Apple At WWDC: Swag In San Jose

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About: Apple Inc. (AAPL)
by: Trading Places Research
Summary

There were an unusually large number of important announcements at Apple’s Worldwide Developers Conference.

They add up to a confident company flexing its tech muscles. They have rock-solid foundations in hardware and software.

The DOJ announced that antitrust regulators will be looking into Apple in the middle of the keynote. I don’t believe the risk is great, but it is also not zero.

After watching this all, I remain as bullish as ever on Apple’s long-term prospects.

Apple video screenshot

One of These Things Is Not Like The Other

Of the many events in Apple’s (AAPL) annual calendar, the Worldwide Developers Conference (WWDC) in the late spring stands out from the rest. The others are largely directed towards Apple’s customers, but WWDC is mostly for the benefit of another audience: third party app developers. Their importance to Apple grows every year and vice-versa.

Typically, Apple uses the occasion to introduce the new operating systems, and how this will impact what developers can do — and also importantly cannot do. Hardware and software announcements are generally geared towards the pro market, not the broader consumer market.

This year was very big in this respect, and it will have lasting impact on Apple’s business going forward. The big bits:

  • The long overdue breakup of iTunes.
  • Splitting off iPadOS from iOS; and PencilKit.
  • Apple Watch independence from iPhone with streaming audio and App Store.
  • SwiftUI, which is what really got the developers fired up.
  • Catalyst, for simultaneous development on iOS, iPadOS and macOS.
  • Multiuser support on tvOS.
  • Support for Xbox and PS4 game controllers on tvOS.
  • New privacy and security features, complete with swipes at Facebook’s (FB) Google’s (GOOG) expense. The Privacy Wars trudge on.
  • HomeKit on routers, with support for encrypted video.
  • New developer tools for augmented reality (NYSE:AR). Minecraft AR (MSFT) in your living room. It’s real, and it’s spectacular.

Also, though it has zero effect on Apple’s bottom line, the new Mac Pro is an expression of a company flexing its design muscles just because it can. What a gorgeous beast, inside and out.

It all adds up to a few things:

  • They are developing hardware, software and services in concert.
  • They remain the most patient company in the world. They continue their tradition of waiting until they are ready, and then picking off low-hanging fruit.
  • Security and privacy remain at the root of everything they do.
  • Every iteration of the operating systems both open it up in some ways, but also sees Apple exerting more control in others.
  • They are trying to leverage the iOS development community for the Mac.
  • They are more open to partnerships than they have been in the past.
  • A few of the things they introduced may not sit well with DOJ antitrust regulators, who coincidentally (?) announced they will be looking into Apple right in the middle of the keynote.

Way to ruin a good time, DOJ. Interactive Brokers screenshot

The WWDC Audience

Apple Watch Series 0. Binarysequence

The biggest cheer in the Watch portion of the program came for a calculator app. That should tell you what you need to know about the audience, many of whom are still likely rocking their Casio calc watches from the 1980s.

It is very different than the usual audience for Apple events, which are members of the media and fans. They seem to clap on cue always, though I’ve never been sure why.

While there’s plenty of media, the audience at WWDC are mostly developers who depend upon the Apple ecosystem for their livelihoods — this is all business to them. In addition, passes are not cheap, so people are paying a lot to be there. They clap when they want to clap, and there’s a lot of information in what gets them excited.

Moreover, Apple reserves some passes for students, who get there through lottery, and they are very vocal in their reactions.

iTunes No More

Would you believe there was a point in time when Steve Jobs had to stand on a stage and admit that Apple had been late to the game with digital music and MP3? That was over 18 years ago, when Apple debuted iTunes, and since then it has undergone enormous changes, most of which have nothing to do with tunes at all. This mismatch between name and function is highly unusual for Apple, and persisted for quite some time.

SVP of Software Craig Federighi made some cracks about this before moving on to the new apps that will replace iTunes come fall — Music, TV and Podcasts, just like in iOS. That is not by accident.

  • Apple is not unifying the platforms — there will be no unified “appleOS” — but what they increasingly want is design consistency across software products and services.
  • This gives them another opportunity to show off Catalyst in the Podcast app, which we will discuss more in a moment
  • It gets the Mac ready for the new services push, and allows the Mac team to build off of what the other software teams are already doing.

