Apple wants to be known as a services company, says Gene Munster in farewell note

Posted:
in General Discussion edited December 2016
Gene Munster, one of the most well known Apple analysts in the game, sent Piper Jaffray customers a final note on Thursday before departing to start a new venture capital firm, offering investors a final five-year forecast on the Cupertino tech giant.




Part farewell, part business, Munster's note can be considered official confirmation of reports that surfaced last week. The analyst, known for his often bullish take on Apple, will leave Piper Jaffray at the end of December to start AR/VR VC firm Loup Ventures with fellow analyst Doug Clinton and former colleague Andrew Murphy.

"We've written a lot over the years, especially on Apple -- this will be our 874th note on the company. This one is farewell," reads the note co-authored by Munster and Clinton.

On to the business portion, Munster says services are key to Apple's future, especially going into the next five years. For over a decade, Apple investors have concentrated on unit growth and innovation as key concerns, and that is likely to continue if the company is unable to pivot to services, he says.

Regarding hardware, Munster sees iPhone 7 beating Wall Street estimates for March and June, while next year's 10th anniversary model should drive high single-digit to low double-digit growth. Apple is widely rumored to incorporate exotic technology like an edge-to-edge OLED screen and glass chassis in at least one version of its next-generation handset.

Referencing the device as "iPhone 10," Munster believes demand for the handset will translate into 170 million sales in fiscal 2018.

Moving beyond near-term product cycles, and citing an emphasis on services seen in recent Apple earnings conference calls, Munster suggests the iPhone maker wants to be known as a services company.

In July, Apple CEO Tim Cook said he expects services, which includes iTunes, iCloud, Apple Music, Apple Pay, Apple Care and the various App Stores, to generate revenues equivalent to that of a Fortune 500 company by 2017. And Apple's services growth appears to be on track to meet that goal. In the September quarter, the segment was up 24 year-over-year, compared to overall company growth of negative 9 percent.

Despite a positive outlook, Munster says it will be an uphill battle to get investors to view Apple as a service business rather than hardware. The backend business would likely need to account for 30 percent or more of Apple's revenue for investors to take the notion seriously, and 50 percent or more for Apple to actually be considered a services brand.

If Apple does indeed want to be seen in a new light, it might have to start selling hardware in a different way, Munster says. For example, the company could accept lower profit margins on cheaper hardware or bundle hardware and software together as value-added packages.

On the topic of innovation, Munster maintains predictions that Apple will focus on augmented reality solutions, likely to see introduction through iPhone. Apple could bring an AR or MR (mixed reality) wearable device to market that ultimately replaces the smartphone in the next five or more years, he says.

Munster also notes Apple's work in the automotive space. Though a consumer product, whether autonomous vehicle software or a full-fledged car, is years away, Apple is likely eyeing auto as the next platform to dominate, he says.

Finally, as a farewell, Munster explained it was iPod that prompted him to become a long-term bull of Apple stock.

"The experience was rough, but using the iPod gave me a sense of joy I never had from any other product," Munster says. "They did it with the iPod and recreated that joy with the iPhone. That magic is a big reason why we've been unwavering bulls on Apple for almost the entire time we've covered it."

While Apple stock is unlikely to replicate the success it enjoyed over the past twelve years in the coming twelve, Munster says, "the company can recreate that magical feeling with some future product and will enjoy watching the stock rise when they do."

Taking over Piper Jaffray's Apple coverage is Mike Olson, who worked alongside Munster from 2004 to 2010.
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Comments

  • Reply 1 of 43
    mattinozmattinoz Posts: 1,019member
    They may "want" to but the customers will decide if their efforts make that true.
    At this stage nope not a services company none of their products make them even close to that it's still OS and hardware that drives sales and profits.

    If no one make decent stuff what will the services run on?
    bigpicsbaconstangai46cali
  • Reply 2 of 43
    For me moving towards a services company is ok as long as they Remember Alan Kay: "people who are really serious about software should make their own hardware". 

    OT: Taste in shirts ... priceless. ;)


    edited December 2016 fh-acemagman1979bigpicsjSnivelylostkiwibaconstangstanthemanwatto_cobrapscooter63MacPro
  • Reply 3 of 43
    They're already a big "services" company with $24.3 BILLION in revenue, twice larger than 4 years prior - but they're a much bigger hardware company, that's not going to switch in 5 years. Apple aren't new to services, I think people forget things like the iTunes and App stores are services.
    lollivermdriftmeyermagman1979bigpicslostkiwibaconstangwatto_cobrajcdinkinspscooter63brucemc
  • Reply 4 of 43
    SoliSoli Posts: 8,687member
    Apple wants to be known as a services company, says Gene Munster in farewell note
    The holidays are tough on us all, and suicide is all too common. I hope he's in heaven now looking down on us via an Apple HDTV.

