MorningWord 5/26/16: $AAPL’s Pipeline Leak

by Dan May 26, 2016 9:51 am • Commentary

OMG, the FT is reporting that Eddy Cue, the Apple (AAPL) exec in charge of iTunes, Music and iCloud, “raised the prospect… of buying Time Warner… at the end of last year with Olaf Olafsson, Time Warner’s head of corporate strategy”.

Remember, Cue is the guy that two years ago at Re/Code’s Code conference said that by the end of 2014, the world would see they’ve got “the best product pipeline that I’ve seen in my 25 years at Apple“. Months turned into quarters, quarters into years.  That product commentary came just after AAPL’s largest acquisition ever, of Beats for $3.2 billion, while he was on stage with Beat’s co-founder Jimmy Iovine. Apple’s (second) relaunch of their Music offering, incorporating aspects of Beats has been a bit of a disappointment, and many Apple watchers expect another revamp of the product at their upcoming World Wide Developers Conference on June 13th in San Francisco.

Apple Music (with streaming) launched on June 30th, 2015 in 100 countries, by October they had 6.5 million paying subs, by February 2016 10 million, and on their most recent earnings release stated they had 13 million.  Not bad growth. So why is that a disappointment?  Well, this tweet from the Spotify CEO highlights the gap:

Just before Apple Music launched 11 months ago, Spotify disclosed:

At the end of May 2014, we reached 10 million paying subscribers and 40 million active users. Today, we have reached more than 20 million subscribers and more than 75 million active users. 10 million subscribers in our first five and a half years – and another 10 million subscribers in just a single year! That’s an average of one new subscriber every three seconds over the last year.

Spotify has gained 10 million subs a year for the last two years. Apple has an installed base of 1 billion iOS users and only 13 million of those peeps have decided to put their fingerprint down to pay for the monthly Music subscription. Ugh. Granted, it’s still early. But the product is certainly not best of breed despite access to a massive customer base. They haven’t redefined the category in any way. And redefining already existing products has been a large part of their success over the last 15 years.

So where is this magnificent product pipeline Cue promised?  The company was unable to secure video content deals in the last year, so they had to scrap their ambitious plans for an Apple TV relaunch, and we are left with a Box that plays others content, much like the previous generation (but with Siri!).

So they considered what would be probably an $80 plus billion play for content with TWX?  That reminds me of something. At the start of the iRevolution in 2003, when Steve Jobs was transforming the music industry with the launch of the iTunes store, there was rumors that the company was going to buy Vivendi, who owned Universal Music. I recall being privy to a conversation where then Apple CFO Fred Andersen said flat out that the rumors were nonsense, and bluntly asked this rhetorical question to my pal, “why would we buy the cow, when we essentially will get the milk for free?” I am not certain that Apple investors would take too kindly now to a cash and stock deal that could be equal to their current debt load of $80 billion, or about a third of their cash balance.

Acquisition of video content does not constitute a great product pipeline. Nor does an evolutionary second tier player in streaming music. On the hardware front, nor does the Watch, or evolutionary iPhones and Macs.

I know AAPL just rallied 10% in two weeks, gaining $55 billion in market cap, off of a two year low, but I’ll just say this as peeps get all geeked up to be wowed at the upcoming WWDC. Don’t hold you breath. The most important product that has been in Apple’s pipeline since Cue made that proclamation two years ago is the iPhone SE. A souped up version of the iPhone that was on the market when Cue made those comments in mid 2014. Why is the SE important? As iPhone sales have slowed in the developed world, and growth markets like China, an iPhone that can be sold at price point the be competitive in places like India is taking on one of AAPL’s biggest growth challenges. Some say that at $500, the SE  is still too expensive and that the demographics in India will be very different for Apple than they were in China. Not to mention the potential cannibalization in developed markets and the adverse effect on iPhone ASPs (more from me here and here on that).

As I’ve argued before, the company could benefit from a bit more clarity. My thoughts on that from last month (Or do you want to come with me and change the world?)

Two weeks ago we detailed a bullish options trade in AAPL when the stock was $90, we offered some thoughts on trade management yesterday as the stock approached $100 (Anatomy of a Trade – $AAPL Oct Risk Reversal) There are some that say, “you don’t trade AAPL, you own it” but we’ve viewed the stock for some time more as a trading vehicle and quite honestly, dead money, as we said in this post from June 2015 when the stock was $127: (Chart of the Day: Is $AAPL Dead Money?).