and nail to preserve its business model.

Mobile Payments – Trouble in paradise

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Mobile Payments are going the wrong way.

  • It appears that the usage of Apple Pay on the iPhone is now declining compared to where it was in June 2016, sending a worrying signal for the outlook for mobile payments in general.
  • The most recent data from PYMNTS.com (see here) shows that both adoption of Apple Pay and its usage are showing the first signs of decline.
  • Android Pay and Samsung Pay have yet to show this decline but I suspect that this is due to the fact that they have not been around long enough to show this trend.
  • Neither of these two offer anything that Apple does not and in almost every case, I think Apple does it better.
  • The percentage of iOS users surveyed that had tried Apple Pay fell from 23.8% in June 2016 to 21.9% in March 2017.
  • Furthermore, in March 2017, 48.6% of those users that had not tried Apple Pay said that they were happy with their current payment method (plastic card) compared to 37.0% in March 2015.
  • Of those that have used it, those that “use it at every opportunity that I get” fell from 48% in March 2015 to just 18.7% in March 2017.
  • It also appears that security, ease of use or the store’s ability to make the payment work are not the reasons for Apple Pay’s lacklustre performance but more the fact that paying with plastic is just fine.
  • I think that this is a great example of how important it is to offer a better experience when one is looking to drive adoption.
  • Paying with a mobile phone is no easier or convenient than paying with a card and in many circumstances, it is much more difficult.
  • This also explains why mobile based payments have been so successful in China despite being based on the much maligned (in developed markets at least) QR code.
  • The offline experience to do almost anything in China is dire when compared to USA or Europe which has meant that even QR codes offer a huge improvement in the user experience.
  • For example, when using WeChat Pay, the time required to buy a train ticket can be reduced to 5 minutes from 45 and wait time at a hospital can be reduced to 20 minutes from 2 or more hours.
  • This is the issue that I see with mobile based payments in developed markets.
  • Plastic cards have very high penetration and almost everyone accepts them.
  • At the same time payments using a mobile phone don’t particularly improve the user experience for the consumer which is what I think has led to the ambivalence that this survey is pointing to.
  • The net result is that to win the kind of adoption that China has, mobile based payments need to offer the user a compelling reason to use them.
  • Failure to do this could see adoption and usage decline to a niche of power users with the vast majority of users sticking with plastic cards which, by all accounts, are plenty good enough.
  • It looks like wallet manufacturers are going to be in business for much longer than anyone thought.

Apple FQ1 16 – One way street.

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iPhone benefits where Google could not.

  • Apple released excellent results highlighting that contrary to my previous view, iOS has been the main beneficiary of Samsung’s recent woes.
  • FQ1 17A revenues / Adj-EPS were $78.4bn / $3.36 compared to consensus at $77.3bn / $3.22.
  • iPhone was the main driver of the upside with 78.3m units shipped at an ASP of $695 beating expectations of 76.3m units at an ASP of $688.
  • In addition to the share gain, prices went up as the larger screen version of the iPhone saw its biggest contribution to the mix ever.
  • I think that has been primarily driven by Apple taking a good share of users that purchased the Note 7 and were left high and dry by the recall.
  • Users appear to have taken this opportunity to move from Android to iOS, a move which I think is pretty much a one-way street.
  • I find this surprising as the iPhone 6 is now in its third generation meaning that a large screen iOS device has been an option for users for 2.5 years.
  • This means that most high-end Android users have already purchased a new Android device despite a large screen iOS option being available.
  • This is what led me to believe that iOS would not benefit from Samsung’s Note 7 disaster but this logic appears not have been correct.
  • Instead it appears that the negative stigma surrounding the recall has been enough to encourage users to switch away from Android despite the fact that many apps will need to be repurchased.
  • I have estimated that around 2.5m users (see here) were affected by this incident of which I think around 2m have bought an iOS device and 0.5m a Google Pixel device.
  • This explains the strong performance of iPhone, the better mix towards the larger screen device (Note 7 is a large screen) and the geographic performance of Apple during calendar Q4 16.
  • It also explains Apple’s slightly cautious guidance for the coming quarter as this gain is likely to have been a one-off benefit.
  • FQ2 17E revenues / gross margin are expected to be $51.5bn – $53.5bn / 38% – 39% compared to consensus at $53.8bn / 38.7%.
  • This is bad news for Samsung as the crowd that bought the Galaxy Note 7 appear to have switched to iOS from whence they are unlikely to return.
  • Ironically, although Google has failed to win those users over to Pixel, it will still benefit as RFM research indicates that iOS users generate far more advertising revenues for Google than Android users in the same demographic groups.
  • These were good results but they do not herald the return to growth that the shares badly need if they are to see any real upward momentum.
  • I still think that the shares represent great value for income based investors but those looking for capital growth will remain better off with Microsoft, Baidu and Tencent.

