Everyone knows Apple is one of the top three brands in the world and is known especially for their iPods, iPhones and iPad’s, as well as their Mac line of personal computers.
As a company, they have had a miraculous track record of disrupting industries and competitors particularly since Steve Jobs came back in 1997 and saved Apple from near bankruptcy and potential irrelevance. During Jobs’ second run at Apple, he pretty much reinvented the PC form factor with the candy color iMacs, the digital music player and smartphones. In 2010, even though tablets had been on the market for almost 20 years, Jobs reinvented the tablet with the iPad and has made it a highly successful new business for them. Apple has made all of these products icons within each product category and allowed them to become a $110 billion a year company with $160 billion in cash in the bank. By all measures, Apple is one of the most successful companies in history and continues to innovate in software and services along with introducing new models of their signature line of products each year.
Setting the Stage
Apple’s run of introducing disruptive products has been really amazing. With the iPod, iPhone and iPad they have changed the way people listen to music, made a cell phone into a pocket computer and delivered the next major new form factor in PCs with the iPad. Most companies are happy if they have one major hit and live on that hit for decades. But Apple’s successful track record has created what I would call unrealistic expectations from Wall Street and even consumers who want Apple to bring out the next great disruptive product that will turn the world on its ear and bring Apple the next great revenue boost to the bottom line. It is true Apple could still do something radical with the TV experience or enter the world of wearables in a big way. They are well on their way to making automobiles a new revenue stream over the years. But given the incredible innovation going on in the world of digital technology today, it would also make sense for Apple to make some highly strategic acquisitions of technology and companies that help grow their business beyond their core competency and current product lines.
Given Apple’s brand, cache with customers, retail outlets and superb customer service, it is perhaps time for all of us to be ready for Apple to leverage these major strengths beyond their current scope of products that only come from internal research and M&A activities. I think the financial world, as well as Apple customers, need to be open to the fact there are a lot of other great products out there that, under the Apple brand, could actually enhance their product portfolio and expand their reach in the marketplace around the world. In fact, I find this idea extremely intriguing since it could help Apple reinvent itself yet again. Remember, for almost 30 years Apple was a computer company. But by introducing the iPod and iPhone, Apple reinvented itself as a consumer electronics company and dropped the word computer from its corporate name — they are now only known as Apple, Inc.
I don’t think I can emphasize enough the fact that expecting Apple to keep coming up with disruptive products that are game changing hits is not realistic. While I do have faith they still have a lot of what it takes to create innovative game changing products, trying to bring out something disruptive on a regular basis is highly improbable. It is also very difficult to do, which is why Apple disrupting three markets with the iPod, iPhone and iPad is truly amazing. They can continue to innovate on existing products and drive them to great profitability. However Apple, as well as Wall Street and consumers, have to be realistic on two key issues about Apple’s future.
First, as stated above, creating a new product category or disruptive product again and again is not only difficult to do but can no longer be the only strategy of Apple’s business plan. The amount of innovation going on in the tech world that Apple could tap into either at the tech licensing level or in forms of tech and company acquisitions is the most realistic thing for Apple to do to add to their future business model. While some might see this as a sign of weakness, it is actually the opposite. Apple as a single company can only do so much with its internal IP and talent. Admitting and accepting this is the first step towards Apple reinventing themselves again. With $160 billion to work with, Apple could pick the cream of the crop from the outside to bolster their current and future product portfolios.
The second thing to understand is Apple as a brand is huge. While Apple’s products will always be central to their strategy, bringing in other known brands or complimentary technologies that can be “Apple” products and sold through their online and physical stores and supported by their world class customer service could easily expand their product lines as well as help them gain more traction in markets around the world. I have to admit, when rumors came out Apple was considering buying Beats for $3.2 billion, I could not understand why they might even consider this. At first I really questioned the valuation amount but given Beats brought in $1.2 billion last year and a $3.2 billion price is the street average of 3 times earnings, at least this could be rationalized. When Google bought Motorola they paid 12x earnings for the acquisition so, by comparison, this is a bargain. I also questioned the fact that at the IP level Apple could have built this from existing licensable IP and created a high end headset of their own.
Now incorporate the possible acquisition of a highly successful branded headset into the idea mentioned above that would have Apple carry other Apple owned products that strategically compliment their core products and sell and support them under the Apple brand and you have the beginning of another dimension of a new Apple. A Beats headset by Apple could double the amount of Beats headsets sold in their first year as a branded product and with the streaming service it clearly would help Apple jump start their move into subscription based music — clearly the biggest trend in digital music.
There is another angle on the potential Beats deal I only discovered after talking to some cultural experts. It turns out a large segment of African Americans and Hispanics buy Android devices and most are in the mid range price segments for smart phones. However a big element of users in those markets do not scrimp on their sports shoes. This has fueled a great deal of Nike’s and other companies’ sports shoe strategies for decades. These groups also are at the heart of the high-end headphones market as apparently they expect their mid-range priced smartphones to have great audio quality but want the top line headphones to experience that music. If Apple understands these demographic issues, they could clearly use Beats to help them gain more traction in a market segment Google and Android dominate today.
Whether Apple buys Beats or not, the fact they possibly have even considered an acquisition like this reinforces my contention Apple has accepted the fact they can’t always create disruptive products from inside and as part of the reinvention of Apple, the company will be looking to license or acquire key companies and technologies that, under their brand, could get them even greater levels of profitability. In fact, on the recent earnings call, Tim Cook basically said Apple was not averse to making some significant acquisitions with their cash horde in the near future. I am sure all would be strategic and, as I have suggested, could bring into the Apple fold products and IP that become branded Apple products as part of this investment strategy.
As one thinks about the future of Apple, I believe we have to consider the fact Apple will continue to innovate from within and enhance their current line of products like the iPod, iPhone, iPad and Apple TV. They will also most likely enter the world of wearables, automobiles and maybe even the health market in some way. But it is unreasonable for Wall Street and consumers to keep pushing Apple for the next big thing that could disrupt markets. I know they have a great track record and we have come to expect this from them. But I am not sure in this day of digital innovation this alone should drive their strategy. Now add to this the idea of Apple using their cash to build the company through licensing and acquisitions and buying strategic products that could be sold through their branded franchise, stores and supported by their great customer experience and you have what I believe will be the next major version of Apple as Apple reinvents itself again.