This is the “why now?” Breaking up iTunes has long been the subject of “Apple Should…” articles. But iTunes was one of their most important trademarks and logos, so it was hard to do, though I’m sure it was discussed internally. They did it now because it was the right time, not because some blogger told them what they “should” do. They are the most patient company in the world.

The great benefit of being this patient is that Apple doesn’t often release something half-baked. But it also allows them to pick off low-hanging fruit, fulfill a long-held expectation, and somehow wow everyone with something completely obvious. They have been doing this for some time now.

iPadOS and PencilKit

Apple Video Screenshot

Despite flattish sales since the initial launch, Apple has put considerable resources into developing the iPad and turning it into to a creative and productivity device, not just a media consumption device.

The newest iPad Pros are the latest manifestation of this, and if loaded up with the keyboard and Pencil, you have a pretty powerful setup, albeit at the cost of a mid-range laptop. Sales have improved with the new lines.

All this hardware development has led Apple to split off iPadOS from iOS since the interfaces are now quite dissimilar. I remain skeptical of the interface for productivity, as I find the fingertip gymnastics required counterintuitive, and the 2-up layout is insufficient for many people to multitask.

However, the combination of the iPad Pro and Pencil is a creative powerhouse with huge advantages over a desktop or laptop. They also announced Sidecar, which will allow an iPad to be used as a second monitor and drawing tablet with a Mac. Combined with the new PencilKit, which will allow developers to easily add Pencil support to their apps, I expect to see many creative apps take advantage of that whole setup.

Overall, Apple keeps investing heavily in the iPad and they are seeing some growth in that line. This definitely marks a break in the development of the platform and gives it room to grow, though again I remain skeptical that it will be a viable laptop replacement for a lot of people outside creative fields.

Also hidden in the announcement is that USB devices, including mice and other inputs, are available now under the Accessibility section of the iPad settings. I imagine many people will use that.

watchOS

Oh boy! It works! The dream lives on. Hakes Auctions

There were actually more important announcements than a calculator app. Watch apps will no longer need an iPhone companion app and will be able to run on their own via a new native Watch framework in Xcode. The Watch gets its own App Store. The other big announcement was that streaming audio will also be untethered from the iPhone.

These are key announcements in the development of the Watch. Series 1 provided base functionality, and gave Apple the opportunity to figure out how people were going to use it, and focus on those things. Series 2 and 3 were important updates, but the current Series 4 is really the first version that works great with few compromises, especially with cellular connectivity added.

When combined with these two key announcements, people can now really leave their houses without their phones, especially when you pair the watch up with some AirPods and Siri. The likely Series 5 this fall will make this all work even better.

Again, we see Apple’s patience on display, with hardware, software and services all developing concurrently. This Watch rollout is incredibly slow motion, but if you step back, the progress is pretty unbelievable. And even with the high price, they dominate the category:

Counterpoint Research

SwiftUI and Catalyst

My kind of demo. Apple Video Screenshot

SwiftUI is what really got the crowd fired up. It’s a fairly technical change, but the bottom line is that they just saved everyone a ton of time in coding interfaces for their apps. Basic stuff like lists, layout, transitions, and navigation become fairly trivial to code for 3 platforms at once. More is coming. There’s lot’s of automation going on under the hood designed to save time, and decrease errors and bugs. Also importantly, there are live device previews where developers can see changes happen instantly on device. Everyone’s workflows just got simplified and compressed, especially if they plop down for a new Mac Pro in the fall. There was much joy and spontaneous bursts of elation (“What?!?”).

Just to give you an idea of the excitement level with SwiftUI, developer and author Paul Hudson:

Honestly, if this were any other year then we’d be talking about dark mode, about Catalyst, about CryptoKit, or about a dozen other things – this week has seen an extraordinary amount of work come to fruition all at the same time, and I think many people are having a hard time trying to see the forest from the trees.

But SwiftUI happened, so all those incredible, breakthrough technologies almost feel like a rounding error; folks here are excited about them all, but the talks that are the busiest are by far Swift and SwiftUI.

This is another place where Apple has invested considerable resources in taking the lead. Swift is part of a new paradigm that takes object-oriented programing, invented in the 1970s, to a new level of abstraction and simplicity. Google has a similar project called Go, and there are other very popular ones like Rust. SwiftUI is a move in the direction of even more simplicity.

