Apple Inc’s ‘‘Hidden’’ Cloud Comes Out Into the Open

Apple's cloud has mostly remained hidden in the background since its inception three years ago. But, the new iCloud Drive has improved inter-operability with other clouds, which should drive new business for the company.

Jun 6, 2014 at 5:00PM

Most people do not associate Apple (NASDAQ:AAPL) with the cloud sector. Although Apple's iCloud has been around for more than three years, it has remained somewhat hidden in the background.

But, Apple is now looking to change that by focusing more on ramping up its cloud. The company announced its intention to provide cloud sharing and document synchronization for users, which will put it into direct competition with the likes of Google Drive, Box, and Dropbox.

What has been holding back iCloud's growth?
iCloud is, first and foremost, a backup target for iOS devices, a job at which it excels. However, Apple seems to be a bit behind the curve in services compared to other cloud drives.

For starters, iCloud is too Apple-centric. It's not designed to work on a continuous network access like a distributed file server. Apple has an enviable suite of iOS and OS X apps such as Numbers, Pages, and Keynote that are stored in the iWork suite. All of these can be used to create, save, and edit iCloud files.

However, iCloud has no equivalent apps for non-Apple-branded devices. Moreover, the cloud-based versions of these programs have remained in beta for quite some time. This seems to be a product of Apple's legacy of locking customers into its ecosystem. This strategy does not bode well for iCloud with respect to competing against Microsoft's (NASDAQ:MSFT) Office 365 and Google Apps.

iCloud syncs videos and photos from iPhones to the cloud and other devices. Window PCs are only offered limited support, while Android devices are unsupported. General-purpose online storage options such as Google Drive, Dropbox, and Microsoft OneDrive have synchronization clients for OS X and iOS, but Apple has nothing in this space.

On the music side, Apple's iTunes ecosystem is more than a decade old. While still dominant, music downloads have dropped dramatically. This might explain, in part, why Apple purchased Beats Audio for $3 billion, with its streaming music service and highly lucrative headphones business. iTunes, however, still does a respectable job in video sales and rentals using the Apple TV set-top box.

New improvements with iCloud Drive
Apple has announced its new cloud service, the iCloud Drive. Apple has tried to integrate the iCloud Drive with its operating systems, and also improve inter-operability with rival operating systems. This way, users can access it without subscribing to third-party services. The new iCloud Drive is designed as a cloud-based file management system capable of running on both iOS 8 and OS X Yosemite, Apple's new operating system for Macs. The new cloud will also work with third-party apps on Windows 8.

An iCloud folder is integrated into the Finder, and all stored files are synced to iCloud Drive when an Internet connection is available. Files can be viewed across devices and edits synced to the cloud. The cloud's features now extend into email, with MailDrop, which allows users to send large attachments. This will also work equally well if the recipient uses third-part email clients.

Prices of the new service have been slashed: the first 5GB will be free, and users can pay $0.99 per month for 20GB, or $3.99 for 200GB.

Hidden cloud, big business
The iCloud Drive is certainly a big improvement over its predecessor. Apple's cloud business, however, also extends to the highly lucrative iTunes/ App Store franchise, and the company has its huge installed hardware base of iPhones and iPads to thank for its healthy ecosystem (and fat profits).

According to Apple, there are 450 million iCloud users and 800 million iTunes users. Apple has sold more than 25 billion songs to date, and recorded more than 50 billion app downloads from the App Store. Although Apple's digital movie sales and rentals are not in league with Netflix's, the company is still considered an industry leader in this segment.

Apple made a total of $16.05 billion in net sales from iTunes, software, and services in fiscal 2013. This translated to almost 10% of the company's total revenue. Moreover, this important segment has been growing at 30%-40% per year for the last four years, much faster than the company's 9.2% top-line growth recorded in fiscal 2013.

In a sense, you could, therefore, argue that Apple is actually ahead of Microsoft in terms of cloud growth, since Microsoft can currently only lay claim to $4 billion-$5 billion in cloud revenue per year. Microsoft's cloud, however, is growing much faster -- 154% in the third quarter of the current fiscal year. Microsoft's cloud is ranked as the second-largest cloud service provider after AWS.

Foolish bottom line
Apple is moving in the right direction by adding more useful features to its cloud and improving inter operability with other clouds. By connecting seamlessly with other operating systems such as Windows 8, iCloud Drive will become even more attractive for new users, which could drive more growth.

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Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), Microsoft, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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