The Power of Apple

Seeking Alpha ^ | 04/14/2010 | John Galt

[Swordmaker]

iTunes helped put the Music store out of business

Remember way back when the mall used to have Music Stores? Remember those stores that would let you preview the CDs before you bought them? Remember how you’d preview the $17.99 CD at the mall and then you’d go buy it at Best Buy (BBY) for $11.99? Do you remember Napster? People used to run out and buy music when their favorite group put out an album, sometimes the CD was a hit, sometimes it was a miss and you wasted your money. In the past people would sometimes buy an entire album for just one song. The simplicity and convenience of iTunes helped bring the music industry to its knees. Apple (AAPL) didn’t knock down the music store, Napster did a lot of the heavy lifting but Apple helped deliver that knockout blow.

iPods won the MP3 Race

Everybody under 30 has one. The iPod dominates the market with an estimated over 90% market share. The prices of iPods are already going down, and the race was easily won by Apple. Nobody has a Zune. In some cases the imitators (I mean competitors) even have better features or products but people still aren’t buying them. Apple is a brand that people know and trust, and it works well with their ecosystem of products. How annoying would that be if you were an engineer at Microsoft (MSFT), Sony (SNE), or SanDisk and you theoretically made a better product and people still weren’t buying it? If you are a competitor, you can’t just equal or be slightly better than the iPod, you have to be much better for people to buy your product en masse. The Mp3 market seemed to be just chugging along until the iPod Touch gave Apple a shot in the arm. These little devices are amazing and gave reason for people to upgrade from their Nano or other iPod.

iPhones changed the game

All other smart phones are just impostors. Remember all the hype a couple of years ago surrounding the iPhone? Wouldn’t you say they lived up to the huge amount of hype? Let’s face it, all of these other Palm (PALM), Motorola (MOT), LG (LGERF.PK), HTC, Nokia (NOK), Google (GOOG) phones are just impostors. Apple is cool, user friendly, convenient, easy to use, and has that “it” factor. All of these other phones are just knock offs of iPhones. Once again it must anger the other companies' engineers greatly that you could create a product that might have better features in some cases but in order to beat Apple, you can’t just equal it, you have to be much better than it. The only thing that was really holding the iPhone back was not being able to sell on Verizon’s (VZ) #1 network but Apple is working on the details of getting around that. There are also rumblings of a new iPhone launch over the summer. How many Verizon customers are there out there that wanted an iPhone but didn’t want to sacrifice service (that will be buying the Verizon iPhone)?

Apple computers continue to sell due to high customer satisfaction and a loyal fan base

The iPhone has been a strong earnings catalyst but Apple computers still derive the biggest chunk of revenues. If you wanted to look at their PC segment qualitatively you’d see that Apple has very strong customer satisfaction and a loyal fan base. You constantly run into people that say things like, “I was always a PC guy but I love my Mac… the conversion isn’t difficult… I’m never going back to PC…this computer just works etc.”. When you look at the total PC market Apple has barely made a dent and has plenty of room to grow. While their competitors are selling PCs under 1000 bucks (and making thin margins), Apple is known as “quality” and is selling computers OVER 1,000 bucks and making higher margins. A wise man once told me that over the long run in business you are better off selling the best quality product for more money than selling an average product for a fair or even cheap price. Plus, it’s much easier lowering prices than raising prices - especially with technology that operates naturally on a deflationary pricing scale.

The iPad will be a game changer

The last big things at Apple (iPod and iPhone) were smashing successes that lived up to the hype and that bodes well for the iPad. I remember the couple of days after Apple unveiled the iPad you’d see strangers on the elevator talking about the iPad instead of the weather. Apple sold 450K iPad units after the first 5 days of its launch and once again you had people camping outside stores to get their hands on the latest iGadget. The iPad is furthering the trend of moving the internet mobile and that’s a trend I’d expect to continue. Why sit down at a desk when you can carry the internet right with you on an iPhone or an iPad? Why not have your music, books, movies, internet, camera, phone and friends with you on an easy to carry device? I know the iPad doesn’t have a camera yet but people expect the next generation will.

