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What Apple Will And Won't Do?

 November 12, 2012 10:29 AM

(By Mani) Apple, Inc. (NASDAQ: AAPL) is surely the talk of the Wall Street for the past two weeks with an earnings miss, executive departure and concerns of losing market share to Samsung whose Galaxy S3 recently said to have outpaced iPhone as the world's bestselling smartphone.

Let' see what the Cupertino, California-based tech giant is expected to do or not to do.

First, Apple is selective about what it does in providing platforms and services to consumers. The company does see new categories to create and appears interested in services.

However, Apple seems to have less interest in owning content or its own network. Surprisingly, it played down the mobile wallet opportunity.

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"CEO Tim Cook has said it is fair to think of Apple as a leading mobile device company. Alternatively, executives suggested that Apple provides platforms and services to consumers. It applies its skills in hardware/software/services in a focused way with a preference for large markets," UBS analyst Steven Milunovich wrote in a note to clients after speaking to Apple management.

Apple, which recently launched iPhone 5 and iPad mini, suggested it does believe there are more frontiers to conquer, more new categories to create while underscoring continued opportunity in smartphones and tablets. There are rumors that Apple may be targeting areas such as wearable computing or entertainment management.

"The remote control is very crude. If they can solve the problem and move to either a touch or gesture recognition, then they can create an app universe on the TV," Apple observer Horace Dediu said on UBS conference call.

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The company does seem interested in layering services over its hardware offerings. iCloud is free and has 190 million users while iTunes runs at a slight profit. There is talk of a Pandora-like service. As Siri evolves it could become a digital assistant, but will these services just enhance the attractiveness of the platform or become a significant source of profit remains to be seen.

Meanwhile, despite Steve Jobs' lack of interest in selling to corporations, Apple recognizes the bring your own device trend. The company has over 200 enterprise sales people in the US, is expanding its value-added reseller channel, and supports companies out of the retail stores.

On the other hand, the company suggested less interest in owning the content and appears happy to sell devices and provide services.

Some investors think Apple should consider building or buying its own network, perhaps as a proof point of what can be done in entertainment or to reduce the risk of phone subsidies declining.

"Management seems to think owning a network wouldn't make sense," Milunovich said.

In addition, Apple does not seem interested in vertically integrating into components despite its size, leaving that to partners and also not very keen on the mobile wallet opportunity.

"Passbook offers useful features, such as holding gift cards and airline tickets. But at least in our discussion, Apple said that NFC is "a solution looking for a problem," that banks and credit card companies don't want to fork out for new terminals and that paying with a phone isn't a step-function better than using a credit card," the analyst said.

This shows that Apple wants to stay focused despite its growing cash pile as it has said "We have never made acquisitions for revenue." The statement indicates that the cash isn't burning a hole in Apple's pockets though it is nice to have if a larger opportunity is presented.

Apple's view of its cash trove is that preservation is more important than return. The majority of cash is overseas, and Apple is lobbying for lower repatriation tax rates. However, much of it is invested in US Treasuries and corporates with an average 16-month duration.

"There was no comment regarding future buyback or dividend plans, but if staying focused reduces the likelihood of huge deals then we would expect increases in both over time," Milunovich added.



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