Jan 28, 2010
iPad or iMonopoly?
I’ve always thought that investing in Apple (NASDAQ:) would be a terrifying experience. The company’s 20X P/E ratio and fierce scrutinization by Wall St. analysts makes it so that they must constantly iterate and come out with new devices to meet earnings expectations.
When you have an iPhone and an Apple computer, what else do you really need from Apple? That is where the iPad comes in. By using the iPhone OS, Apple is able to dig a moat around the device’s software. To develop rich applications for the iPad you are going to have to sell through Apple’s app store. And every application sold gives Apple a 30% cut. To be fair, this is not entirely new ground here — the iPhone came out with the app store first, but now we are seeing Apple’s attempt at using this same approach to software for general computing.
Look at Apple’s current revenue streams:
About 83% of revenues are coming from what I would characterize as hardware sales. If Apple can grow their App Store, they have the potential of getting a new revenue stream that is actually much more attractive than their hardware business. Creating a distribution channel for applications, where Apple simply takes a 30% cut, makes a new business line that requires little actual capital to operate. The returns on invested capital are huge and they have the potential to offset the need for constantly innovating on the hardware side of things. Instead, Apple could position itself to start receiving a healthy income stream from consumers on an annual basis.
The potential here is great. With his announcement yesterday, Steve Jobs positioned the iPad as a media consumption device. He wants you to use the iPad to browse the internet, watch TV/Movies, and read books. For content providers, Apple’s control over the user experience is a big deal. You don’t have to worry anymore about ad blockers and you might actually be able to create some truly creative advertising experiences by leveraging the device’s abilities.
For publishers, the iPad is no silver bullet. What you might see though are publishers who step up to the plate to make applications worth paying for. For most local newspapers that are bleeding to death, this scenario is unlikely. For larger publications, like the New York Times or Wall Street Journal, there could be value.
Then there are ideas that people in manufacturing or sales could use the iPad to roam around factories or give demonstrations on the fly. These sorts of ideas seem possible and all involve having to go through Apple. If the iPad is widely adopted, developers are going to have to increasingly work with and split revenue with Apple. If you thought Microsoft had a competitive advantage with Windows, think about what Apple could have in the future by totally controlling the user experience and applications market.
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