The iPad will help put bookstores out of business

iTunes and the iPod helped put music stores out of business, and I believe the iPad will help put the bookstore out of business within 5 to 10 years. These bookstores are sitting ducks, at least in their current form, much like the music stores were 10 years ago. They are big, take up a lot of space, and their books are more expensive than Amazon (AMZN) mailings, a Kindle or soon to be iPad. Why would you go into Barnes and Noble (BKS) and buy a new book that might not even be in stock for 25-30 bucks when you can buy it on Amazon for cheaper or on your iPad for 10 bucks? Why have a library full of books in your house when you can have them all digitally online saving space? I do believe you’ll still see used bookstores in trendy urban areas like Washington’s Dupont circle, but the big neighborhood bookstores will be dinosaurs. They could try and sell coffee, have online books, and build a “community”, but there is no need for retailers to dedicate all that floor space to books in the year 2010. Yes, some people do like the tangible aspect of holding a book, but people respond to prices and the Amazon bookstore, Kindle and iPad win hands down. There will still be Left-leaning Americans with a “Luddite” mentality that will want to support their neighborhood bookstore to the bitter end, but most Americans will do the sensible thing and buy the lowest cost provider. You could start a support (higher priced) Mom and Pop movement all you want, but people are still voting with their feet and buying the lowest cost stuff at Wal-Mart (WMT). Apple will be the Wal-Mart of Books pushing the Kindle out of the way.

Changing Newspaper industry

Newspapers are currently on the ropes as well but they are in the process of changing forms. You don’t need to buy the paper when you can view it online, oftentimes for free. Before the days of the internet, cities had virtual monopolies over their geographic markets. Now you could live in a big city and read your local paper from back home or anywhere around the country from your iPhone or iPad.

Cannibalization & new niche markets

The iPad will lead to new “niche” markets. In all reality the iPad will cannibalize some existing iTouch and laptop sales (estimated 15%), but I believe it will also bring new people to the market and better serve customers. You could see older people that have never used a laptop/desktop buying an iPad. You could see older people with declining vision buying a beautiful new iPad. The device could serve a niche market as it’s in between a laptop and iPod Touch. I believe the iPad has the potential to serve customers' needs unlike any other product currently out on the market.

iAd
This all leads to the iAd. An advertising platform for Apps on mobile devices that will bring in hundreds of millions of dollars within a few years. Not only is Apple creating homerun products, but they are in the process of creating a residual income stream off of those products. If you are a marketer you want people to see your advertisements, whether that be in the form of the newspaper ad, a Google search, or before an iPhone app. You want an audience, and you want to hit your target markets.

Apple is an innovator

Apple didn’t invent a lot of their products, they just made them better with a visionary leader who added value. Henry Ford didn’t invent the automobile but he made cars better, faster and cheaper. Ford's known for bringing the innovative assembly line process into the auto factory, he’s known for paying his workers the high salary of 5 dollars per day, and he’s known for making cars affordable enough so that you didn’t have to be rich to buy a car.

Apple didn’t invent the computer, MP3 player, smart phone, or even the tablet. Steve Jobs took an existing product, saw the potential and made it "his" in much the same way Henry Ford did with early cars.

Explosive Earnings Growth
2004: .37
2005: 1.44
2006: 2.47
2007: 3.93
2008: 5.36
2009: 9.08
2010E: 11.87
2011E: 13.88
2012E: 15.19

2009 Breakdown of Earnings
Computers 13.859 Billion
- Mac Notebooks 9.535 Billion
- Mac Desktops 4.324 Billion

iPhone 13.033 Billion
iPod 8.091 Billion
Music + iPhone apps 4.036 Billion
Software 2.411 Billion
Peripherals & other hardware 1.475 Billion

Less Cost of goods sold 25.683 Billion
Gross Profit 17.222 Billion

Selling & Gen Admin 4.149 Billion
R&D 1.333 Billion
Operating Income 11.74 Billion
Interest & other Income .326 Billion
Pretax Income 12.066 Billion
Taxes 3.831 Billion
Tax Rate 31.8%
Net GAAP Income: 8.235 Billion
2009 GAAP EPS 9.08

Valuation
Look at Apple's earnings growth explode to the upside when our country is going through our Recession/Depression in 2008 and 2009. I'm a boring dividend/value Investor but I do allow myself a select few speculative companies and Apple is a company I'm willing to bet on. The good news is that you don't have to pay a big premium to invest in Apple. Over the last 5 years Apple has historically traded between 65x and 16x earnings and is now at 20x earnings. The company is bigger than it was 5 years ago so I don't see them trading at 60x earnings but let's say they went to 25x earnings or 30x earnings which is reasonable for a big growing company. That would put the stock in the 300-350 rage, the 350-400 range next year, and the 375-455 range in 2012.

