Carnegie Mellon Professor Vivek Wadhwa recently declared, in two interviews on CNBC, that Apple (NASDAQ:AAPL) should break up its businesses and license iOS to other phone makers. Wadhwa first argued that reorganizing Apple's businesses in a similar manner as Google's transformation into Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) would prevent it from being "left behind" the tech curve. He then declared that Apple could gain "hundreds of millions of users" by licensing iOS to other OEMs.
But in my opinion, Wadhwa misunderstands Apple and Alphabet's strengths and weaknesses in the mobile world. Let's see why Wadhwa's propositions would likely hurt Apple instead of helping it.
1. Misunderstanding Google's transformation to Alphabet
Google transformed into Alphabet because many investors bemoaned the tech giant's lack of clarity in its financial reports. It was always unclear how much Google was spending on "moon shots" like driverless cars and biotech.
By organizing its core search and ad businesses into the Google subsidiary and its more speculative investments (Calico, Nest, Fiber, Google X, and VC investments) into "Other Bets," Alphabet provided investors a clearer picture of its growth. Reporting revenue and operating income from these businesses separately revealed that although the Other Bets unit was posting widening losses, they were easily offset by Google's robust bottom line growth. That transparency gave Alphabet breathing room to pursue longer-term plays, but it didn't matter much to investors, who couldn't buy individual shares in each subsidiary.
Wadhwa argues Apple should follow Alphabet's lead and form a similar division to pursue "radical projects and lease products" on its own. However, Apple has already been pouring plenty of money into new projects like AR, VR, streaming music, and Project Titan.
Apple's R&D expenses have risen 28% annually to $7.5 billion over the past nine months, so the company certainly hasn't been conservative in its investments in the future. Therefore, I'm not sure how much more aggressive Apple can get, or what an Alphabet-like reorganization would actually achieve.
2. Claiming that Apple has "no new products"
Wadhwa also claims that Apple has had "no new products" since the iPhone's launch nine years ago -- an odd argument since the iPad was launched in 2010 and the Apple Watch arrived last year.
Wadhwa overlooks the fact that the iPad and Apple Watch respectively disrupted the tablet and smartwatch industries. Tablets were mostly convertible laptops for niche markets before Apple left the laptop-based form factors and software behind. The smartwatch market remains small, but IDC reports that the Apple Watch already controls nearly half of it. Apple has also launched new services like Apple Pay and Apple Music, which aim to diversify its portfolio away from hardware and into software and services.
3. Comparing iOS to the entire Android market
Wadhwa believes that Apple should license iOS to other handset makers to grow its market share against Android. However, Apple's core strength is its prisoner-taking iOS ecosystem, which locks in users with App Store and iTunes purchases. If those users switch to Android devices, they lose that content.
Android OEMs can't retain users in the same way. A Samsung user can easily switch to an HTC device and retain all their content from a Google account. If Apple licenses iOS to other OEMs, it might gain a short-term sales boost followed by a big decline in its core hardware sales, since iOS users would migrate between iOS devices from Apple and other manufacturers. It would also be difficult for iOS to remain secure across multiple hardware configurations, which would result in the security issues that currently plague Android's fragmented market. There's also no guarantee that OEMs would pay Apple to license iOS when Google offers Android for free. Apple already offers Apple Music on Android devices, indicating that it can profit from individual Android OEMs without licensing out its entire OS.
Wadhwa then mistakenly compares Apple's market share to the entire Android market. Instead, Apple should only be directly compared to market leader Samsung, which controlled 22.4% of the global smartphone market last quarter, according to IDC. Apple came in second with an 11.8% share with just three current-gen devices on the market, while Samsung sells dozens of different models. Lastly, Wadhwa overlooks the fact that Samsung repeatedly tried to break away from the Android ecosystem with its own OS, Tizen -- indicating that it recognizes the strength of Apple's end-to-end approach across hardware and software.
Nope, Apple shouldn't act like Google
Wadhwa seemingly believes Apple could improve its business if it just acted more like Google. But there's no reason for Apple to launch a dedicated moonshot unit when it's already investing heavily in its future, and it would be silly to revisit the old idea of Apple licensing iOS to other smartphone makers. Therefore, investors should take this outspoken tech guru's advice with a grain of salt.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. 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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