- Apple and IBM partnership will help the two companies capture the enterprise market.
- The alliance will leverage Apple's product knowledge and IBM's enterprise focus to deliver value to both the firms.
- The alliance will result in long term profitable revenue streams for both Apple as well as IBM.
Apple (AAPL) - IBM (IBM) alliance has taken place at an important point in the life of both the firms. This groundbreaking partnership will lead to the development of an ecosystem of products, apps and services for enterprises which would become the de-facto requirement for a majority of enterprises. Apple will develop new products and help in the building of apps centered on the functionalities required by enterprise clients. IBM on the other hand will help in the management of big data, data security, IBM’s cloud services and give support and service for these applications. The advantages of this partnership will be seen by both the companies for at least another generation, helping create enterprise iOS apps and build long term sustainable revenue streams for both the partners.
Enterprise Benefits for Apple
The Apple IBM alliance will take another couple of quarters to show actual benefits. Currently majority of analysts believe that the biggest benefit for Apple will be in developing a strong and loyal market for its tablets division. As per Amigobulls, iPad profits in 2015 could reach $11.6 billion.
The actual benefit for Apple is much bigger than getting a larger market share for enterprise devices or shipping of more devices every quarter. One of the issues with new devices is that they eventually get overtaken by other competitors who can build on the market developed by the innovator. This pitfall cannot be removed even after using all patent regulations available. Apple faces a similar issue where the market share of its devices is slowly gobbled up by a plethora of manufactures on the Android platform. (Read: Xiaomi A Threat To Apple)
The fickleness of the general customers is reversely matched, and many times exceeded, by the deep loyalty of enterprise customers towards their IT providers. IBM is a prime example of this. Using the relationships it built with its clients in the mainframe market IBM was able to develop long lasting associations for other requirements like software development, services and data management. On the back of enterprise iOS apps Apple will be able to hook the enterprise customers to their products and develop long term relationship with them. It would be difficult for any competitor to grab this market because any change of the ecosystem by an enterprise using products of Apple-IBM alliance would require complete change of products, application, services, security and IT management not to mention the retraining of their staff.
Tim Cook mentioned in the last conference call:
“Healthcare leader Sanofi has... over 450 in-house apps for sales teams and corporate employees to get their products and information into the hands of doctors and other healthcare providers.”
At the same time Sanofi uses 25,000 iPads for its operations. This amalgam of products, applications and end services would develop a vise like grip on any enterprise or sector. Both Apple and IBM are looking to cash in on a movement of enterprises towards mobility.
Besides the benefit of selling devices Apple will also benefit through the use of its applications by the enterprises which can be monetized to a greater extent. The entire history of the technology sector shows that hardware faces enormous downward cost pressure which leads to newer devices or reduction in the profit margins of the older devices. Apple has also faced this pressure on its profit margins due to the onslaught of similar smart devices.
Any custom app for an enterprise would require long term deal which will not face similar cost pressures due to negligible competition. We can also see that the hardware sales would form a small part of these deals and the application development, maintenance and services would be a major part of revenue stream. This should also give stability to the overall stock movements which in Apple’s case have seen major swings on the perception of their future product pipeline and device reception by the customers.
iOS Benefits for IBM
After missing the last quarter earnings estimate IBM stock tanked by more than 10%. Even before that the stock has been stagnant for the past two years. One of the major reasons for this is the flat topline growth for the past decade. IBM generally divests out of businesses which give lower margins and looks for opportunities to enter higher margin segments. It made a shift from hardware to software services in 90’s which gave it sustained growth and margins for over a decade. Lately the software services business has become greatly commoditized. Even during these times IBM has been able to retain its client base on the back of long term relationships formed with other companies and the overall end to end product development and service offered by it.
The strength of IBM can be gauged by the recent downfall in the share price of the company. If any other firm would have a similar string of bad earnings and future projections the stock would have plummeted without a bottom to be found. However the value of IBM stock has simply taken a hit of 15% to its stock price and settled at a lower range. This is due to the long term revenue generation deals which the company has in its pockets.
IBM comprises 12% of the Buffett portfolio for 2014. As the Oracle of Omaha remarked on the advantage IBM has while investing $11 billion in IBM stock:
“It's a company that helps IT departments do their job better. It is a big deal for a big company to change auditors, change law firms", or for IT departments to move away from using IBM, he said. "There is a lot of continuity to it."
The strength of IBM can be viewed by comparing it with its partner Apple.
Fig 2: Minor fall in EPS expectation led to a drastic fall in Apple’s stock vis-à-vis 15% correction in IBM’s stock on massive EPS downfall
After releasing the shocking EPS figures in October 2014, IBM stock was down by 15%. During this quarter the company not only told that it missed the current quarter earning’s target but also disengaged itself from the 2015 target of having EPS of $20/share which it followed for over 5 years. This should have led to a major slide in any technology stock, but IBM was able to weather this storm much more easily due to long revenue generation deals which it has with other organizations. On the other hand a massive slide of over 38% in Apple’s stock was seen from September 2012 to mid-2013 when it missed its earnings projection by a couple of points.
This continuity and relationship building is the biggest strength of IBM which has allowed it to move out of low margin businesses, enter into newer technology areas and get sustainable revenues from older clients. The Apple-IBM alliance will help IBM to use the products and application knowledge of Apple and build new business relationship with enterprise clients. It’s “strictly business” motto will also give a better platform to these applications and allow easy acceptance within the business community which in turn should play a positive impact on the value of IBM stock.
Apple’s products have always faced a perception problem among enterprises, who feel they are not customized for business use or do not have adequate support infrastructure in place. IBM will fill this void and in return will get a sustained revenue stream for development, service and support for these applications.
IBM has assiduously followed the policy of moving out of low margin business. They did this by selling off the PC division to Lenovo and chip manufacturing unit to Globalfoundries. Currently IBM cloud services is the focal point of the entire management. But even Amazon who has a lead is facing tough competition in cloud services space, with biggies Google and Microsoft having their own offerings.
The end result would be a major downfall in the prices and eventually wafer thin margins.
Its software and service segment is facing increasing competition from tech majors like Accenture and Cognizant. There has also been a mushrooming of high capacity tech majors in India like TCS, Infosys, Wipro and HCL which would give IBM a run for their money in any future software/services deals. Hence IBM needs to quickly find new avenues where it can use its relationship building skills, data management, analytics and security skills to ensure long term revenue streams.
Apple IBM Alliance Will Drive Revenue For Both
Apple-IBM alliance offers such a possibility and already work has started on enterprise iOS apps in several sectors like Retail, Finance, Transportation, etc. which will see new apps getting released. These apps would be customized for the enterprise and the sector to ensure maximum productivity gains for the enterprise. In the end the hardware sales might not be the focal point of this partnership. They will slowly make this ecosystem an indispensable part of every enterprise client which would be difficult to discard or replace with another competitor. It should also lead to a domino effect where adoption by one enterprise in a sector forces other enterprises to adopt it in order to provide similar customer service to their clients. This is akin to what happened during the PC revolution.
The Apple IBM alliance will take several years to mature and much of its success would also depend on the final execution. Putting an exact incremental value to IBM’s stock or Apple’s stock through this partnership would be impossible at this point. We would have to wait a couple of quarters to see the actual market penetration made. However one thing is sure, that this partnership would be extremely beneficial to both the firms allowing them to build an additional revenue stream with good margins.