Summary
Apple helped put music stores out of business and they will help put book stores out of business (at least in their current form) within 5 to 10 years. Apple has changed the way we think about music, movies, telephone, games, internet, and computing just by improving and optimizing existing products and making them their own. They have the power to be a dominant overall media provider in the near future.

Apple is exactly what Corporate America and this country as a whole needs. They demonstrate financial prudence by carrying no long term debt, have tens of billions in cash, they make products that people in other countries want (they export stuff) and they represent American innovation and creativity. As a freedom loving American I am proud of the company Apple and I own their stock.

Disclosure: Author is long Apple but none of the other stocks mentioned.

[Swordmaker]

The Power of Apple... commentary from Seeking Alpha... PING
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[JoeProBono]

[Mr. Jeeves]

You know what else the iPad is poised to kill? The teachers unions. A full K-12 curriculum will easily fit on the 64GB model, and what is their excuse going to be when kids with iPads can use simple, programmed instruction concepts developed in the 1960's to operate at college level by age 10?

It will take all of the Left's cunning to save their carefully cultivated army of brainwashing professionals from the technological onslaught that is coming. Because even if the West sticks with its century-old military-priesthood academic model and refuses to embrace technology - Asia will.

[dcgst4]

Hmmm...
http://www.theonion.com/video/apple-introduces-revolutionary-new-laptop-with-no,14299/

[tubebender]

And then there is the demise of the Back Pack industry as students downsize their daily tote which will also put chiropractors in the unemployment lines...

[Defiant]

Do you remember Napster?

I have Napster. It's legal, costs $14 a month for unlimited downloads that you can put on your mp3. It's a great deal, especially compared to $1 per song downloads when you have a bunch of kids constantly adding songs to their players.

[Raymann]

I’ll freely admit that Apple makes good products but when it comes to actually usefullness, most of them don’t fit the bill.

For a music player, the ipod really isn’t better then most other players. It’s plays a limited number of formats, has an average UI, and is damn expensive. I want a product that does more if I’m going to pay that much for it and fortuntatly Apple has the Ipod Touch. For me it was worth it with the apps, games, and other tools and I bought one (on Craigslist :) ).

However that’s the only Apple product I have and ever plan to get. I do a little programming and use many relatively rare and unknown programs for various things which will only run on windows. For what I want to do with my computer, gaming especially, there is no other choice and if I had one it sure as hell wouldn’t be a Mac. I build my own computers, you ever tried looking for Mac parts? Bah

As for the iPad, I have an ipod touch, why would I want a bigger one? If I’m going to pay that much for a computer, I want a computer not an overgrown speak and spell. There are at least 4 other slates coming out this year that will have better specs and better OS’s then the ipad (you know, like multitasking...the lack of which is unforgiviable).

As for books, I’m willing to give the Pixel Qi screen a chance but I will never read a book on a backlit LCD, I stare enough at a computer all day. I’ve been reading on e-ink for years now and that’s as relaxing on my eyes as paper. Even if I do get a slate in the future (non Apple) I’m not reading books on it.

Sorry about the rant. Saw a guy with an Ipad today and he saw me looking. He had such a smug look on him that I just wanted to punch him in his dumb monkey face.

[edh]

I wouldn’t go so far as to say Apple will kill teachers unions. While school districts may spend your tax dollars to buy Macs buy the truckloads, there is no way they’ll let an iPad and a parent kill their personal cash cow. Never.

Should that happen, the “Zune Pad with Homeschool Lockout” or “Android For Idiot Teachers” or some other thing will suddenly be all the rage in your local school district.

[martin_fierro]

You know what else the iPad is poised to kill? The teachers unions.

From your keyboard to God's ... er ... screen.

[Nosterrex]

Oh, the good ole Napster days. From the article, you would think that we will have to change the way that we record history from BC and AD to before and after iPad.

[Swordmaker]

I’ll freely admit that Apple makes good products but when it comes to actually usefullness, most of them don’t fit the bill.

There speaks a man who does not use what he criticizes.

For a music player, the ipod really isn’t better then most other players. It’s plays a limited number of formats, has an average UI, and is damn expensive. I want a product that does more if I’m going to pay that much for it and fortuntatly Apple has the Ipod Touch. For me it was worth it with the apps, games, and other tools and I bought one (on Craigslist :) ).