Apple FQ4 16A – Margin gadfly

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Margin pressure from product mix is not a problem. 

  • Apple reported results that broadly met expectations although slight weakness in profitability is an indicator that some users are buying the cheaper iPhone 6s rather than the 7.
  • FQ4 16A revenues / EPS were $46.9bn / $1.67 compared to consensus at $47.0bn / $1.66.
  • Apple sold 45.5m iPhones which was in line with consensus at 45.0m but pricing was weaker than expected at $619 compared with consensus at $625.
  • Mac shipments fell 14% YoY 4.9m units mostly due to the overall weakness in PCs and iPad was also weak declining 6% YoY to 9.2m units.
  • Guidance was mixed with FQ1 17E revenues / gross margins expected at $76bn-$78bn / 38.0% – 38.5% compared to consensus at $75.4bn / 38.9%.
  • It is the miss on gross margin that has triggered the disappointment as a combination of higher overall revenue bringing greater scale benefits and a full quarter of the iPhone 7 should help profitability more than Apple is indicating.
  • This is especially the case as improving costs was the main reason for FQ4 16A gross margin strength which came in at 38% at the top of the guided range of 37.5%-38.0%.
  • Although Apple remains supply constrained on the iPhone 7, I suspect that the reality is that there is a slight mix shift towards the older and cheaper models.
  • Despite the new colours and no headphone jack, the new iPhone is not very different from last year’s model and the ecosystem experience for the consumer is the same as they run the same software.
  • Furthermore, I think that some consumers are put off by the lack of a headphone jack which could be driving them to upgrade their older models to the iPhone 6s rather than the 7.
  • Older devices have lower gross margins than new devices as the price falls more quickly than the cost to make them which could be responsible for this slight weakness.
  • Overall, the weakness is very slight and Apple is continuing to increase the number of users that it has in its ecosystem.
  • This is critical for its long-term outlook which I think remains pretty rosy as Google’s Android is still unable to offer much to induce users to switch away from iOS.
  • Gross margin variation due a mix shift is a normal factor in every business and this is what I think Apple is dealing with.
  • Gross margin pressure from competition is a far more serious problem and with Samsung is disarray and no real competitive threat from Google, I do not see this happening in the short-term.
  • The net result is a company in a commanding position but one that is struggling to find growth as it has high share in the segments that it addresses which are themselves increasingly saturated.
  • I do not see Apple going to lower tiers to find growth but instead it is looking for new product categories.
  • Of these there is little sign meaning that the medium term is likely to be one of very low growth but mighty cash flow generation.
  • For an income investor, this is a great place to be but anyone looking for short term capital growth should probably look to Microsoft, Tencent or Baidu.

Qualcomm vs. Intel – Storm in a teacup.

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Qualcomm thrashes Intel but not where it really matters. 

  • It appears that Qualcomm has once again demonstrated superiority over its peers when it comes to radio but I think it highly unlikely that users will notice.
  • Radio performance analysis specialists Cellular Insights have run a series of tests on the iPhone 7 powered by Qualcomm’s MDM9645M modem and the iPhone 7 powered by Intel’s XMM7360 modem to compare radio performance.
  • The results are startling and much more so than in the infamous “chipgate” episode where the A9 (iPhone 6s) made by TSMC resulted in 5-7% battery life than the same chip made by Samsung.
  • In this case the Qualcomm modem has consistently outperformed the Intel modem on 4G by 30% when the signal was moderate and 75% when the signal was at its weakest.
  • When the signal was at full strength, both modems performed similarly.
  • This does not come as a huge surprise as Qualcomm modems have for years been consistently better at performing in non-ideal radio environments giving it a major point of differentiation.
  • This difference is far greater than it was for chipgate but I doubt whether this is going to have users scrambling to check the model numbers of their devices prior to purchase.
    • First: Battery life is a major issue for every smartphone and is a concept that is very easily grasped by the consumer.
    • As long as there is a connection and the service works, most users will be satisfied, meaning that a difference in speed is less likely to be noticed.
    • A device that does not turn on or fails right at a critical moment is far more noticeable.
    • Second: Bleeding edge.
    • What Cellular Insights has measured is performance at the bleeding edge.
    • For example, in band 4 at -120dBm (very weak radio) Qualcomm manages around 30Mbps while Intel does around 12Mbps.
    • When I look at the Digital Life pie of smartphone usage there is not a single service that I think will be noticeably degraded by that difference to the point where the user will blame the radio.
    • Furthermore, almost all networks still have an underlay of 3G meaning that user will have some data coverage even in the advent that 4G fails completely.
  • Most tellingly of all is the fact that the iPhone 7 has been widely available for over a month and there has been not a single murmur from reviewers or users that one version of the device has a better radio than the other.
  • Consequently, I think that posterity will take note of this difference and move on with no real impact being felt in shipments of one variant or the other.
  • However, for Qualcomm this is an important demonstration that it remains peerless when it comes to radio modems.
  • This is critically important as this test is likely to influence device makers when they are selecting which modems to use in their products giving Qualcomm slightly better pricing power.
  • The general consensus out there is that radio modems are beginning to commoditise as LTE matures as a standard but this test clearly shows that this is not the case.
  • Despite this good news, Qualcomm still needs to expand its horizons into other device categories to keep growth going as smartphones are grinding to halt.
  • This is where its smart drone, IP camera reference platform and potential purchase of NXP semiconductors come into play.
  • This is bad news for Intel but I think it can quite easily shake it off as its performance inside the iPhone 7 is clearly good enough.

