Apple’s Secret Sauce


New York – Earlier this month, Integrity Research polled a group of analysts at several independent research providers chosen from its database of over 3,900 firms to ask them a few questions about Apple, Inc (AAPL).  With all the recent news surrounding Apple, we thought that it would be interesting to get the opinions of a few people who focus on the company for a living.

Integrity identified five analysts from four firms to participate in our discussion on the company.  Jason Mauricio is an analyst at Arete Research Services LLP.  Shannon Cross is the CEO at Cross Research Group, LLC.  Chris Hazelton and Gregg Speicher are analysts at The 451 Group, and Ross Rubin is a Tech analyst at The NPD Group.

Below are the questions we asked, and the answers the analysts gave.  If you would be interested in talking to any of the analysts, please don’t hesitate to contact us.

1)   What effect will the recent announcement that Verizon will start to carry iPhones have on Apple’s market value? Will Apple’s entrance onto Verizon’s network have any effect on the rivalry with Android?

Jason Mauricio: We forecast Verizon will sell 12m iPhones in FY11, contributing $7.4bn to its $100bn sale base. We expect the demand will largely come from current Verizon customers and any AT&T hold outs at T-Mobile and Sprint. AT&T has spent a lot of money locking in iPhone subscribers over the past three quarters.

The iPhone on Verizon may temporarily stem Android’s market share gains. However, we see the smartphone market as a whole continuing to grow with both iPhone and Android taking feature phone and legacy smartphone (Symbian, Windows Mobile, etc.) share. Increasingly, we expect Apple competitors to launch Android smartphones at price points that Apple is not willing to go down to. We do not view this as detrimental to Apple. Despite having shipped 16.2m units in 4QCY10, 3-4% unit market share, Apple nearly leads the industry in value share with its $10.5bn sales base, not far behind market leader Nokia, which posted $11.5bn in revenue in 4QCY10 but on a far larger number of units (124m).

Shannon Cross: We expect Verizon to sell approximately 11 million iPhones during 2011, contributing to our 69 million unit estimate for the year (up 46% y/y).  In addition to providing an additional channel for Apple, the company has also historically seen overall larger take rates of iPhones within a geography when there are multiple carriers.  The Verizon iPhone has been expected for over a year and therefore we believe it has already been incorporated into Android’s plans.  Given the significant growth in the smartphone market, we believe there is room for both iOS and Android to succeed.  However, we continue to believe Apple is better positioned given the control is has over the iOS eco-system versus Google’s open source model.

Gregg Speicher and Chris Hazelton: This is a huge untapped subscriber base for iPhone, and it will be a long growth cycle as well as more and more VZW subscribers become eligible for iPhone as their contracts run out. So the significant boost to revenues will be more than a blip, but a long sustained rise in revenues. Blips will be larger as new versions of iPhone may hit AT&T and Verizon at the same time. With iPhone available on Verizon’s network Android devices will lose the prominence they once enjoyed, no longer championed as Verizon’s answer to iPhone – now the answer is iPhone. Growth in Android will need to come from AT&T who has already shown a willingness to push Android devices, most notably Motorola’s ATRIX. While this is a significant blow to Android, device vendors leveraging Google’s OS will aggressively target the remaining US carriers (and abroad) that still lack iPhone with high end Android device offerings. The opportunity is there to offer devices with LTE before Apple adds this air interface to iPhone.

Ross Rubin: Clearly we’ll see some Verizon customers who have held out adopt iPhone and some AT&T customers switch or switch back. We may also see some holdouts on T-Mobile and Sprint who wanted the iPhone but not AT&T move to Verizon. Overall, though, consumers have certainly not been shy about moving to Android, and while Apple’s share will likely rise, Android has pulled far enough ahead to stay in the top spot.

2)   Is there a reason for concern over any competitors to the iPad in 2011 and 2012?

Jason Mauricio: The greatest concern over iPad competition in 2012 is that substandard tablets turn consumers off the category. We think Apple is likely to lead the tablet market again in 2011 due to several factors:

1)      Apple remains the preferred platform for the majority of developers. While porting apps from one platform to another is now easier, developers tell us that Apple products monetize better than Android. Much of this has to do with the frictionless payment system Apple has engineered within iTunes and the AppStore, which has yet to be replicated on Android’s Marketplace.

2)      Apple has a distribution edge – we expect Apple to keep its lead at point of sale. Judging by AT&T’s and Verizon’s recent earnings releases, operators have not proven a lucrative channel for tablet distribution. At last count, Apple has ~15,000 points of retail distribution for the iPad, including some 10,000 in the US alone with the majority being traditional retail. This is another differentiator vs. the competition, who are largely mobile device vendors. Only Samsung and potentially Sony can trump Apple’s reach outside of cellular carriers.