I see, an "average" user interface. The one that none of the others seem to be able to better. OK.

However that’s the only Apple product I have and ever plan to get. I do a little programming and use many relatively rare and unknown programs for various things which will only run on windows. For what I want to do with my computer, gaming especially, there is no other choice and if I had one it sure as hell wouldn’t be a Mac. I build my own computers, you ever tried looking for Mac parts? Bah

What parts are you having trouble finding, Raymann? Memory? Standard. Hard drives? Standard Serial ATA. Cables? Standard. Keyboards? Available on line... or plug in a USB keyboard and use it. Mouses? Plug in any USB mouse. CD/DVD drives? Standard ATA Optical drives.

And those hot-air ware slates... Exactly WHAT OS are they going to be running? Windows 7 with a pasted on touch input driver? Linux with the same thing? And what specs? A crippled, cut down laptop without a keyboard or mouse? The iPad will have multi-tasking as of September, it's already announced... and it already has multitasking in Apple apps. But you wouldn't know that, getting your talking points from people who don't use one just like you don't use one.

Saw a guy with an Ipad today and he saw me looking. He had such a smug look on him that I just wanted to punch him in his dumb monkey face.

That last ad hominem teils more about you than it does about Apple product users. What bigotry... and closed mindedness.

[Raymann]

I wasn’t trying to write another article but to answer your questions:

“There speaks a man who does not use what he criticizes.”

I’ve had to use them in college and one of my previous jobs. The last Mac OS I’ve used was 10 and I found it unintuitive and presumptuous (took forever to change default setting to the way I like it).

“I see, an “average” user interface. The one that none of the others seem to be able to better. OK.”

Actually I think the Zune Metro is much better :)

“What parts are you having trouble finding, Raymann?”

Uh, I did mention gaming? High end gaming isn’t a priority for Apple so mac compatiable cards and drivers come out much later then their PC counterparts. And even if they didn’t the mac gaming library is tiny compared to the PC’s.

“And those hot-air ware slates... Exactly WHAT OS are they going to be running?”

Depends on the slate. HP will be some Linux varient, the MS Curior will be 7 of course, and the Marvell will be andriod. And if I don’t like the slate with the OS it has, I could probably change it.

And as for your multitasking comment its not my fault they released a crippled comment. As for my talking points, they all come from place like CNET, Gizmondo, Engadget, and my own use of the Ipod touch. No one likes the closed app system, no one likes the near impossibility of user modifications other then jailbreaking it, no one likes that it can’t play flash which means no HULU, and no freakin USB.

And seriously...I’m a BIGOT for not liking the Ipad??? Christ man I just don’t like a lot of their products, get a grip.

[Othniel]

I don't need an ipod. I can whistle.

[Ronin]

I gotta disagree that the iPad is a gamechanger.

I played with one for about 30 minutes in the store today and came away unimpressed. It’s a nice toy, but that’s all it is — a toy.

I might be interested in having a used one if it was about one third the price, and I would be moderately pleased if someone gave me one, but this incarnation of the device is strictly a yawner.

[Swordmaker]

And as for your multitasking comment its not my fault they released a crippled comment. As for my talking points, they all come from place like CNET, Gizmondo, Engadget, and my own use of the Ipod touch. No one likes the closed app system, no one likes the near impossibility of user modifications other then jailbreaking it, no one likes that it can’t play flash which means no HULU, and no freakin USB.

OK, all 85,000,000 of the "no ones" who have bought the iPhones and iPod touches don't like them... I get it. Right. No one likes it.

I think you protest too much.

[edh]

“And seriously...I’m a BIGOT for not liking the Ipad??? Christ man I just don’t like a lot of their products, get a grip.”

No, you are a racist pile of scum for not liking Apple ;-).

My disgust with that company goes back to the 1970s when Steve Jobs would rape Steve Wozniak by screwing him out of bonus money. Wozniak did some slick engineering to create Atari’s Breakout. Jobs reaped all the bonuses since Woz was able to reduce the chip count. Hell, the Breakout hardware was pretty much the basis for the Apple II computers. This has been well documented.