Apple – A stern test

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The iPhone 7 is a stern test of Apple’s brand. 

  • Removing the headphone jack will be a tough test of whether Apple’s brand is strong enough to wean consumers off a connector that they have loved for over 100 years.
  • Apple launched two new products and one new accessory at its annual launch event on September 7th.
    • First: iPhone 7.
    • The new device no longer has the 3.5mm headphone jack but comes with an adaptor in the box.
    • Users wanting to use traditional headphones will no longer be able to listen and charge at the same time.
    • The device also sports a brighter display, much improved camera (with wide angle and telephoto cameras on the 7+), a new home button as well as water resistance to 1m of immersion.
    • With the exception of the headphone jack, there is not much here that does not already exist on competing products although I suspect that when it comes to the camera, Apple’s combination of software and hardware will create a top notch experience and image results.
    • The iPhone 7 doubles the capacity of previous versions with the top size now being 256GB but the price is staying the same as the previous generation.
    • Second: AirPods
    • These are wireless Bluetooth headphones that automatically pair with the iPhone and Apple Watch with some very nice features that should create a great experience when used with Apple’s products.
    • They will also work with non-Apple products meaning that it the AirPods are using standard Bluetooth and so it will be important to see how well the audio quality measures up to wired headphones.
    • The AirPods also allow use of Siri with a double tap as well as voice calls and easy device switching.
    • The AirPods are very expensive at $159 and I expect them to sell only to the real top end of Apple’s fan base.
    • At the same time, Beats is incorporating the new technology into a range of its devices at more reasonable prices giving consumers more choice.
    • Third: Apple Watch 2.
    • Apple updated the Apple Watch adding water resistance to 50m making it good for swimmers as well as adding GPS to allow full activity tracking without the iPhone being present.
    • These went hand in hand with a nice new ceramic case and a version of the device which has Nike running software embedded at the factory.
    • However, what Apple did not do was provide an answer to the most asked question at the Apple Watch tables which remains: “Why should I buy it?” not “How much is it?”.
    • Hence, I do not see the Apple Watch 2 lifting the smart watch market out of its current decline and I remain very cautious on the outlook for wearables in general.
  • Apple is certainly taking a step forward in removing the headphone jack but at the same time it has given competitors material for marketing their products.
  • It also makes the device even more proprietary than it already was which is likely to anger some users.
  • The biggest risk here is not whether Apple will lose users to Android but whether users looking for a new phone will buy the 6s which is almost as good and still has the beloved 3.5mm jack rather than the 7.
  • If all goes well then I expect ASPs and gross margins to hold steady but should users shun the 7 for the cheaper 6s then ASPs, revenues and profits will come under pressure.
  • This is the big gamble that Apple is taking where clearly it is hoping that its brand is strong enough to force the industry and users to move on from something they have been using for many years.
  • I do not think that there is nearly enough here to drive a real replacement cycle (like the iPhone 6) but there should be enough to keep the ship steady while Apple searches for the next revolution.
  • Hence, I continue to think that Apple is a great long term investment as it offers great value but there is nothing from these launches that is going to drive revenues back to growth.
  • Samsung, Microsoft and Baidu are my top short-term picks.

Apple Q3 16A – High yield

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Apple as a bond is yielding 9.8%. 

