Apple Inc. (AAPL) recently launched a new cloud service and a bunch of software in its highly anticipated annual Worldwide Developers Conference (WWDC).
However, Apple did not launch any new hardware device in the first day of this year’s conference, thereby breaking the trend that it has been following for some time.
Apple has typically used the Worldwide Developers Conference to preview its newest hardware gadgets such as the iPhone 3GS and the iPhone 3G. In the June 2010 event, Apple introduced iPhone 4.
On the first day of the event (the event is expected to run till June 10 and is being held in San Francisco’s Moscone Center), Apple launched its new cloud service “iCloud”. The company also unveiled iOS 5 and Mac OS X Lion.
iCloudis a complete suite of services that automatically allows Apple product users (iPhone, iPad, iPod touch running iOS 5, Macintosh running Mac OS X Lion with a valid Apple ID) to store and retrieve applications in the cloud for free. The product is set for an official release this fall. Users of Microsoft Corp.’s (MSFT) Windows Vista and Windows 7 operating system can also access iCloud services.
Currently, the iCloud service comprises a number of services including MobileMe services (previously available for $99, now free), App Store and iBookstore. Through iCloud, an Apple product user can download purchased iOS apps and books to all devices, not just the device they were purchased on.
iCloud includes 5GB of free cloud storage for mail, document storage and backup. Moreover, space used for purchased music, apps, books and photo streaming is added to this storage limit.
iCloud’s photo stream service automatically uploads the photos taken or imported from other devices and the same can be accessed from all devices and computers.
iTunes in the cloud allows users to download previously purchased iTunes music to all iOS devices at no additional cost, and new music purchases can be downloaded automatically to all devices.
In addition, Apple has also launched a new iTunes Match service, which can store and access songs that were originally not bought on iTunes. This service will be available in the U.S. only, costing $24.99 per year.
We believe Apple will earn incremental revenue from the new iCloud services. With this new offering, the company is focused on strengthening its footprint in the emerging cloud computing market. Apple has three data centers to support iCloud.
However, recent hacking incidents at Sony Corp (SNE), Lockheed Martin Corp. (LMT) and EMC Corp. (EMC) have made security a major concern for cloud-based offerings.
We also believe that iCloud will provide Apple a competitive edge over the music services launched by Google Inc. (GOOG) and Amazon Inc. (AMZN) as Apple has license agreements with three top record companies. These agreements put Apple in the lead with its licensed cloud-music service.
As expected, Apple previewed an upgraded iOS 5, and released a beta version to iOS Developer Program members. The iOS 5 beta release includes over 200 new features that will be available to iPhone, iPad and iPod touch users from this fall.
The most important new feature in iOS 5 is the availability of the wireless software updates, which negates the requirement of a personal computer.
iOS 5 includes a new notification center, an updated Safari mobile browser with a new reader and built-in Twitter integration and Newstand, which enables efficient newspaper and magazine subscriptions management.
iMessage allows users to send text messages, photos, videos or contact information to a person or a group on other iOS 5 devices over Wi-Fi or 3G. This is quite similar to Research In Motion Ltd.'s (RIMM) Blackberry messenger service.
We believe an upgraded iOS was absolutely essential to counter increasing competition from Google’s Android and Honeycomb operating systems.
The new Mac OS X Lion has more than 250 new features and 3,000 new developer APIs and customers can download it from the Mac App Store for $29.99 starting July.
Lion includes new features such as touch-screen support with multi-touch gestures, similar to iPhone and iPad. The new operating system allows peer-to-peer document sharing over Wi-Fi.
We believe the upgraded Mac OS will help Apple sustain its growth momentum in the PC market. According to research firm IDC, Apple accounted for 8.5% of the U.S. PC shipments in the first quarter, up from 7.0% a year earlier.
Our Take
We believe Apple is focusing on developing a niche for its online services and software, which is significant in order to maintain a brand following. In recent times, the company has been facing some serious competition in a majority of its markets. The new software and services, particularly the iCloud will provide a competitive edge, in our view.
However, lack of any new innovative hardware product disappoints us. We are aware that the company is facing supply chain problems coupled with problems related to the 4G development in its iPhone.
However, we believe the gap between Apple and its competitors is declining and the markets are getting saturated. Unless the company introduces a completely new product or finds an entirely new market, we believe the shares will remain range bound.
We maintain a Neutral rating over the long term (6-12 months). Currently, Apple has a Zacks #3 Rating, which implies a Hold rating in the short-term.
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