thinking about the iPhone 5 launch

Thinking about the iPhone 5 is, for me, a good way of focusing on the question of where APPL goes from here.  My conclusions in this post are preliminary enough that I haven’t documented what I’m writing in the way I would usually.

Here goes:

importance of the iPhone

The iPhone is by far APPL’s largest and most profitable product, accounting for over half the company’s gross  income.  It generates huge upfront cash from device sales (Industry estimates are that the iPhone 5 costs about $200 to make.  It sells for $650.).  In addition, APPL gets a percentage of the recurring fees the wireless networks charge their iPhone customers.  It also gets a big chunk of the money iPhone users spend on apps, books and periodicals.

On top of all that, the iPhone has replaced the iPod and the Mac as the iconic APPL device–the one that powers the brand name and motivates customers to buy the newest/best in the whole range of AAPL products.

the iPhone 5

–in many ways, it’s a “me, too” product.  Its most important new features, like larger screen size and LTE network access, have already been available on Android phones for a while.  Yes, Siri is apparently better (could she be worse?) and you can take panoramic photos, but still…

I don’t think this is necessarily a bad sign.  It probably signals, instead, that AAPL thinks that significant future hardware changes will be harder to come by, and easier to copy, than ever before.  Therefore, competition between iOS and Android (Google/Samsung) will play out on other fronts.

–AAPL is offering proprietary mapping services, provided by a wholly-owned, newly acquired, subsidiary.   GOOG maps are gone.

All the initial publicity is about how the new AAPL maps are, at present, not up to snuff.  I think they soon will be.  One might say that Safari and iWork aren’t great confidence builders, but they’re parts of what is now a small legacy business for AAPL.  I think there will be a lot more emphasis 1 Infinite Loop on getting maps right.

More important, AAPL may see proprietary apps as the next big phone differentiator.  This could be the way AAPL would like to steer the smartphone business, or it could simply be the way it diagnoses the competitive environment will evolve, whether the company wants it that way or not.

If so, rapid improvements with Siri and maps, as well as new proprietary apps will be keys to watch for.

–the iPhone 5 appears to have fewer Samsung parts in it.  If so, this is probably another facet of the intercompany competition highlighted by recent copyright litigation between the two.  To me, this would imply making a foundry-like deal with INTC as the logical next step.  For INTC, this might mean a better chance to have its proprietary processors (not just foundry output) appear in AAPL phones.

–the iPhone 5 appears to work on more networks than the one a customer contracts with.  According to one report I’ve read, changing the tiny sim card inside the phone will enable it to work on either T or VZ networks.  It may be capable of working on other networks as well.

If so, why have this feature?

There may be some manufacturing efficiencies, but I don’t imagine that’s the reason.

As the smartphone business matures, and assuming APPL wants to retain its upscale image, the company faces the issue of motivating customers in the developed world to buy a new $650 phone every two years.  At the same time, the price of the iPhone is far too high for all but the wealthiest users in the developing world to afford.  So the biggest growth area for smartphones would seem to be closed out to it.

Suppose, however, you could “recycle” used iPhones by buying them from T or VZ for, say, $100, replacing the sim card and furnishing them to a telecom carrier in the developing world?  Then you could expand your user base–and the associated income stream from carrier charges and apps etc.–without being forced to manufacture a cut-rate phone for the developing world that would threaten to dent your upmarket image.  You’d also be giving the developed world user a $$$ reason to upgrade.

Something to watch.

my bottom line

The best growth companies re-invent themselves every few years.  AAPL has already gone through several evolutions, from Mac company to iPod company to iPhone/iPad company.  The next turn of the wheel may be to become predominantly a software developer and usage royalty generator.  If that process is already under way–and if it’s successful–there may still be a lot more growth in AAPL than the consensus expects.

I don’t think there’s anything built into today’s AAPL price for the possibility.  I don’t think may people are thinking about it, either.  There’s a temptation to conclude that owning AAPL gives you a free call on the potential upside. In assessing downside risk if something like this doesn’t happen, however, the relevant question is whether AAPL becomes a MSFT (and just drifts) or a RIMM (and plummets).

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