Apple Inc. Can Grow with Beats and an iWatch

Ever since the launch of the revolutionary iPod, Apple (NASDAQ: AAPL  ) has been experiencing success at every turn thanks to its constant innovation. However, the industry's performance and quality gap is decreasing. New high-end products are being launched and there are some concerns over Apple's innovation leadership. It is safe to assume that Apple will follow a "design-first" strategy and will be able to sustain its smartphone market share with new offerings.

The worrying factors for the company, however, are the performance of its iPad and MacBook Air, and threats from the Surface Pro 3 launched by Microsoft (NASDAQ: MSFT  ) . Moreover, Apple is trying to counter shrinking iTunes revenue through the acquisition of Beats.

Industry outlook and Apple
Phone and tablet growth is slowing. Smartphone sales are expected to grow by around 19%, as compared to 39% growth in 2013. Tablet growth is expected to be capped at 19.4% this year, as compared to an impressive 51.3% last year. Most of this growth comes from emerging markets, and the average selling prices and margins are decreasing. The slowing growth, increasing competition, and commoditization of smartphones will impact the margins of any company operating in the industry.

As Apple generates more than 50% of its revenue from the iPhone, it should be considerably affected by this outlook. However, this may not be the case due to several reasons. First, Apple will be able to sustain its share in North America, where consumers trade in old phones for new ones more frequently as products refresh.

Second, consumers have developed a strong loyalty to the iPhone. The HTC One or the Samsung Galaxy S4 did not have any impact on iPhone sales in 2013 despite their larger screens and superior performance.

Apple has shown a rather unimpressive performance in the tablet and PC arena in the recent quarter, indicating that consumers may not place as much value on the iPad or MacBook Air as they do on the iPhone. Moreover, the recently launched Surface Pro 3 is directly competing with iPad Air and MacBook Air.

This will put additional pressure on sales going forward, but the refresh cycle of iPad and MacBook Air may neutralize the threat from Surface Pro 3. The increasing competition in the tablet space along with the decline of iTunes -- thanks to music-streaming services like Pandora and Spotify -- could affect the prospects of the company going forward.

Beats acquisition
The recent acquisition of Beats Electronics will help the company in boosting iTunes and entering the music-streaming market, which is currently the high-growth segment in the music industry.

Beats gives Apple access to a major music-streaming platform. This will allow the company to offset the revenue-per-user decline in the iTunes segment. Moreover, music producers Jimmy Iovine and Dr. Dre will help Apple negotiate deals for streaming music. In short, the Beats acquisition is likely to counter the iTunes problem.

The launch of Apple's smart watch can neutralize the threat it is facing in the tablet and PC arena. Apple executive Eddy Cue believes that the company's upcoming product line is the best he has seen in the past 25 years. This is quite a bold statement and relates to a new product, most likely the iWatch, because mere upgrades cannot justify such a claim. The smart watch is expected to have a rectangular dial, and Apple is expected to ship up to 50 million units. This translates to $15 billion in revenue at an assumed $300 price tag. The iWatch is a promising product and has the potential to repeat the iPhone effect.

Bottom line
The smartphone industry may be heading toward maturity, but the iPhone is not likely to suffer due to strong consumer affiliation and Apple's design superiority. The headwinds being faced in the tablet and PC market will be countered by the launch of the iWatch later this year. Moreover, Apple is directly addressing its music content business by buying Beats and launching a radio service. These steps will ensure Apple's growth and it will continue to be the apple of the shareholder's eye.

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  • Report this Comment On June 23, 2014, at 2:23 PM, Dro1992 wrote:

    "The iWatch is a promising product and has the potential to repeat the iPhone effect."

    The article was overall good except for the statement above being vastly incorrect; it has nowhere near that potential. When the iPhone came out it revolutionized an industry as the first of its kind. There are already a ton of smart watches out there, Motorola is supposed to be releasing one as well that looks much better than the hideous gear although that is subject to individual taste. The most the iWatch would do is link to an iPhone well, but a lot of people that have iPhone's byu them with carrier subsidies etc. I highly doubt a number of them will be willing to ditch out $250-300 for a watch when they, foolishly I may add, think they bought their phone for less.

  • Report this Comment On June 24, 2014, at 4:28 AM, mcbob wrote:

    No, no, no, no no. People have such short memories.

    I remember PCs before the Mac. I remember MP3 players before the iPod. And I definitely remember someone at work proudly showing me their fancy new smartphone that could open web pages, manage their diary and so on. Then along came the iPhone and it looked like an antique.

    Let's wait to see what Apple have created before judging, shall we? I think their track record certainly entitles them to a fair judgement.

  • Report this Comment On June 24, 2014, at 6:01 AM, Mathman6577 wrote:

    The potential of the iWatch lies in the Internet of Things. There will be 50 billion objects connected in the year 2018 requiring a central control/notification device. The iWatch, maybe tethered to the iPhone or iPad, might the best way to do it. Health/fitness will have less of a market.

  • Report this Comment On June 24, 2014, at 6:43 AM, CraigWPowell wrote:
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