When Apple Computer (AAPL) launched the iPhone, competitors established in enterprise were quick to say of Apple Inc.'s (notice the name change?) now top-selling product would never have significant market share. Information Technology analysts recommended enterprises to steer clear of iPhones, and it seems at least some government agencies adopted the same view. After iPhone was an established phenomenon, analysts still explained that Apple's market was limited to consumers because its product was inadequate for the needs of enterprise. Looking at Apple's current product and its response from enterprise, the question has been turned around: are Apple's competitors relevant any more?
Let's review the evidence.
Apple Overtaking Enterprise Mobile
Over the past several years, "not yet" on Apple's iOS devices has converted to Full Speed Ahead. The enormous transnational oilfield services conglomerate Halliburton Company (HAL), which employs personnel worldwide in the 80 nations in which it operates, has decided to deploy iPhones in place of Research In Motion's (RIMM) Blackberry products.
Analysts viewing this trend peg Apple's Mac and iPad growth in enterprise at 58% in 2012, for non-iPhone sales of $19 billion. Based on a Forrester survey of 10,000 information workers in 17 countries and 3,350 IT hardware decision makers in North America, one in five enterprise workers already uses Apple hardware at the job (led by iPhones). Whether the result of user preference or organizational policy, 92% of Fortune 500 companies currently test or deploy iPads - for iPhones, the number is 93%. Among these enterprises is International Business Machines (IBM). The Bureau of Alcohol, Tobacco, and Firearms recently followed the National Oceanic and Atmospheric Administration to deploy iOS and "delete the BlackBerry from the mix."
We read that the future of computers lies in mobile computing. If iPads are counted as mobile computers, Apple is the #1 vendor worldwide for mobile PCs. Canalys predicts Apple will become the leading PC vendor globally. Yet there is room for growth: excluding iPads, Apple's worldwide share of the PC market stands at 5.2%, the highest it's ever been. And it's growing on that other 90+%.
Hewlett-Packard (HPQ) is losing share of back-office systems to commodity-maker Dell (DELL) and has reported earnings reductions exceeding 30%. The Pyrhic victory left Dell's own profit suffering as it reported uninspiring results last quarter and guided down. Research in Motion has joined Nokia in losing phone share, apparently yielding the field to the Linux-based freeware Android operating system supported by Google (GOOG) and Apple's proprietary Unix operating system, derived from the operating system it acquired in the NeXT acquisition, which has been branded for mobile devices as iOS. The collapse of BlackBerry market share in enterprise has been so severe that Research in Motion's smartphone share now stands in competition for third place against Microsoft (MSFT). Microsoft's share-buyback program might be good for shareholders, but does little for the underlying business: Forrester expects Windows sales to fall 3% this year. When the U.S. PC market contracted over 10% during 2008, Apple grew its share of the PC pie not only in market share from 6.7% to 8%, but in absolute numbers by 8.3%.
Vending back-office support software that serves competitors' devices is unlikely to be a route to success for Research in Motion, as BlackBerry Enterprise Server provides only 3% of its revenue and thus serves as an implausible replacement for handset revenue. Taking share by losing profit isn't a long-term strategy for Dell, which thus far has not demonstrated differentiators that would allow it to capture a premium in either equipment or services in comparison with its competitor Hewlett Packard or the entire enterprise consulting industry (which includes Microsoft's substantial army of consultants).
How To Play Management Rather Than Markets
There's a lot of risk in shorting Apple's competitors: PCs or mobile phones might do so well that even losers' shares enjoy a boost. Buying Apple may appear a safe bet, but macro risks affecting all players can affect it, too. To play Apple's strategy against its competitors with the least risk of confounders from factors affecting the market, one can match an Apple buy against a short position of one or more Apple competitors whose lunch Apple will eat.
While the long-term outlook for Microsoft may not look as rosy as Apple's, Microsoft has conducted a shareholder-friendly share buyback campaign and pays a dividend that shorts may not want to carry over the period of their investment which - based on share count contraction rather than competitive success - could move in the wrong direction even if the basic thesis regarding Microsoft's competitive position is generally sound. Microsoft is thus not the ideal short for this trade. For a profitable company paying over 2% in dividends while repurchasing shares, Microsoft may be fairly priced - and it will enjoy safe Office revenue for years (thanks to file format lock-in) regardless the quality of its competitors' products. Moreover, Microsoft can continue to enjoy success in servers (Microsoft controls domain authentication and email in so many enterprises that it's difficult to see its server business quickly replaced) notwithstanding a clobbering in mobile, which has never been a significant part of Microsoft's business. The destruction of commodity vendors who rely on Microsoft's operating system software may be an embarrassment in Redmond, but it has little impact on the consulting, server, and Office businesses responsible for so much of Microsoft's revenue.
Neither Dell nor Research in Motion pay a dividend. The principal risk in shorting either is that since they are priced by a market that isn't expecting particularly good performance, any success poses an opportunity for upside surprise. At about 15x trailing earnings, long Apple's shares aren't exactly priced for perfection. Dell will continue soldiering on as a commodity vendor that's trying to become a services company, which will only make it into that much more of a direct competitor to longtime competitor and experienced enterprise vendor Hewlett Packard (HPQ). Both share a P/E under 10, and should be expected to fight like dogs to steal each others' profits, to the detriment of both. Dell just entered ARM servers, for example, to be that much more competitive with Hewlett Packard.
The future is, however, even dimmer for BlackBerry profits. Research in Motion has no other substantial source of revenue than the dying BlackBerry platform. Research in Motion will continue to be marginalized in its only substantial market and, as successive revitalization efforts prove incapable of stopping the incoming tide, its best alternative will likely be to sell itself to someone interested in its device-management software. On the other hand, with the BlackBerry track record for delays and blackouts, even that might be a hard sell.
This key - focus on an Apple-dominated market in which it will ultimately fail - is why Research in Motion is such an attractive pick for a long/short match with Apple. Apple has become predominantly a mobile device company. Although Apple has become more profitable than all mobile phone vendors worldwide despite having only 9% of the mobile unit share, its profitable PC business has been dwarfed over the last few years by its mobile device profits. Research in Motion competes directly with Apple's greatest areas of strength (mobile phones and tablets) without the infrastructure support other vendors get from Google and without alternate revenue streams to support it as times get tough. Pairing Research in Motion with Apple as the short end of a long/short position thus offers protection against such mobile device success that every vendors' shares soar, and allows investors to invest not in the mobile market but in the relative success of Apple over Research in Motion in a market segment in which Apple's star is rising and Research in Motion's is on a downward slide into irrelevance.