Catalyst, née Marzipan, was also well-received, but expected by the crowd so the reaction was not as loud and boisterous. Apple is trying to leverage all the iOS developers and get them to release their iPad apps as Mac apps.

For starters, Swift has become very popular with developers. Objective-C, which Swift both replaces and lives along side of, is very unpopular. From StackExchange’s 2019 survey of developers:

StackExchange 2019 Developer Survey

Swift is the 6th most loved language, and Objective-C is the 2nd most dreaded among developers, so Swift removed a major pain point. Swift has become the language of choice for many iOS developers, which requires Apple’s Xcode development environment.

So Xcode is the third most used development environment for mobile, but way down the overall list on the left. That’s something Apple would like to change.

With Xcode 11, developers can take their iPad app and make a Mac app out of it with a single click. This will adapt all the interface elements for macOS, though more customization is required to really make a great Mac app. Still, Twitter (TWTR) and others said that porting their iPad app to macOS was fairly trivial.

Since all the Apple operating systems use the same microkernel and most frameworks are common to all, these are native apps running at full speed, not under some sort of emulation layer. The decision to base all of the operating systems around the Mac OS X microkernel continues to pay dividends, all these years later.

If you use macOS, you are already likely using apps built this way — for example, Apple’s own apps for News and Stocks in Mojave, the current OS. These have been a bit disappointing, and feel like ported iPad apps. It is one of the few times that Apple has released what is essentially public beta software without identifying it as such.

But this new version promises to be much better. It follows a pattern where Apple tries out new technologies in their own software first, and then releases the updated APIs with lessons learned for third parties the following years.

Developers can now write code for three Apple platforms simultaneously in a single Xcode project. It remains to be seen if developers bite, but it would certainly revitalize the Mac App Store if they do.

tvOS

Apple Video Screenshot

Apple’s biggest challenge in media services continues to be video, where many content owners have balked at Apple’s conditions regarding revenue and data collection.

While they keep plugging away at that, they made two important changes to tvOS, on which the AppleTV runs. The first is multiuser support like Netflix (NFLX) apps have — more low-hanging fruit that wowed everyone. This leads to the next question: why no multiuser support on iPadOS? Maybe next year, but I won’t hold my breath.

The second is much more important, and that’s support for Xbox and PS4 game controllers. The crowd went wild over the PS4, sorry Microsoft. This is a huge addition, especially in light of the upcoming Apple Arcade subscription service. The controller has been a major issue for adopting tvOS as a games platform. This could be a real boost to the platform, which I think has lagged the others.

More low-hanging fruit.

Security and Privacy

This has become an increasing part of Apple’s pitch to consumers and they are currently engaged in a low-grade privacy war with Google and Facebook. WWDC always brings us some news on this front, and this year was no different.

  • Sign-in with Apple — a broadside against Google and Facebook — and will undoubtedly be much-discussed, including here.
  • Changes to location services
  • New Find My app
  • HomeKit on third-party routers, including Amazon’s (AMZN)
  • Encrypted security camera video on iCloud from select third-parties.
  • Single-line encryption calls using best-practices with new CryptoKit.
  • Changes to App Store submission guidelines.

Sign-in with Apple was not received well in the offices of Google and Facebook, who very much love their sign-in services. For a little convenience, users are letting them vacuum up even more data about them from their apps, link it to their account, and create an even more accurate profile. Most people don’t even realize what this transaction costs them.

Sign-in with Apple will have the option for a random anonymized email forwarding address, and will allow easy TouchID or FaceID sign-in to apps. No data is collected by anyone.

Moreover, the new App Store guidelines say:

It will be required as an option for users in apps that support third-party sign-in when it is commercially available later this year.

The rumor on the floor was also that the Sign-in with Apple button will have to be placed above the others, but I’m not sure if that’s policy. This cuts off a major source of Google and Facebook’s life blood — user data. Expect some blowback on this one, and maybe from the DOJ too

Apple’s pitch to software publishers is that whatever they lose in user data, they will gain in increased signups from decreased friction in the signup process. I’m not sure they’re going to buy that argument.

There are several big changes to how apps can interact with a device’s location. Apps can no longer ask to track location in the background at first. They have to first get foreground permission from the user, and then request background permission separately.

Users will also have the option of only sharing their location with an app once, which is going to become the default behavior for a lot of people including me. Also, Apple is making location tracking via WiFi and other backdoor methods harder. None of these changes will be welcomed by software publishers.

