Friday, April 16, 2010

Does Software Development Threaten to Dethrone Apple?

A couple of months ago I wrote an article speaking to how Apple (AAPL) was the fourth largest company in the United States by market cap according to the S&P 500 (it is currently the 3rd largest), and began speculating as to whether or not the company deserved this highly coveted position. While being a tech company with no debt obligations is going to bias Apple's position upward in the S&P 500, I do think investors should re-evaluate whether Apple deserves this position in the market.

Yesterday there was a very interesting article posted in Slate (Apple Wants to Own You), and while I feel that the title is far too fear-mongering, I do think that a few of the issues raised are pertinent to Apple's ongoing success.

The biggest point raised in the article is the fact that the locking-out of third-party software that originally only pertained to the iPhone is now being included in the iPad, something at the very least controversial given that the iPad is being hailed as a tablet computer. This is to say that except by ways of the Apple marketplace for apps, you are unable to install any non-Apple endorsed piece of software on the iPad without manually unlocking the device and voiding your warranty. While this may not be a short-term concern for Apple, the Slate article identifies that one of the key draws to Apple products is the rich environment of downloadable apps.

This of course raises the question of whether software begets users, or users beget software. As it stands now, Apple gets 30% of the sales from all apps. That's a pretty lucrative business for being referee and market maker on your own devices. With Apple additionally trying to take 30% out of magazine subscriptions on the iPad as well as growing rumblings over the subjectivity and increasing conservatism of iPhone and iPad app acceptances, there is concern that Apple is starting to take more advantage of the moat of user base it has built up with the lights-out success of past products.

While the iPad currently has no side-by-side competitor, other phones such as those using the Android operating system produced by Google potentially offer users a more unfettered access to third-party software than those using the iPhone.

The story of the iPad has been a huge success thus far, with Apple reporting over 500,000 units sold. Apple's stock momentum appears to be one of maintained margins and continually growing revenue, with revenue expected to jump 47-80% from last year's second quarter. While Apple has been a very strong performer in the past, it might be worthwhile to current investors to re-weight the risks and evaluate whether the price that Apple is currently trading at is pricing in a significant amount of optimism regarding future success.

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