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Summary

  • Several individual users of Apple iCloud were hacked and nude photos released.
  • It is not clear how hackers were able to gain access to the accounts, which included several celebrities.
  • Apple’s products already lack several features offered by its rivals. If the company loses its perception of security, sales could suffer.

Apple (NASDAQ:AAPL) is under fire - and its ecosystem could be vulnerable. The popular company is investigating reports that its iCloud service was hacked. Celebrities were the target. Hackers published a series of nude celebrity photos and videos, including several from actress Jennifer Lawrence and model Kate Upton, that were hacked from their private accounts.

The security breach could have important implications for Apple's ecosystem.

Apple's ecosystem pulls together all its devices and services with iCloud - a convenience and a security all in one that syncs everything from music and photos to documents and apps between devices for Apple users. It is one of the many reasons Apple iPhones are often called a gateway to its other devices. However, it appears Apple's ecosystem may not be as secure as many would hope and this could impact the company's bottom line.

INVESTMENT THESIS

The problem is that Apple's strategy is based on its ecosystem and iCloud is at its center. If this structure is perceived as vulnerable, that ecosystem loses its relative value. Already Apple's devices lack several features favored by its competitors - without the strength and security of its ecosystem and so many competitors now able to offer the same sort of interconnectivity, Apple may lose market share.

APPLE PLAYS CATCH UP

Apple will hold a media briefing on September 9 during which time the company is expected to debut products like iPhone 6, which is rumored to have a larger screen than previous models; the iWatch; and possibly an iPad with a larger screen. These developments seem intriguing but it is really a case of Apple playing catch up.

Several of Apple's competitors already offer similar products. There are several companies offering larger screens and wearable smart technology. Samsung Technologies (OTC:SSNLF) has several larger smartphones, such as its Galaxy series, and a variety of smart watches (see the line here). Samsung has debuted several commercials which make fun of Apple not keeping up (such as this one).

At the same time, Microsoft (NASDAQ:MSFT) recently launched an oversized tablet with a detachable keyboard called Surface Pro 3. Rather than matching the device against an iPad, the company released a series of commercials that compare the Surface Pro 3 to MacBook Air (see the commercial here).

The commercials are funny and well-done, but they are also true. Apple used to be at the forefront of technology but the company has recently been behind the pace - and while the evidence of this is concrete when it comes to devices, it is even more apparent in the "cloud."

APPLE iCLOUD

Apple's iCloud service does a lot. It lets users stream and sync photos, videos, and music. It also provides a function for saving certain files, such as those from Apple's iWork - but it lacks many features that are widely available.

Dropbox and Google (NASDAQ:GOOGL), (NASDAQ:GOOG) Drive also allow users to store and sync files but it doesn't preclude many file types - to back up documents and many other files on iCloud they have to be in one of Apple's file formats.

Apple iCloud allows use of Apple's video chat service FaceTime, but that service is only available for Apple users - Skype and Google Hangouts are available regardless of the operating system you prefer.

Apple's iTunes allows users to sync purchased music and movies, but so does Amazon, and Amazon doesn't charge for the storage of purchased media - and there are many people who prefer the use of Pandora (NYSE:P) or Spotify for music and Netflix (NASDAQ:NFLX) for movies and shows.

Further, in addition to the popular services named above, there are dozens if not hundreds more which provide the same or similar functions - so why Apple?

A MATTER OF PERCEPTION

Apple's interfaces are easy to use, it offers great customer service, and there is a convenience in having everything sync and update from a single log in - but Apple's biggest strength has been its security.

In a survey conducted earlier this year, Intelligent Defense "surveyed 500 people and found that only 33 percent of respondents believed the statement 'Macs don't get computer viruses' was false. Meanwhile, 67 percent either agreed with this statement or didn't know whether this statement was true or false-and the distinction between ignorance and confusion makes little difference from a security perspective."

This perception of security has translated into big gains for Apple, particularly in the corporate world. "Apple won about 8% of global business and government spending on computers and tablets in 2012, Forrester Research says, up from 1% in 2009," writes the Wall Street Journal. "By 2015, Forrester estimates that figure will climb to 11%." In addition, "More than 90% of all business apps were deployed on Apple's iOS mobile-operating system in the third quarter, according to Good Technology, which provides mobile-security software and tracks mobile-device use by more than 5,000 corporate customers."

If public perception of Apple security shifts, the company could lose some of those gains.

TAKEAWAY

Apple is popular, easy to use, and sleek. There is a status to having the newest iPhone or using an iPad - but that doesn't mean that the company will always enjoy that status. There are other alternatives to Apple's ecosystem. If the system is perceived as vulnerable and this perception is combined with the fact that Apple products are lagging in innovation, there could be a rapid shift away from Apple products.

Apple's share price Tuesday appeared unaffected by the news of the iCloud hack but that doesn't mean that the company's sales will weather the storm as effectively.

Source: iCloud Hacks Could Damage Apple Ecosystem, Sales May Suffer