    (Only read the headline¡)
    jSnivelybestkeptsecretmagman1979[Deleted User]macxpresswatto_cobraidreyjcdinkinspscooter63dasanman69
  • Reply 5 of 43
    Farewell Munster & good riddens!!!!  Munster is an analyst that has literally been wrong on his calls 80% of the time.
    His calls were unsubstantiated. His sources were unknown (perhaps a dream). In any case he won't be missed by the Apple community.

    Hey Apple now that Munsters gone you can unveil that Apple TV.


  • Reply 6 of 43
    apple ][apple ][ Posts: 8,433member
    Where is the damn Apple streaming TV & Video service?

    I have never bought a single movie or tv series from iTunes and I probably never will. 

    I do on the other hand pay money to Netflix and Amazon for their streaming services every month.

    Where is the Apple streaming service that can compete with and be better than both of those?

    If Apple had a good service, that was better than the others, then I would give money to Apple every month instead of to the others. 




    baconstangasdasdgatorguypscooter63elijahg
  • Reply 7 of 43

    They might need a new CEO, someone who knows how to implement web delivered services, because right now they have a supply chain guy, and web services (something Apple has not had the best reputation of getting right) and hardware supply chain are two very different things.

    As others have pointed out, for every service Apple offers, someone else does it better. Siri as a web assistant is downright awful when compared to Google's offering. Their productivity stuff, mail contacts and calendars are not as good as Microsoft and Google's offerings. Their music is not bad, but not any better than Spotify. iCloud storage does nothing that cheaper and better (cross platform) services like Dropbox offer.

    The company is at an inflection point, and if I had to bet, they will go the way of IBM, Dell, and Balmer Microsoft. That is to say, they won't be going out of business any time soon, but their inability to continue to innovate and deliver new products after the unfortunate death of the companies visionary, will lead to a period of malaise.

    If their pro product offerings including the most recent pro laptop tells us anything, the are no longer able to deliver products that get anything greater than a 'meh' from the people that have historically championed the brand.

    I for one, am not in a hurry to subscribe to new Apple services, on the contrary as time goes by, I find I am happier with non-Apple services. I have been using a Mac since 1987 and recently have been finding using Apple products less appealing, due to instability and unnecessary complication of software and questionable design choices in both hardware and software. For me it is not so unappealing that I will be using my Surface or Galaxy 7 Edge as my daily drivers, but I no longer see it is an impossibility.

    edited December 2016 bigpicsavon b7nubusbobrooelijahgajbecker8cali
  • Reply 8 of 43
    Gene Munster is a failed AAPL analyst. He had been wrong many times more that he was right about his forecasts. I was foolish enough to subscribe to his analysis in my Apple investments that I regret the day I believed his crap. Stay away from this guy.
    baconstangcali
  • Reply 9 of 43
    They're already a big "services" company with $24.3 BILLION in revenue, twice larger than 4 years prior - but they're a much bigger hardware company, that's not going to switch in 5 years. Apple aren't new to services, I think people forget things like the iTunes and App stores are services.
    Most of that is App Store downloads. I know that's technically considered "services" but how much is Apple really driving that number (outside of hardware sales)? Are more people spending money on the App Store because of something Apple is doing? I would argue no, and I'll bet most of the App Store revenue is IAP revenue from games. Of course now this also includes Apple Music and there I would argue the success comes mostly from the power of defaults not that it's a superior service to the alternatives. Had Apple left the music app as is, put a brand new app on the App Store for download (not automatically installed on everyone's device) and offered an API for other music apps to utilize Siri what would Apple Music numbers look like? If Apple needs to become a real services company it's not going to happen with Eddy Cue at the helm. Case in point the crappy new TV app which is sitting in a junk folder on my iPad right now.
    patchythepirate
  • Reply 10 of 43
    "...or bundle hardware and software together as value-added packages." Don't they already do this? Is there any Apple software that you have to actually purchase separately?
  • Reply 11 of 43
    I still think Apple is (or should be) an ecosystem company. Services is a part of that, but just a part. 

    Apple's comparative advantage is (or could/should be) that they provide a collection of devices and services such that the whole is greater than the sum of the parts. Each device or service need not be the absolute best on the market, but it needs to be among the best. And some of the devices really do need to be the absolute best. 

    This ecosystem should slowly expand over time to include more devices and services, making Apple a bigger part of its customers' lives. 

    I think that's the best way forward for Apple, but when I see them dump good products that are an important part of that ecosystem (or let products languish without updates), I worry that this is not currently able to pull off this strategy. My hope is that Apple recognizes and addresses its deficiencies. 
    nubusLeeinAZmattinozcali
  • Reply 12 of 43
    Services is always the end phase of a company, although you could go even lower than that and end up like Philips, become a company that sells all of its IP, axes all of its research and development and production facilities and let Chinese firms use your name for a 5 or 10 year lease period (because shareholders and advising economists think that this is the way to the biggest - always short term - profit).
    edited December 2016
  • Reply 13 of 43
    This would not be unprecedented....

