It’s hard to be bearish on a company that has had a run as amazing as Apple and a hugely successful launch of a new product. But there are two reasons that lead me to question where things will go from here:
The first reason is Apple’s approach to software. I already blogged last Friday about how hard it is to maintain simplicity. But there is a bigger issue: Apple is only creating software for their own devices. Yes they have iTunes for Windows but I am talking primarily about mobile apps. I would be surprised if Google did not come out with a beautiful native maps app for the iPhone – it certainly didn’t take them very long to launch their own Youtube app. Conversely I would be similarly surprised if Apple extended their own maps app to Android. In that scenario I believe it won’t take long for Google’s app to be better and people to switch to it as their maps app (this is not just a programming issue but also a data issue). So what will an iPhone be when your photo app is from Facebook (Instagram), your video app and maps from Google, and so on.
Shiny hardware will go only so far in determining which phone people pick. If apps converge to apps that are non-Apple, then the price of the device will really start to matter. On that front, Apple has chosen a path of extreme vertical integration, even designing their own chips. As has been reported the iPhone 5 is powered by a custom Apple designed CPU. The history of vertical integration in other industries is one of great short term benefits followed by long term headaches. It is incredibly difficult to keep up with component innovation if you are the only buyer of those components. Years of excessive vertical integration are what accounted for many of the problems of US car companies. Now some people might argue that Samsung also makes their own parts (and in fact was a parts supplier to Apple). But Samsung is a conglomerate with individual divisions at scale and competing in the market.
There are two important potential counter points. First, Apple has unspeakable amounts of cash. A while back there was a rumor that they were buying Twitter. They could easily afford that and a bunch of other companies. It’s unclear though to me that Apple is good at buying companies. They haven’t done a lot of it and when they have they seem to have some trouble making it work (case in point: Quattro). On top of that Apple might use the cash to double down on vertical integration which could compound that problem.
Second, Apple has a huge number of credit cards connected to mobile phones. With Passbook they are taking a step towards a potentially larger payments play. To make that really count though they would have to go beyond being an Apple only solution. Payments is a broad horizontal opportunity and will not be restricted to devices from a single company.
I don’t have enough conviction on the timing of my bear case to short Apple but I am definitely not a buyer at the current stock price.
