I was sent a few paragraphs of opinion from Victor Basta, top man at M&A experts, Magister Advisors. Normally these opinion pieces are sent as releases with the intent of one or two sentences being picked out and used by the media. In this case, I think his whole statement is worth a read:
MAGISTER ADVISORS: “APPLE’S iPHONE SALES NEED TO BECOME IRRELEVANT”
“Apple needs to get to a place where it doesn’t matter whether they sell 50 million devices or five”
Apple’s, Samsung’s and Nokia’s results this week have added further weight to the argument that the mobile market is no longer about the device, according to analysis by Magister Advisors, M&A advisors to the global technology industry.
Victor Basta, managing director at Magister Advisors, said: “Apple is currently rated at a PE of less than 10. In order to be rerated it needs to be able to demonstrate significant earnings growth potential. The amount of profit that can be made out of smartphones will plateau and then contract. Apple needs to get to a place where its most interesting announcements are not about new devices. It must grow its revenues from software and services. ”
“Device saturation will have a huge effect on RIM, Nokia, Samsung and other device manufacturers. By chasing volumes, they will inevitably go the way of Dell which has itself been frantically replacing declining revenue by driving greater volumes.”
“Apple is in the best place to achieve growth and rerating through innovation in software and services. It has hundreds of millions of credit card enabled subscribers through iTunes and the App Store. Apple arguably owns and controls the whole app concept and is the micropayments king. How Apple transitions its revenue dependence from hardware to software is at least as important as any Apple TV and in the medium to long term much more so. Fundamentally Apple needs to get to a place where it doesn’t matter whether they sell 50 million devices or five. Devices are fast becoming irrelevant and will continue to trend towards zero profit and beyond.”
Margin pressures have been a theme in this week’s announcements, underpinning the significant pressures facing hardware-focused businesses as the smartphone and device market moves towards saturation. Samsung, which reported huge profits on the back of device sales, is likely to be on the crest of a wave, Magister Advisors argue.
Hardware, Victor Basta argues, is now simply a tool for enabling consumers to buy content and will become as prosaic an element of the commercial relationship as a credit card: “Apple’s revenues from sales of content are growing faster than total revenues. We expect this trend to accelerate.”
Thinning and in some cases non-existent profits on devices add weight to the argument that profit will increasingly stem from incremental content purchases. Victor Basta said: “Amazon already makes no profit on the Kindle mobile device. As competition intensifies across the mobile industry we predict that devices will be sold at a loss or potentially given away to capture value in content sales.”
In case you’ve been sitting there thinking “Magister Advisors?” and wondering if the name rings a bell. Here’s a prompt: They were the team behind the sale of C3 Technologies for $250m (40x revenue), LoveFILM’s $320m exit to Amazon, Mobile Interactive Group’s $59m exit to Velti and Clearswift’s sale to Lyceum Capital.
Back to the topic, though.
At what point will it become more effective to give away a device for free?
We’re already seeing the beginnings of this with the likes of Amazon’s Kindle and Google’s Nexus strategy. Right now the economics — or, at least the financial wizardry at both these tech giants — doesn’t support 100% device subsidy.
Individually, though, with some customers, I bet it does already. You only have to look at what I’m spending (in gross terms) with Apple or Amazon each month.