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.
You know what the fastest way is to have all your profits taken away from you? Android. For now, some services on iOS are not on Android. It is because of that Apple still sells a lot of iPhones. But in the Android camp, where people are using the exact same platform, components and services, it has already become a race to the bottom.
The other thing the quote you mention gets wrong is it omits lock in. I am locked into apple for Movies and TV Shows. I have a huge library and 0 incentive to switch to a platform that does not allow me to stream or redownload that content. It does not matter that Google / Samsung would work could work out a way to give me their hardware for free. I am still locked in.
In essence, the new game is not hardware or media content. Its services lock in. It is the only thing left. Apple has its media and app ecosystem. (I cant very well play Clash of Clans on a GS3). Android has Gmail which they are sectioning off, blocking other platforms. Microsoft has exchange and other trumps. It is lock in that matters.
Because of this, I expect hardware to be less of a differentiator for Apple going forward, but still more profitable by unit than Android devices, for the simple fact that there is no micromax or zte making iOS devices. Android companies however, are royally screwed. What lock in do I have when I use a GS3? What prevents me from using a HTC? Nothing.
I think Nokia had it right all along. They may have made a mistake by not profiting from Android in the interim, but in the long run, Android is peeing in your pants to stay warm. They are doing the right thing, with their location, music and imaging differentiation.
Ewan, question to you; You spend on Apple and Amazon. Why would you use an Android device that lets you connect to Amazon but not your Apple library? Would the price you pay for your Apple device feel different to you if Amazon starting giving away phones? You would take the Amazon device, of course, it is free. But would it prevent you from buying a new iPhone? (disregard the utter lack of innovation in the latest iteration)
I don’t know that I agree. And that’s even with me saying that the age of platforms is over and the age of ecosystems sometime ago (ref post http://arjw.wordpress.com/2011/02/13/the-age-of-platforms-ended-ecosystems-is-now-where-mobile-lives/)… depends on where folks sit on the mobile value chain, and really, its not all that cut and dry.
Now, I would agree that devices don’t matter if we weren’t just seeing the use of extendable platforms, but an active behavior change with them. As it stands, you don’t see the ‘normob’ talking about purchasing an Android device and changing the camera app with Instagram, or bickering about which mobile browsers to use, or even that its easy for them to publish to various social media outlets with few to no clicks… that’s something of a behavior that’s reserved for mobile elitists, and even then, the dominating platform of the day (Android) merely shows you options to extend more than it allows the non-carrier-partner to direct the entire experience.
If I were a carrier, sure, its all about services. The entire telephony value chain is all about services. The devices have always been a means to get those services into the active behaviors of consumers and marketers. That much hasn’t change… maybe the dependence on devices *only* to do that, but about the carrier mobile perspective being about services, no, that’s not changed at all.
If I were a manufacturer, and this news were shocking, then I would argue that you are probably not paying much attention. Its always been about making the hardware “go away” and then tangling the consumer (and even the service provider) into a pattern of use that marks the hardware as “necessary enough.” Amazon understands this and is pushing that hardware cost so far down so fast that you have to rely on its services architecture, whether you want to or not, if you want access to the knots that Amazon has already put together.
As neither of the above, but as a consumer, I find that there’s nothing about mobile being all about services that’s all that exciting. That is, unless open device platforms, and regulations on networks, allowed for discovery and choice to be the metrics by which platforms, ecosystems, and services survive. That’s not the case. If it were, then the excellent services management found in MeeGo (and webOS for that matter) wouldn’t have gone away so quickly, and there’d be something more to be said about mobile other than “there’s a service for that.”
Looks like Magister Advisors is another poorly informed & far from insightful financial service firm that I’ll not be paying any attention to. Even when he’s on his own turf – Finance, he actually mentions PE as though it’s a useful ratio – that’s just embarrassing!
Meh.
If Victor Basta knows so much, why doesn’t he go make some phones.