The new Find My app replaces Find My iPhone and Find My Friends, and will allow Apple devices to be located, even when the device is asleep or otherwise disconnected from the network. The details are quite extraordinary, but security and privacy were obviously at the core of the whole effort.

There were two big announcements for HomeKit. First, Apple will support end to end encrypted security camera video, with 10 days of free iCloud storage. This will require an iPad, HomePod, or AppleTV and all data analysis happens on-device. We again see the long-term payoff from Apple’s heavy investment in the A-series CPU/GPU SoCs where these lightweight devices can process all that video and send it to the cloud.

The second big announcement was a HomeKit firewall/VPN firmware update for several existing routers, including Amazon’s Eero. They have a complicated relationship.

The purpose of this is to firewall off IoT devices which are usually the weakest point in the home network. This puts Apple’s killing off of the Airport in perspective, as they likely had this in the works when they made that decision.

Apple is really pushing developers to use encryption for all data, and to do as much data processing on device as possible, leveraging the neural engine and the heavy investments Apple has made in on-device AI. To make the encryption part super simple, Apple has added the CryptKit API, which will allow developers with no cryptography expertise to employ best practices with a single call.

Privacy and security changes to App Store guidelines:

  • Guideline 5.1.3(i). Apps may use a user’s health or fitness data to provide a benefit directly to that user, such as a reduced insurance premium, if the app is submitted by the entity providing the benefit and the data is not shared with a third party. The developer must also disclose to the user the specific health data collected from the device.
  • Guideline 5.1.1.(vii) Apps that compile information from any source that is not directly from the user or without the user’s explicit consent, even public databases, are not permitted on the App Store.
  • Guideline 5.1.1.(i) Apps must get consent for data collection, even if the data is considered anonymous at the time of or immediately following collection.

None of that will be popular with publishers, but war is hell.

Miscellany:

  • The new loud-sound tracking feature on watchOS only records small samples, does not store them, and does all processing on-device.
  • The new voice-control accessibility feature processes all data on-device.

AR Grows Up

Microsoft’s Minecraft AR demo. I promised Mrs. TPR that I wouldn’t leave my virtual blocks laying around the house. Apple Video Screenshot

Tim Cook has been very hot on AR for some time. Whenever someone asks him about VR, he always pivots to AR.

I feel like Apple’s investments here are beginning to bear fruit for two different types of apps. First is for games, and the Minecraft AR demo was super fun. The other is for retail, which Apple really stressed in their State of the Platform address, which is sort of a second keynote, even more focused on the developers. They showed demos like Ikea putting furniture in people’s houses, and Warby-Parker putting glasses on people’s faces.

But for many applications, AR on a phone or iPad doesn’t make as much sense. Once you have the phone in your hand, it’s often just as easy to accomplish the task in another way besides opening an app, waiting for the AR world to load, etc.

This is why I think Apple is already working on some sort of AR glasses solution, and maybe even working with aforementioned Warby-Parker. This is pure speculation on my part, but it makes a lot of sense.

Apple added a lot of tools to Xcode for developers to work in 3D AR worlds without any particular expertise. They will still need to acquire 3D assets, and these can range from free to very expensive depending on the usage. So even though there’s a big hump there still, using AR in iOS just got a whole lot easier for developers.

I played around with Apple’s new Reality Composer app, and it strikes me as Keynote for 3D/AR. Setting up an animation is a breeze, and there’s plenty of stock animations and behaviors to make interesting AR worlds with zero coding.

Reality Composer comes with a large set of 3D primitives, but nothing more complicated or textures. My guess is that next year’s Xcode will come will some stock 3D models, textures and worlds that will be very easy to pop into an AR scene.

The 2019 Mac Pro

KYM

The sound I heard off in the distance was hundreds of film and TV editors in Burbank screaming, “Shut up and take my money!"

The back story here is that pros like big honking towers that can be constantly upgraded. Annual incremental increases in speed are more important than money. The 2013 Mac Pro “trash can” failed miserably on this account. Many stuck with their old 2010 and 2012 Mac Pro towers, and kept upgrading until they busted from the seams.

The 2019 Mac Pro reminds me of the 1990s Mercedes SL convertibles, where management told engineering and design to disregard cost and just go for it. The new Mac Pro is a beast unlike anything else Apple has ever produced. It will start at $6,000, and likely max out over $60,000. There’s a $5,000 6K monitor that goes with it. The nano-etched anti-glare glass version is $6,000. The stand for the monitor costs $1,000. The stand.