  • Apple reported better than expected Q3 16A results as the iPhone SE sold better than its predecessor, the iPhone 5c, despite a much larger than expected channel inventory reduction.
  • Q3 16A revenues / EPS were $42.2bn / $1.42 compared to consensus at $42.1bn / $1.39.
  • As usual all eyes were on the iPhone which shipped 44.4m units to end users compared to consensus at 39.9m but did so at a lower price as ASPs were $595 compared to consensus at $605.
  • This is what was responsible for the better than expected results but iPad and Mac also fared reasonably well.
  • iPad shipped 10.0m units compared to consensus of 9.1m and the iPad Pro helped ASPs improve to $490 from $415m.
  • Mac shipped 4.3m units compared to consensus of 4.4m underscoring slow but steady market share gain in the PC market.
  • Q3 16A Services revenues grew by 19% YoY to $6bn underscoring that developers are faring better on iOS and are increasingly preferring to develop their apps for this platform before considering Google Play.
  • Guidance was also positive with Q4 16E revenues / gross margins expected at $45.5bn – $47.5bn ($46.5bn midpoint) / 37.5% – 38.0% (37.8% midpoint) slightly ahead of consensus at $45.8bn / 38.4%.
  • These good results underpinned another very strong quarter of cash flow with $10.1bn generated from operations, $13bn returned to investors leaving gross cash down slightly at $231.5bn.
  • With debt unchanged at $72bn this leaves the net cash position at $159.5bn.
  • Although the market was clearly relieved that the declines were not as large as had been feared, these numbers do nothing to alleviate Apple’s current problem.
  • In the eyes of the stock market, Apple has to produce growth in order to command a higher valuation and of this growth, there is no sign.
  • This is why Apple is unlikely to receive a rerating of its shares until it branches out into a new product area.
  • Apple Watch saw declines this quarter (see here) and I think that while Apple is building a car, it will never launch it (see here).
  • This leaves Apple unlikely to see much in the way of growth but it is continuing to distance its ecosystem from Google’s.
  • This gives me confidence that its superb profitability and cash flow are likely to remain intact for some time to come.
  • On that basis, I like to think about Apple equity as a bond and on that basis it is currently paying a coupon to its owners at a run rate of $52bn per year.
  • Hence, equity holders are earning a yield of 9.8% per annum with a very low risk profile.
  • For those that are not worried about capital growth, this is a no brainer as most companies with bonds yielding 10% are highly distressed.

Apple – Replacement problem.

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The iPhone 6 is so good; it does not need replacing. 

  • The summer season of speculation, rumour and leaks of what will and will not be in the iPhone to be launched this September is already in full swing.
  • With loss of the headphone jack having been already put to bed (see here), attention has turned to the screen but I suspect that Apple is unlikely to be able to do what I think it will take to launch another major replacement cycle.
  • Top of the list of screen upgrades is a move away from regular LCD to Active Matrix Organic Light Emitting Diode (AMOLED) which would have an impact on the brightness, clarity and contrast of the images shown on the screen.
  • Unfortunately, even Samsung’s best marketing videos on how AMOLED improves the viewing experience fail to make me want to rush out and spend another $700 on a new iPhone.
  • I think that a large part of the problem is that the iPhone 6 is still almost as good today as it was nearly 2 years ago.
  • This means that the user needs to see something that either appeals to his fashion consciousness or meaningfully improves his Digital Life and I can’t see an upgrade to AMOLED providing either.
  • Consequently, I think that the upgrade in the brightness and clarity of what is already a perfectly adequate display is not sufficient to encourage users to replace what is already good enough.
  • However, if Apple were to do away with the side bezels all together and have a wrap-around screen that might just create enough excitement to trigger a cycle.
  • A wrap-around screen would not necessarily improve the function of the device but it would meaningfully differentiate it from its predecessors making the current generation look old and tired.
  • As many handset companies have found to their great profit, pointless gimmicks can sell vast volumes of mobile devices and I can’t see why Apple would be any different.
  • Unfortunately, I suspect that this year’s model is very unlikely to have this sort physical upgrade leaving the iPhone 7 or iPhone 6s II looking much like those that have gone before it.
  • As a result, there is very unlikely to be an upgrade cycle of anything like the size of what we saw in 2014 and 2015.
  • Therefore, I do not see Apple showing a sudden growth spurt which will disappoint those looking for a catalyst for the shares.
  • Despite this, I think there is value to be had in Apple.
  • It is a cash machine that is second to none, with an incredible global brand but it trades like a broken steel company.
  • Hence for those that have faith that Apple’s margins are unlikely to be challenged any time soon, this makes a great long term investment.
  • In the immediate term, I think Baidu, Samsung and Microsoft have more upside in terms of share price.

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.