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Gregory Pepin
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Gregory Pepin is a co-partner of a Wealth Management company in switzerland. He has a Master of Science degree in Finance and Actuary Science from HEC Lausanne (Switzerland). He also teaches Finance at the University of St. Joseph (Lebanon). Gregory is a strong believer of the Graham Theory that... More
  • Apple : One more (Big) thing....? 0 comments
    May 22, 2009 8:49 AM | about stocks: AAPL

    I usually don't try to speculate on what could be Apple Next product like we usually see on the media and through analyst. We know that Apple is often at the center of tons of speculation concerning their product line and potential new "innovation".

    But as a long term investor and analyst, i always try to project what could be their long term business strategy.

    Here is my conclusion : Apple might be ready to release a entire new product that will open a new market. When will they release this potential new product ? I have no clue. But instead of trying to project the timing of the release, it could be interesting to study the elements that make me thing that one more (big) thing might come out of Cupertino.

    As you know, with this company is it all about hidden message, they usually are pretty good in keeping secret on what they have in mind until a few days before the release day. When Steve Jobs announced the Iphone, he introduced his speech with a simple comment "This is a day i've been looking forward to in two and a half years". The Iphone product line was the result of more then two years of R&D. Apple Management knew that the Iphone would come in the market sooner or later.

    I think once again it's the case with a new revolutionnary product (will it be as revolutionnary as the Iphone, i don't know, but it will probably be big enough to create a new multibillions market).

    Here are some of the indication that lead to this assumption :

    - Apple doesn't do many acquisition and usually has some very good reason when they decide to spend their money on a outside company. In 2000-2001, Apple bought the rights of PortalPlayer technology, we now know they used it to build the Ipod (Based on Tony Faddell idea). Before that, when they bought Next, they used this as the centerpiece of their Mac Product Line with their solid Mac OS software. All their software company acquisition in 2002-2003 helped solidify Ilife product line that now is great software for Mac that PC User would love to have.  In 2008, Apple bought PA Semi and increased their stake into Imagination, a small chipset company in UK in which they owned the exclusivity use of their new chipset. The acquisition of PA Semi cannot be a "innocent purchase", it has to make a sense in the future development of their business. The first outcome from this purchase is : Apple will build their own proprietary chipset architecture. That is probably true. But will it be for the Mac Product Line ? Probably not as the relation with Intel is working perfectly and the Windows compatibility that Macs offers is a killer advantage against their competitor. Will it be for the Ipod and Iphone product line ? Maybe, now don't forget that Apple will also probably use the Imagination Chipset in these Product Line. They turndown the use of Atom (Intel chipset). Can it be for another product line ? Probably....

    - In addition to these acquisition, Apple hired Mark Papermaster and Bob Drebin both are well-known chip designer respectively in IBM and ATI/AMD. Those addition are a solid complement to the purchase of PA Semi. It validates the assumption that Apple is building their own chipset design.

    - The development of Iphone OS 3.0 : When you look at the new feature on the OS 3.0 you discover that it becomes a fully independant Operating System. For example the fact that it can communicate with external device using protocols that the developpers can create or a standard protocol offers a great potential that is quiet limited with the Iphone or the Ipod Touch, but perhaps not for a new set of Device. With OS 3.0, you can also create a network or connect to a network etc. These new operating system, build on OS X core, is now a fully independant platform that will evolve by itself and on which Apple can seriously build a new product line (along with the Iphone and Ipod Touch) on it. People might point out that, OS 3.0 doesn't allow background processing. I would answer to them : Well it doesn't allow it (and it isn't that sure as some rumor states that there is some background processing with some apps) it still can do it and might allow it sometime... for certain device that has a battery that can handle it. What do you think ? :)

    - The App Store development and more important the "In App purchase" development is a very interesting upgrade in the OS 3.0. Right now, Apple developped a new marketplace that is only open for Ipod Touch and Iphone that offers a wide range of apps for almost every needs. The In App Purchase API will offers also the opportunity for developpers to develop a market in their own app. With the new API in the SDK, some news very useful Apps will probably come. Now the nature of Ipod Touch and Iphone product limits also the potential of the App Store but perhaps the Store hasn't been created only for the Touch and the Iphone.....

    - Tim Cook and Steve Jobs comments on Netbook are very interesting. Both admit that right now it is a quiet big market that has just been created with netbook, but it is also a limited market. What i mean by that is : The margin is very low and the usage of Netbook is very limited because in fact, people that buys that kind of product only use it for Internet, Email and Office Usage (Spreadsheet and Wordsheet). The idea to install further program or use tons of new apps is quiet tough to imagine due to the nature of the product. Due to that and others reasons, both Cook and Jobs considers Netbook has crappy product, i won't say it is crappy but it is clearly not in the type of product line Apple is used to do. But they also both said they have some "good idea". Now it is clear that their "good idea" are probably not in the purpose to compete in the netbook market as they considers it as crappy, but perhaps it could create a new market that would be stronger and would makes netbook marginal and less attractive to customer. This new market could provide a valuable product at difference price tag (that would be accessible for low income customer) and offers a better user experience and more important more usage then the very limited Netbook. Also, based on the precedent earning Conference Call, the feeling that Apple might create a new market with a product that could compete against the netbook but won't be a netbook is stronger then ever (Specially based on the answer of Tim Cook to Ben Reitzes question).

    - During the last MacWorld keynote from Apple, the show ends with a very interesting song : "The Best is yet to come". I guess, everyones knows about a potential future update of the Iphone and also the update of the OS for the Iphone at that type. So i don't believe Apple though about those two key elements as the "Best" to come.....Also Tim Cook mentionned that Mac Product line pipeline is amazing (Last Earning Call conference), what i understand through "Mac Product Line" is "Product that can compete any kind of PC including Netbook"....

    I do believe their is a high probability that Apple is cooking a new product that will surprise tons of people, including Analyst. The only one that seems the closest to it is Gene Munster (that has been the most serious analyst concerning this company) that says the potential new product will probably be a dramatic different then what people thinks. I do agree with him on that, i would even go a little deeper and say :

    Apple might develop a product line build around the OS 3.0 that could be use as a PC like netbook but the battery life will be better, thanks to their chip design, and the potential of usage will be bigger because these product will be link to the App Store.  Through this new "big" thing, Apple could have three different unit : The Mac Unit : build around OS X (with the future Snow Leopard software), the Music/Vdeo Unit (Ipod but also don't forget potential expansion of the Apple TV) and the "OS 3.0" unit (that would include the Iphone, the Ipod Touch and the new product line build around the Operating System 3.0).

    By creating a new type of computer using their proprietary chip design, their proprietary OS 3.0 and the App Store, Apple would kill the low end market of the Netbook without hurting their Mac Product Line they would also be able to find an answer to the price umbrella below their lowest price MacBook and Imac. These new product could easily work by itself and used as a PC because users might be able to connect Printer or whatever device on it, with the new feature out of the OS 3.0 and they will be able to buy or download free apps out of one of the biggest growth marketplace in place now : the App Store.

    If i am true on those assumption, sky would be the limit for Apple. Right now already with the growth potential of the Mac Line and the Iphone line, the company growth outlook is already amazing but if you add a new market build around a new chip design and OS 3.0....

    All the assumption might be pure speculation, but it doesn't sound that crazy for me.... and it would perfectly fit to Apple well known innovation DNA....

     

    Disclosure : Long on Apple

    Stocks: AAPL
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