3)      Component supply constraints should continue in CY11. Apple is one of the largest purchasers of critical components such as NAND Flash and touch screen controllers. We see Apple putting large orders in for CY11, in part to secure supply and lock in favorable pricing against its competition. Other OEMs may find they have to fight for allocation or pay higher prices for components. Already, the few competitive tablets on the market have not been able to undercut iPad pricing.

4)      Custom UIs are likely to tarnish a promising Google 3.0 Tablet experience. At CES, Motorola was adamant that its Blur UI was a core differentiator for its Android phones, despite repeatedly poor press and consumer reviews. We expect Motorola, Samsung, LG and Vizio to continue to layer their own UIs over Android tablets, giving Apple’s familiar interface an edge.

Shannon Cross: We expect Apple’s iPad to remain dominant given its strong feature set and eco system of applications and media options (books, movies, music).  We do see increasing competition over the next two years but believe the substantial market growth (we expect 80 million tablets in 2012) will provide upside to market participants.  I just returned from HP’s webOS tablet launch and was impressed by the feature set and integration with the Pre3 smartphone.  We think HP will benefit from leveraging its webOS software throughout its product line up (they discussed notebooks and desktops as well during the event), similar to the quality control that Apple gains from its OS X and iOS software platforms.  However, the TouchPad will not be available until this summer and HP has yet to announce pricing and carrier partners.  We think Apple will continue to innovate (the coming iPad 2 will have a front facing camera for video chat via FaceTime, faster processor, more memory and potential an improved display), remaining ahead of the competition.  In addition, Apple is strategically investing in components (flash memory and displays), in order to lock in leading technology and gain competitive differentiation from other tablet manufacturers.  Net of HP’s TouchPad, we are also watching Motorola’s Xoom tablet (based on Google’s honeycomb) but do not see much of a competitive threat from tablets from Dell, Samsung, Lenovo and RIM.

Gregg Speicher and Chris Hazelton: There are close to 100 competing tablet offerings, but our survey data shows that for the majority of vendors, their devices are unanticipated by the market with little interest from potential buyers. Exceptions are Motorola, Research In Motion, HTC, and HP, who have garnered above average interest in their tablet offerings prior to launch.

Ross Rubin: Apple will likely continue to lead this market through 2011. They have a strong product, strong distribution and a big lead with developers. HP’s recently announced TouchPad has some potential by leveraging HP’s retail channel strength and a strong user experience, but its lack of apps will be a challenge for the tablet.

3)   What effects will Steve Jobs health have on investor confidence in Apple?

Jason Mauricio: It’s the one hole in Apple’s investment thesis. However, investors are taking comfort in the progress made during his last absence in 1HCY09. Tim Cook (COO) and Peter Oppenheimer (CFO) proved able to lead the company effectively. The shares are now up 3% since Steve Jobs announced his latest medical leave.

Shannon Cross: Investors are very aware of Steve Jobs health concerns and we believe it is a risk factor that must be weighed.  However, we are very confident in the strength of Apple’s executive team and believe Apple will continue to innovate and dominate well into the future.

Gregg Speicher and Chris Hazelton: It will always remain a damper until more is known; while one could argue that Apple is more than Jobs; it is likely that it is his abilities that have propelled the new products not just from idea to execution, but from idea to completely reshaping multiple industries.

4)   What are the ramifications of Apple’s $50 Billion cash stockpile and what do you see as the most likely use of this cash? Are there any likely acquisition targets that you see?

Jason Mauricio: There is a long list of potential acquisition scenarios one could dream up to put Apple’s growing war chest to use. However, we think it will sit on it. Apple has not historically been acquisitive, and we believe it lacks the culture and processes to seamlessly assimilate other companies. Our best advice would be to offer a dividend.  Apple could pay out any dividend based on its current cash flows and not have to touch its $60bn balance. The company is growing fast enough to still attract growth investors and, offering a dividend, would potentially allow income funds to be able to purchase the shares.

Shannon Cross: While some have speculated on large acquisitions (within consumer IT and adjacent markets), we believe that Apple thinks being strategic involves deploying assets in a way that creates and sustains differentiated consumer products. Therefore, we think Apple will focus on securing access to increasingly constrained components and improving its supply chain.  This thesis has been somewhat proven out by Apple’s recent announcement of a $3.9 billion investment in components (we believe displays) to lock in availability.

Gregg Speicher and Chris Hazelton: We do not foresee any large hardware acquisitions – more likely Apple may acquire smaller supply chain partners to strengthen its ability to avoid shortages in components as its device shipments continues to grow at a rapid rate.

