The world’s largest consumer products company has undergone a major shift in strategy. Apple (AAPL), in their conference on Monday, announced some changes contained in the new version of IOS that are truly significant. Those changes hint at a company that is tweaking their business model quite significantly in the long-term, but the timing suggests something that could be a worry to investors whether they own AAPL or not.
Since the first iPhone was launched in 2007, Apple has sold more than 2 billion of them, making it arguably the most successful product ever, at least in consumer electronics. Obviously, that is a lot of sales revenue over fifteen years, but what the company has begun to realize over the last few years is that they have over a billion devices in people's hands that could potentially generate revenue. The trick is to unlock that potential.
That was the thinking behind the launches of Apple TV and Apple Music, for example. If you could make people pay for the content that they consumed on their devices as well as the device itself, you could produce a recurring revenue stream rather than just a one-off purchase. It is kind of like the razor model, where the handles are sold at a discount to lock in future blade cartridge purchases. If just half of the one billion iPhone users sign up for a service at just $5 a month, that would translate to $25 billion in annual revenue for Apple. Admittedly, not a massive influence on a company whose sales last year totaled over $365 billion, but still significant, especially given the high margin nature of service revenue.
What worries me as a general investor, though, is that Apple is choosing this moment to accelerate that move, adding features to its Apple Pay service while accenting service revenue in other ways too. They have been moving that way for some time and seem to have had the technology for a while, so why the hurry all of a sudden? The most likely explanation is that they are looking for ways to boost revenue, even pull it forward to some extent, because they are expecting some lean times in their base retail business.
If that is the case, you can’t blame them. Inflation is still climbing, both in terms of numbers and how it feels to consumers, while one of its main drivers, the price of oil, has also continued to climb, with WTI around $120/barrel this morning. That is despite the Fed starting to make necessary changes like raising rates and reducing liquidity. Those things are clearly having a demand-reducing effect, as they are intended to, in at least one way. This morning’s mortgage data showed the lowest demand for home loans since the start of the century, with house sales falling off dramatically. That is going to impact house prices, and we all saw in 2008 what a boom-and-bust housing market can do to consumer spending.
I’m not predicting a 2008 style crash all over again. That saw the Dow lose over 50% from its high in late 2007 to the low in early 2009, and circumstances right now just don’t justify that kind of panic. Still, a recession that goes beyond two consecutive months of negative GDP growth really impacts revenue and profits for a wide range of companies, and it looks much more likely now than it did just a few months ago.
It seems that Apple can see that, and is attempting to generate some sticky, recurring revenue now rather than waiting. That will prove to be good news for holders of AAPL in the long-term but sends a bit of a warning to investors. Listening to that warning may prove to be a smart thing to do. Recently, I wrote a piece saying that I expected a bounce off of the 3800 level for the S&P and so far, that is what we have seen. I also said, though, that any bounce could prove to be temporary, and the moves made by Apple, combined with commentary by other consumer-facing companies in the last week or so, make that seem much more likely now than when I wrote that piece.
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