Apple Should Rise On This $29 Solution, Eventually

Oct. 2.12 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) topped over $700 per share in September after the release of its iPhone 5, only to drop more than $40 by October 1st. Some swelling is to be expected around the release of any new product when a company is followed as much as Apple or a product as much as its iPhones, but there was a secondary factor going on - one of connection.

Apple had distinguished itself from competitors like Microsoft (NASDAQ:MSFT), International Business Machines (NYSE:IBM), Dell (NASDAQ:DELL) and Hewlett Packard (NYSE:HPQ) by creating an ecosystem. In essence, it created an environment where its customers would be encouraged to up their respective buy-ins with each new product because of the way those products interact - Apple iPhones sync with Apple laptops and Apple iPads, and so on. The added convenience of this "ecosystem" increases the value of these arguably luxury products, making it more likely, for example, that a Mac user would buy an iPad when he or she is in the market for a tablet. It also developed the market by creating value-added features that allow Mac users to communicate in unique ways. For instance, the iMessage program lets iPhone users sync their text messages between iPhones, iPads and laptops as well as allow the user to send text messages without cellular signal, using just WiFi.

Microsoft had tried to corner the market with its various proprietary software, such as Microsoft Word. It succeeded in that Word is in fact a household name and is used extensively around the world, but Apple took it one step further. Apple uses a completely different build in its technology and, while it does allow its Mac users to also use Microsoft software on its systems, it discounts its own considerably. For instance, for $200 you can buy Microsoft Office for Mac, but you could have Apple's iWork for around $60, plus you can buy the word processing, spreadsheet and presentation software separately, so you only buy what you need.

But, Apple also developed an ecosystem with regard to its connectivity.

Apple had an ecosystem going with regard to connectivity because its chargers and connectors were interchangeable. It was a strong convenience to be able to just grab a single charger and know that it would charge your iPhone, iPad or iPod, as well as those of your friends. Moreover, the stability of the technology meant that other companies could develop products that use that connection, such as Bose and its SoundDock system - of course, that statement is in the past tense because with the iPhone 5, Apple changed the connection from the 30-pin connector to what it calls the "Lightning" connector. The idea is supposed to be that it is more durable and reversible, so that you can plug it in either way.

The problem is that such a change removes the interchangeability that Apple users had come to love and makes some higher end products like the $250 Bose SoundDock obsolete for iPhone 5 users - a major factor for those considering upgrading their iPhones. Would you spend a few hundred dollars to upgrade your phone when it won't work with your SoundDock, the tray in your Blu-ray player, or the FM transmitter in your car?

Apple introduced a $29 solution to the problem - an adapter. The biggest issue I can see is that it doesn't support video, but with its audio, charging and syncing support it may be just enough to not weigh negatively on the company. That said, don't expect Apple stock to soar right away. There is going to be a large bank of people that will be reluctant to upgrade because of the connector issues, and the adapter does not work with all 30-pin products, so there are bound to be some disappointed customers.

I would recommend holding Apple stock if you already own, it but I wouldn't buy in straight away. The iPhone 5 has been out for less than a month - not nearly enough time to weigh its impact. Apple is a good company - there is no doubt about that, and technology invariably must upgrade, evolve and improve - but that doesn't mean that the effect of the new connector will not be felt. I expect Apple stock to go lower in the near term, then begin to climb as buyers get closer to holiday shopping.

Investors should also be wary of companies that are heavily invested in manufacturing iPhone-compatible products. Many of these companies are going to take a hit as many product mainstays are rendered useless with the new technology - remember, the adapter doesn't work with all devices. That said, keep a watchful eye on the first movers to develop products that are "Lightning" compatible - buy in will likely be huge amongst new iPhone users this holiday season and shortly thereafter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.