Ross Rubin: Right now, Apple is using its cash hoard to tie up key supply components. I wouldn’t expect a big splashy acquisition. However, I would look to more being done in the wireless area, perhaps more to level the field among the carriers or allow it to offer more data access without carriers.

5)   What is the biggest risk currently facing Apple?

Jason Mauricio: We see the biggest risk to Apple coming from cloud-based services. RIM does an excellent job delivering users and operators a managed email solution, Google does something similar for email and maps, and a host of upstarts promise to serve music, video and video games in the same way. We expect a response from Apple this year, given the investment in its new datacenter. However, without a direct answer, we see this as an area where Apple is most exposed to competition.

Shannon Cross: We believe Apple is well positioned and see little fundamental risk.  The company has shifted its revenue mix away from the US and China, for instance, now constitutes almost 10% of revenue.  Therefore, if there are any shocks in Asia, this could impact Apple’s business.  Net of that, we expect the company to continue to exceed estimates in the near term with international expansion and increased corporate penetration driving upside.

Gregg Speicher and Chris Hazelton: The biggest risk to Apple is death by a thousand cuts from Android, as the OS is supported by almost every competitor. As Apple pushes its iOS devices into new markets and expands further into segments like the enterprise – Android is there as well. Offering a clear alternative to Apple’s view of what users need and want.

Ross Rubin: There are two main risks, both driven by Google. First is the commoditization of hardware that is being driven by Google. The company’s latest priority in the smartphone space is the low end and bringing more powerful capabilities to what were once feature phone-class products. The other challenge is that consumers may become dependent on Google Web services that Apple does not want to support, which would cause them to favor competitive products.

About the Respondents:

Please contact Integrity for more information on any of the providers mentioned below.

Jason Mauricio was an original member of Arete, joining in 2000. Jason runs the Digital Consumer/Video Game sector globally. Prior to joining Arete, Jason spent two years at Goldman Sachs International, covering European Tech. Jason is a graduate of Wheaton College and holds a BA in History. Over the past decade Arete has grown to 32 analysts, sales and support staff with offices in London, New York, Boston and Hong Kong. Research from Arete presents investors with a global perspective of the key themes and companies across the sectors it covers. Arete Research is totally independent, free of any conflict of interest from corporate advisory work and proprietary trading. As a matter of principle Arete never receives any form of compensation from the companies it analyses; its sole purpose is to help investors better understand the complex dynamics of the sectors it covers.

Shannon Cross is the CEO of Cross Research Group, LLC, which provides equity research services focusing on the technology industry. Cross Research’s coverage universe includes the enterprise hardware, imaging technology, storage, and software industries. Cross Research analysts host multiple non-deal road shows and company visits monthly. In addition, they speak at industry conferences and tradeshows alongside leading industry experts and executives and restricts distribution of its insights to a select client base.

Chris Hazelton runs the mobile and wireless research practice at The 451 Group. His research covers all aspects of mobile and wireless within the enterprise, as well as the increasingly important prosumer space. 451’s mobile and wireless research practice focuses on mobile software & services, wireless networks (both LAN and WAN), and mobile devices. Chris completed his MBA and MS in Information Systems from Boston University in May of 2005. Gregg Speicher, CFA, joined the 451 Group from Moss Creek Capital where he covered well over 10 companies in the software sector.  Mr. Speicher has over 12 years experience writing in the software sector.  The 451 Group is a deep domain industry expert in the information technology space-specifically in enterprise IT innovation. The firm’s research is specialized in infrastructure computing, open source, security and EU Research realms. The firm covers all new and emerging technologies in these areas and maintains a database of mergers and acquisitions among emerging firms complete with estimated deal sizes.

Ross Rubin is the Executive Director of Industry Analysis at The NPD Group.  He has over 20 years’ experience analyzing and writing about the technology industry, and leads The NPD Group’s coverage of consumer electronics with an emphasis on connected intelligent devices and convergence.  Prior to NPD, Rubin was a vice president and chief research fellow at Jupiter Media Metrix, where he founded and managed research services focusing on PCs and peripherals, smart devices, wireless, broadband, and video games.  The NPD Group is a global provider of consumer and retail market research information for a wide range of industries. The firm provides consumer behavior and point-of-sale (POS) information and industry expertise internationally across the following industry sectors: automotive, beauty, commercial technology, consumer technology, entertainment, fashion, food & beverage, foodservice, home, office supplies, software, sports, toys, and wireless.

For more information on any of the respondents or how to contact them, please contact Nathan Bragg at or (646)786-6854.


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