When Tim Cook takes the stage in California on September 12, tech gurus and journalists will be watching closely for the three new iPhone models that Apple is expected to announce.
But Morgan Stanley analyst Katy Huberty has her eyes on something less flashy than a next-generation OLED screen or prices of the new phones: She’s focused on Apple Services.
It’s not an exciting gadget, or even a groundbreaking technology, but Apple Services — which includes the App Store, Apple Pay, iTunes, and iCloud — made up 16% of Apple’s total revenue last quarter, more than any segment except iPhone.
Business Insider spoke to Huberty about all things Apple, from China to Wall Street, from new iPhones to self-driving cars, and her bullish $US183 price target for the stock. Here’s just a part of what she had to say ahead of Apple’s much-anticipated event next month (her responses have been lightly edited for length and clarity.):
Graham Rapier: What’s the biggest question you have for management right now?
Katy Huberty: Apple in June launched ARKit, and will launch smartphones in September with improved camera capability that allows for advanced augmented reality experience. That ARKit allows all sorts of developers — from retailers, to gaming manufacturers, to social media companies — to take advantage of Apple’s new hardware in this platform to write new applications.
To the extent that those are successful, not only will Apple take its 30% cut of those services, but the existing iPhone base will need to upgrade to new hardware that has this new camera capability.
The biggest question is to get a better understanding of how Tim Cook sees ARKit and augmented reality as a category influencing the Apple model. Is that something that can really move the needle, accelerate upgrades, create new services, and new revenue streams in the next six to twelve months? Or is it a technology that they are planting a flag today that has longer term impact? If the company and the reality plays out that this is a trend over the next 12 months, that’s something that’s definitely not priced into shares.
On Apple TV:
Huberty: Apple hasn’t announced it, but the press has reported Apple investing $US1 billion in original video content.
TV and video is a big focus, and it’s certainly of interest. Tim Cook has said they’re interested in TV and original content, but going back to the Services discussion: Apple charges a tax on HBO, Showtime, and now even Amazon Prime is available on Apple TV.
They play Switzerland. They don’t play favourites. They are taking a cut from everyone, and that creates a diversification. If Netflix were to stumble, there would be somebody else that picks up the slack and Apple will continue on collecting from all of those companies.
When you take a step back and think about strategy around video, how successful or disruptive do they really want to be, when you ultimately would be disrupting your partners? Particularly given that the 30% cut that Apple takes is pure profit.
So Apple would generate more revenue if they, for instance, owned one of those platforms, but the profit dollars probably aren’t all that different. I’m always cautioning investors to think about the bigger picture strategy around services and whether Apple would ever push hard into a category like gaming or video where they’re already collecting a large base of tax from third parties.
On self-driving cars:
think Apple might participate in electric or autonomous cars.
Our view is that Apple is most successful when they are vertically integrated, meaning they control the hardware, the software, the components and they control the platform for distributing third party services.
It’s unlikely Apple is going to partner with somebody and allow them to design a big part of an automobile. If they decide to play, it is most likely to be Apple-designed, certainly partner built, but Apple-designed from hardware to software with a platform on top of it. We also believe that we are probably a decade away from an automobile having any impact on the financial model.
You can read the rest of Business Inisder’s interview with Huberty here.
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