I really don’t get this Apple cult. I’ve used personal computers my entire life ... anything from about 1980 on up, I’ve done *something* with it. In the 80s, I found the Commodore and Atari line of PCs to be the best for general purpose computing. Sure the Mac had that slick OS and Mototola 68000 processor and the like, but the C64 and Atari computers just had more value and a broader range of software. Even the TRS80 CoCo had a pretty powerful 6809 processor (crummy graphics and audio though) and was a great deal. Even back then, I was told how fantastic Apple was by a few people just didn’t get it. I used Apple IIs in school for 4 years and found myself enjoying programming on a TI99/4A we had in our computer lab more than the Apple. There was simply more hardware out-of-the-box to use and abuse.

While I dig Apple’s aesthetics & engineering, I just don’t seem to get high off these products. I don’t know ... maybe every time I used one the plastic had hardened and I couldn’t get high off the fumes.

Like you Raymann, I was told that I didn’t know what I was talking about when I used an iPhone and really didn’t like the user interface. Maybe I didn’t use it long enough to get hypnotized into liking it. I was also told that my Droid was an inferior ripoff of the iPhone and that I didn’t know what I was talking about by many Apple users. This was all because I said “I prefer the Droid to the iPhone because of the slide out keyboard”.

Quite honestly, I could care less what other people think of what devices I choose to use. They serve me well. I was able to play with an iPad the other day. Again, neat toy ... it’s really pretty and amazing looking. But, really, at the end of the day, I can get more bang for my buck with a Tablet PC or an older Slate PC. I want a slate to read and take notes ... a bigger bonus would be to be able to take notes on a PDF Ebook or the like. More importantly, since I’d be doing a ton of reading on a slate PC, e-ink would be a Godsend.

Maybe iPad has an app for the PDF/Ebook note taking ... if so, great ... that means a similar one will be available very soon in either an MS or Linux flavor.

Seriously, whoever wrote this article seems more like an adolescent cheerleader or numbnut. Good for Apple for being so successful. Fantastic. Go ahead and blindly support a company and blast others as inferior bigots when they don’t like the products. You sound like those kids who fight about their Xbox 360 being superior to a PS3 and vice versa. It’s mind numbingly stupid!

Quite frankly, I’ve pretty much decided against owning any Apple products mainly due to the downright arrogance displayed by its user base. I’ve seen a picture recently with a girl who carved “apple rules” into her arm with a razor blade ... the caption says “10% of the market, 90% of the crazies” ... that picture gets truer by the day.

Also, I know, Rush Limbaugh uses Macs ... big deal ... I’m not a mind numbed robot and blindly follows everything he does.

[Mind-numbed Robot]

Thanks for telling us about your life. Other than that I don't see much useful information in your post.

Saw a guy with an Ipad today and he saw me looking. He had such a smug look on him that I just wanted to punch him in his dumb monkey face.

I think that is the most telling part. Why let others get to you like that, especially over a device they are using? His attitude and "smug look" are only your assumptions, but even at that, who cares?

[freedom_forge]

I agree with others here that this article is more cheer leading than substantive. Not everyone's life revolves around the niche markets Apple serves. And, although the company is innovative, especially its marketing department, the majority of people are unaffected by iphones and itunes, believe it or not.

The vast majority of computing platforms we use in our everyday lives we don't even notice. They are in all our appliances, our automobiles and in dozens of other devices such as our cameras. Taken together, their number dwarfs the number of laptops and cell phones. And taken together they change our lives more than any single fad device from a single company.

Regarding the iPad specifically, we'll have to see how it develops, but I've never got a lot of use out of a device without a full keyboard. Maybe that's just me, but I have to manage contacts and data bases and documents in addition to managing gobs of images and video. I don't know how to do some of that with a touch screen only.

But, in general, I like Apple and I particularly like the fact that their MAC operating system is based on an open source UNIX-like standard because I think open platforms are more flexible and longer lasting than proprietary ones. But one should never forget that there are smart people everywhere, not just in one company, and the competitive edge can change quickly. By the way, the fact that the MAC runs on free BSD makes your contempt of Linux amusing.

[Swordmaker]

But, in general, I like Apple and I particularly like the fact that their MAC operating system is based on an open source UNIX-like standard because I think open platforms are more flexible and longer lasting than proprietary ones. But one should never forget that there are smart people everywhere, not just in one company, and the competitive edge can change quickly. By the way, the fact that the MAC runs on free BSD makes your contempt of Linux amusing.

What contempt of Linux is that, Freedom? You won't find it from me. However, BSD is not Linux. BSD is UNIX. UNIX and Linux are not equivalents.