    IBM, the mainframe company (and before that the typewriter company), has always focused on its service to the customer.   The saying went:  "Nobody ever got fired for buying IBM equipment".   The truth is that IBM equipment was NOT the reason for that truism.  Rather, IBM made sure that the customer's needs were met -- which is service oriented rather than hardware oriented.  

    Does it matter whether the company (whether it is IBM or Apple) deliver that service via hardware or software...

    As Steve Jobs knew:   The IPod was great for what it did and what it represented -- not because it was an innovative chunk of hardware.
    ... Jobs knew that hardware and software were both merely a means to the end.
    cali
  • Reply 14 of 43
    I can see why Tim and Jony's Apple would like to be service-centered. The margins are obviously higher and their liability is obviously less. 

    But in the same breath I would also say a service business does not need a bazillion dollar spaceship to conduct business in. You do not need Apple Stores. You do not need (like Amazon) customer service. You do not need developer conference spectacles. etc. etc.

    So, the new Silicon Valley is going to be on what ever street Craigslist is located?
  • Reply 15 of 43

    Does it matter whether the company (whether it is IBM or Apple) deliver that service via hardware or software...

    Bingo!

    The Apple/IBM partnership delivers MobileFirst solutions -- Cloud services through apps running on iOS devices.  

    The iOS apps are written in Swift.  Much of the Cloud [backend] services run on server apps written in languages before Swift.

    IBM has written Kitura -- an open-source Cloud web server in Swift.

    Kitura can run locally on macOS or in the Cloud on Linux.

    So, what's the big deals? Developers can:
    1. develop, test, debug, maintain both the iOS front end and the Cloud backend on a Mac *
    2. share code and use a common language, Swift, for both the front end and backend
    3. deploy the backend to the cloud as warranted
    4. Kitura provides access to other [non-Swift] backend through Swift program interfaces

    * this results in sales of Macs to IBM and enterprise IT who use and support MobileFirst solutions



    https://developer.ibm.com/swift/





    edited December 2016 pscooter63palomineroundaboutnowknowitall
  • Reply 16 of 43
    bobroo said:
    I can see why Tim and Jony's Apple would like to be service-centered. The margins are obviously higher and their liability is obviously less. 

    But in the same breath I would also say a service business does not need a bazillion dollar spaceship to conduct business in. You do not need Apple Stores. You do not need (like Amazon) customer service. You do not need developer conference spectacles. etc. etc.

    So, the new Silicon Valley is going to be on what ever street Craigslist is located?
    Why would Jony, someone who designs physical things for a living, be pushing Apple to become a services company? 
    dasanman69LeeinAZcali
  • Reply 17 of 43
    Referencing the device as “iPhone 10,”…
    iPhone 10: aka iPhone 7S; the 11th iPhone.

    It’s like a fucking Police Squad! sketch…

    rogifan_new said:
    Why would Jony, someone who designs physical things for a living, be pushing Apple to become a services company? 
    It makes as much sense as Apple becoming one in the first place, so if they do you can bet he’d be behind it. Either that or the rumors of him wanting to retire are true and the rest of Apple is just a bunch of fucking cowards who don’t want to bother even trying to find a replacement.
    edited December 2016
  • Reply 18 of 43
    MacProMacPro Posts: 18,147member
    For me moving towards a services company is ok as long as they Remember Alan Kay: "people who are really serious about software should make their own hardware". 

    OT: Taste in shirts ... priceless.


    Totally agree with Alan on that one.  Service companies, as far as I know, are not necessarily known for making their own hardware.  So I'd say Muster is not totally correct when it comes to Apple.  I get his reasoning, Wall Street seems obsessed that Apple needs another paradigm shifting product to survive, but this is Apple, Apple doesn't conform to known business models, never has and hopefully never will.  'Think Different'.  That all said, I always wonder what new product or products, we cannot even imagine, might have come by now had Steve still been with us.
    edited December 2016 ai46
  • Reply 19 of 43

    The real killer service for Apple will be remote ApplePay, e.g. online buying, bill-paying, funds-transfers, etc.

    edited December 2016 cali
  • Reply 20 of 43
    apple ][ said:
    Where is the damn Apple streaming TV & Video service?

    I have never bought a single movie or tv series from iTunes and I probably never will. 

    I do on the other hand pay money to Netflix and Amazon for their streaming services every month.

    Where is the Apple streaming service that can compete with and be better than both of those?

    If Apple had a good service, that was better than the others, then I would give money to Apple every month instead of to the others. 
    service != streaming. I believe selling movies and tv and music is still a service. 
    edited December 2016 pscooter63
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