I had a good chuckle last week glancing at the silent TV in my gym showing some talking heads on CNBC talking heedlessly (and bullishly) about Apple’s stock at its all-time high. I commented aloud that these savants likely were bearish on Apple $200 billion in market value ago. Sure enough, moments later the screen identified one of the enthusiastic “experts” as a former Apple bear.
Underestimating Apple is dangerous. To illustrate why, I dug into a report over the weekend by one of the best research analysts on Apple, Toni Sacconaghi of Bernstein Research. The thoughtful Wall Streeter noted Apple’s intentions to double services revenues in four years and asked how it could accomplish this feat. After accounting for expected growth, Apple would need an additional $13 billion in annual revenue from services, Sacconaghi writes. He concludes that only acquisitions will get it there, just as Aaron Pressman of Fortune astutely surmised last week.
First, Sacconaghi notes how relatively good Apple’s services business is. It counts only its take of App Store and related revenues, a high-margin 30% commission. Similar companies account for the whole purchase price customers pay. This means that buying even as big a content player as Netflix ($9 billion in revenue, accounted for the non-Apple way) won’t cut it.
The analyst thinks Apple has ample untapped opportunity if only it would market its services more aggressively. “What is striking to us is that perhaps in the spirit of upholding its privacy tenets, the App Store is much more ‘pull’ than ‘push,’ and it is a transactional marketplace, not a real ‘community.’” He cites Apple’s unwillingness, unlike Facebook and Amazon, to implore users by email to come back, to offer tools to create interest lists, to provide user-friendly recommendation engines, and so on.
Sacconaghi also sees opportunity for Apple to snap up small game developers because gaming is so popular in the App Store. In terms of traditional content development, he thinks it is “increasingly unlikely” that Apple could set up its own cable-like service and instead will be forced to “aggressively acquire (or more likely) license content.”
Watching Apple maneuver will be great fun. Just don’t underestimate it.
BITS AND BYTES
South Korean prosecutors have more questions for top Samsung executives. The conglomerate’s vice chairman Jay Y. Lee was summoned for another interrogation about his alleged role in a bribery scandal that resulted in the impeachment of President Park Geun-hye. They’ve also broadened the scope of their interest to several other senior Samsung managers, including Samsung Electronics President Park Sang-jin. (Reuters, Wall Street Journal)
Ford will sink $1 billion into an artificial intelligence startup. The investment in Argo AI, which spans the next five years and will turn the company into a subsidiary, is the automaker’s first big move (at least publicly) to develop its own self-driving vehicle technology. It mirrors the General Motors acquisition of Cruise Automation last year. (Fortune, New York Times)
Oracle and Google are heading back to court over Java. The database software giant doesn’t agree with a San Francisco jury’s opinion last fall that found Google made “fair use” of Java application programming interfaces when it embedded them into its Android mobile operating system—it filed another appeal last Friday, the latest in a legal fight that began in 2010. Oracle believes that Google should pay billions in licensing revenue. (Ars Technica)
Verizon drops its long-time resistance to unlimited data. Its new plan available Monday, which starts at $80 per month, comes without monthly data consumption limits—and no speed throttle for streaming video. AT&T’s offering is limited only to those who also use its DirectTV service. Verizon’s smaller rivals T-Mobile and Sprint started the practice last summer. (Fortune)
This security rating from Microsoft could affect your company’s cyberinsurance rate. The software giant has begun grading its business customers on how well they’ve secured their Office 365 cloud software accounts—the more protection, the better. At least one insurance company, Hartford, plans to take this into account when setting the premiums for its cyberinsurance policies. (Wall Street Journal)
IN CASE YOU MISSED IT
Google Is Studying How Robots Will Collaborate, by David Z. Morris
Chris Rock Draws Laughs, Controversy at Salesforce Sales Meeting, by Barb Darrow
Apple CEO Tim Cook: Fake News Is ‘Killing People’s Minds’, by Lucinda Shen
This Founder Quit His Job at Google to Start a Mobile Chat Business, by Polina Marinova
Tim Cook Thinks Augmented Reality Could Be As Big as the iPhone, by David Z. Morris
ONE MORE THING
Tongues are wagging over this leaked Magic Leap photo. Media site Business Insider published images of what its sources claimed is an early edition of highly anticipated augmented reality device that layers photo-realistic imagery onto the “real world.” The startup’s CEO Rony Abovitz took to Twitter to refute that claim, saying the company—which is backed with more than $1 billion—won’t let fans down. (Fortune)