Apple Delivers Against Extraordinarily High Expectations
CCS Insight’s VP, Americas Geoff Blaber represented CCS Insight at Apple’s launch in Cupertino on 9 September, where a range of new products including the iPhone 6, iPhone 6 Plus, Apple Watch and Apple Pay were announced. Here are his first thoughts and a few of his snaps from the event.
Apple was under significant pressure to deliver new products and growth opportunities following repeated promises by CEO Tim Cook of “amazing new products”. The finer details of the forthcoming Apple Watch are unclear, but the launch of two highly competitive new iPhones in much-needed larger screen sizes combined with a move into mobile payments with Apple Pay has addressed concerns of a lack of innovation under Mr Cook. CCS Insight believes that the announcements at the event have set the tone and direction for Apple in its post-Steve Jobs era.
The iPhone 6 and iPhone 6 Plus were entirely consistent with expectations following leaks from Apple’s supply chain leading up to the event, but this should not detract from their importance. Apple introduced two screen size variants for the first time: a 4.7-inch and a 5.5-inch device. Although iterative, they further raise the bar in the competition of hardware (the iPhone 6 is just 6.9mm thin) and features with the introduction of Apple Pay (US only), LTE support for up to 20 bands, the Retina HD display and selfie burst mode. Other key aspects of iOS8 include HealthKit and HomeKit, among others (see Event Report: Apple Worldwide Developer Conference 2014).
Some features could be cited as uncompetitive (the eight-megapixel camera or the lack of 4K video recording), but these are extremely unlikely to affect the products given the broader strength of the iPhone value proposition and of the Apple brand. However, CCS Insight views the iPhone 6 and iPhone 6 Plus as acknowledgments that Apple can no longer compete with a “one size fits all” approach in an increasingly segmented smartphone market. Apple made no direct reference to its belated decision to embrace larger screen sizes relative to the competition, but it is clear that Apple’s four-inch portfolio has ceded ground to those at the forefront of the shift to larger display sizes, particularly in Asia.
CCS Insight believes Apple could suffer a hit to its margin in the near term given that the company has now been forced to offer two high-end variants with different display sizes and component configurations. This would echo the challenge Apple faced when it transitioned from a 3.5-inch display to the iPhone 5’s four-inch display before it generated significant economies of scale. However, this is likely to be a short-term problem.
Apple now has a highly competitive portfolio with the iPhone 5c (free in the US on a two-year contract), iPhone 5s (available from $99), iPhone 6 (available from $199) and iPhone 6 Plus (available from $299). This represents a strong end-to-end portfolio that caters to multiple segments and continues to obviate the need for a low-cost iPhone — as CCS Insight predicted, the iPhone 5c has effectively become that product. The introduction of larger-screened devices removes a significant point of differentiation for Apple’s competitors generally and Samsung in particular.
CCS Insight believes that the iPhone 6 Plus could cause some cannibalization of the iPad mini. However, this would be largely positive given the higher margins on the iPhone relative to iPad mini. We believe a shift to larger screen sizes in the iPhone range could spark a positive shift in the iPad mix in favour of the higher-margin 9.7-inch iPad Air. This points to an opportunity for a larger-screened, more productivity friendly iPad (aided by Apple’s strategic partnership with IBM for the enterprise), which could help Apple to reinvigorate the stagnating iPad category.
The launch of Apple Pay using NFC is of huge significance. It will be US-centric initially, but the involvement of 83% of leading US credit cards by volume, a host of leading retailers and compatibility with existing contactless payment infrastructure confirms CCS Insight’s long-standing prediction that it will be Apple that finally makes the promise of mobile payments a reality. This builds on the existing strength of iTunes, with over 800 million registered accounts and most of these with associated credit cards. Apple Pay is likely to be a seamless extension of the user experience for existing Apple users who are comfortable with the one-touch payment model of iTunes and the App Store.
CCS Insight believes that Apple Pay stands to offer a huge demand reinforcement benefit for Apple devices, further strengthening the Apple ecosystem. The extent of this benefit will depend on how quickly it can ramp the infrastructure beyond the US. This is likely to take some considerable time and investment given the complexity of the task and the fragmented nature of markets in regions like Europe. However, CCS Insight predicts this will be an area of substantial focus for Apple over the coming years owing to the significant long-term ecosystem benefits.
Apple Watch represents the company’s success where others have failed: Apple has created a device that stands up to highly personal pieces of jewellery. The personal element is likely to be why Apple opted to launch three distinct collections (Apple Watch, Apple Watch Sport and Apple Watch Edition) with multiple choices of materials for the watch face and strap. CCS Insight believes that this underlines the extent of Apple’s commitment to the category. More details are needed to ascertain the degree to which the device will be considered a “must have” when it launches in early 2015 (starting at $349), but there can be little doubt that Apple will quickly sell millions of devices.
In a single evening, Apple has become a leader in smartwatches and massively raised consumer awareness of the wearables segment. The delayed launch of the watch means Apple will miss the lucrative holiday sales season, but we feel this will have no effect on consumer demand. The delay could dampen demand for rival products in the near term as consumers wait for commercial availability of the Apple Watch before making a final purchasing decision.
Apple delivered against extraordinarily high expectations at its most important event since its launch of the iPad in 2010. Crucially, it has unveiled a much-needed and significant update to the iPhone, but will be able to continue to expand its addressable market with the iPhone 5c. The company’s move into wearables and payments is extremely promising, but global success will be dependent on the very difficult task of market education and expansion of Apple Pay beyond its home market. Other new platform efforts including HealthKit and HomeKit will also play a central role in the future. Apple’s challenge will be managing expectation and investor ignorance at the size and scale of the task ahead.