5 Reasons Apple Won't Conquer Enterprise

| About: Apple Inc. (AAPL)
This article is now exclusive for PRO subscribers.

Many of the more enthusiastic Apple (NASDAQ:AAPL) bulls point to the company's modest market share in the enterprise market (i.e. business and government entities) as further evidence of the company's strong growth prospects. After all, there's a lot of enterprise market share to be taken for Apple and the company's percentage gains in this market have, reportedly, been very strong over the last few years (albeit, growing from a very small base). Furthermore, prospective industry research points towards Apple's continued strong growth in this market, going forward.

Now, given Apple's incredible popularity and the company's historically small base of enterprise customers, it's not surprising that they are getting good growth in the enterprise market and I do believe that these positive trends should continue, to some extent. That said, I would warn against extrapolating from these trends and assuming that Apple will ultimately expand beyond their role as a niche player in the enterprise market, for several reasons:

1.) Cost:

I believe that a main headwind that Apple will ultimately face in the enterprise market is cost. Enterprise customers can be much more price conscious, when compared with individual consumers. They can be more focused on the bottom line and are generally not given the luxury to purchase substantially more expensive products for reasons of image and popularity. There needs to be an economic justification for buying Apple's products and, given their substantially higher costs for similar specifications, it would seem to be a difficult case to make for most enterprise customers.

Spending hundreds of dollars more for a Mac or iPhone (over a comparable PC or Android/Windows phone) is simply not going to cut muster with budget committees focused on minimizing expenses and improving the bottom line. The fact that the Mac is a cool and trendy device, which interacts seamlessly with Apple's other devices (largely for entertainment content applications) and has lots of fun apps is not going to tip the needle in favor of Apple for most information technology (I.T.) budgets.

2.) Image:

Apple portrays its products as trendy and high-end devices. That "cool" factor would likely dissipate upon seeing hundreds of your colleagues doing their daily tasks on the thousands of corporate-issued Macs floating around the workplace. Commoditizing Apple's products, by selling them in-mass into the enterprise world, would go against the company's very essence. What's more, to be competitive in this market, Apple would probably need to price differentiate for corporate customers (i.e. lower their prices compared to what's being charged in the consumer market) -- an action, that would impair margins while eroding the product's image.

3.) Tablet evolution:

It appears that a large percentage of Apple's enterprise sales are derived from iPad sales. The iPad currently dominates the tablet market -- with limited competition from Google's (NASDAQ:GOOG) Android and Microsoft's (NASDAQ:MSFT) Windows products and an Amazon (NASDAQ:AMZN) Kindle product that is somewhat limited in its business usefulness (i.e. mainly used for the consumption of content).

Going forward, I believe that these market dynamics will change and there will be more Android and Windows tablets offered in the marketplace at very competitive prices. Despite weak initial entrances into the tablet market, the leading positions of Android and Windows operating systems in the smart-phone and personal computer markets, respectively, provide a strong tablet growth platform for these operating systems. As a result of expanded and improved choices for tablets, I believe that IT departments may be less able to justify buying the iPad (given their higher costs) and Apple's enterprise tablet market share may ultimately fall.

4.) Control and functionality:

Apple's products are designed for simplicity and ease of use and the product features and ecosystem are tightly controlled by Apple. In order to increase their enterprise share, Apple may need to cede some control while offering more customized computer solutions to their customers. Again, this could take away from the company's underlying business philosophy and the image of uniformity and simplicity that Apple tries to convey.

With regard to this last point, let me be clear that I'm only highlighting potential big-picture product feature issues. I believe that there are also more technical issues with regard to enterprise system security and compatibility/integration issues with legacy Microsoft and/or other non-Apple information technology infrastructure. While I believe that these other issues also clearly exist, they are beyond the scope of this article.

5.) Desire:

For many of the reasons mentioned above, I believe that Apple hasn't aggressively targeted the enterprise market and I see no reason why this may change anytime soon. Without a more focused effort, it seems that increased enterprise share will continue to be derived from incidental growth (which will ultimately have limitations in scope).

In summary, it is clear that Apple's consumer growth prospects remain very strong and a degree of enterprise growth should continue to contribute to the company's overall growth levels. That said, it appears unlikely that Apple will ever dominate the enterprise market and optimism in this area should be tempered by the substantial headwinds that the Apple faces in this market. Likewise, I believe that any resultant negativity concerning an Apple-driven reduction in the enterprise share for traditional hardware suppliers like Dell (DELL) and Hewlett Packard (NYSE:HPQ) should not be overdone.

Disclosure: I am long AAPL, DELL, HPQ.