None of this will make any difference to Apple’s bottom line, but they made one small customer group very happy after years of ticking them off.

Adding It All Up

As a reminder, from the introduction:

  • They are developing hardware, software, and services in concert.
  • They remain the most patient company in the world. They continue their tradition of waiting until they are ready, and then picking off low-hanging fruit.
  • Security and privacy remain at the root of everything they do.
  • Every iteration of the operating systems both open them up in some ways and also sees Apple exerting more control in others.
  • They are trying to leverage the iOS development community for the Mac.
  • They are more open to partnerships than they have been in the past.
  • A few of the things they introduced may not sit well with DOJ antitrust regulators, who coincidentally announced they will be looking into Apple right in the middle of the keynote.

We’ve addressed all of these except the last one, which may in the end turn out to be the most important. There were several things in the presentation that are likely to be part of the scrutiny. Apple probably put fertility tracking apps out of business by incorporating it into the Health app. Sidecar will be in direct competition with several products now. Additions to Reminders will impact sales of to-do apps

The Sign In with Apple feature, and its requirement that it be used if other single sign-ons are used, will definitely attract the attention of regulators if they are already looking. There will be a lot to unwrap here once the final implementation and rules come down in the fall.

My guess is that this goes on for years, DOJ comes up with very little, and Apple agrees to some sort of minor consent decree that does nothing to change the way they do business.

But more than anything else, there was a sense of swag in this whole affair that struck me. They will wait to do things until they are ready. They will exert further control over developers if they believe it will improve the user experience. They will invite developers to use their crown jewel tools and SDKs, but only if they play by Apple’s rules. Long-term commitments to the development of their chips and Xcode/Swift are bearing fruit.

The Mac Pro was the physical manifestation of that swag. They know the price will lead to the sort of gasps you heard when they announced the price of the $1000 monitor stand. They have to understand that.

But Apple has the confidence to send a whole bunch of hardware and display engineers off for two years to build the biggest, baddest thing Apple has ever made, just to satisfy a small group of users who were whining loudly and persistently. Count on it having superbly over-engineered packaging too.

Upshot for Apple Stock

I am a long time Apple bull, so perhaps I’m biased, but this WWDC gives me even greater confidence in their future prospects.

The context right now is that Apple’s iPhone cash cannon has stopped growing, and the issues with China loom large. This past March quarter and likely the current one as well are the worst quarters Apple has had in a while.

They are looking to replace that lost growth with the range of services that they have been building out for years now, but accelerated this year. The timing here was a little off, as they don’t have enough services up and running to replace the lost iPhone growth, and so they needed a bridge to get them to the fall when the new iPhone and services roll out. That bridge was the March services event to keep everyone focused on services, and an outrageously fast pace of share buybacks in the March quarter — the Wall Street Quarter.

So that’s the short-term picture, which is a little cloudy. But if you step back and look at the totality of what they were presenting at WWDC, you see a company that has been building rock-solid technological foundations for their current platforms, and whatever platforms to come. We mostly got a look at software at WWDC, but there is parallel and coordinated development on the hardware and services sides.

No other company puts all these pieces together.

Finally, there is a storm brewing for the tech mega-caps. Apple will certainly get scrutiny on the antitrust side, but their decision years ago to use the lack of data collection as their competitive advantage will shield them from the kind of frisking that Facebook and Google are about to get.

This is not to undersell the danger here to Apple’s business model from antitrust scrutiny. It’s no secret that Apple likes control. The largest manifestation of that is the App Store, the only way to get third party apps on the iPhone, iPad or Watch. This, with the restrictive guidelines Apple imposes on software publishers, especially with pricing, will likely be the focus here.

If Apple is forced to open up to third party app stores, they are likely to start seeing these sorts of headlines, which they very much do not want.

or this:

That’s just from the past week. I could keep going.

My non-attorney guess, like I said, is that this goes on for several years, and never amounts to much, but that doesn’t mean there isn’t danger to Apple stock in the meanwhile. There will be leaks and rumors that depress Apple stock, and in the end, it may not turn out as well as I anticipate.

But still, I can’t look at all this swag in San Jose and not remain bullish.

Disclosure: I am/we are long AAPL. 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.