When it comes to Apple, Morgan Stanley’s transportation analyst defers to the firm’s information hardware analyst.
From a note to clients that landed on my desktop Tuesday:
ADAM JONAS: So, Katy, when I talk with clients about Apple potentially entering the auto industry, I try to emphasize that Apple probably does not want to make a car the way most people think about cars…. but that they may want to turn your car into a mobile Apple store and fundamentally reconceive what the experience is. So, where do you think the biggest value add is for Apple and selling vehicles that might be privately owned, or is it that turning the car into mobile real estate where the value is in the network and the services that could be offered to consumers in, say, like an app store environment in the car?
KATY HUBERTY: Right. Well, first, let me reiterate something, because I get this question a lot. Does Apple really want to build a car? Why don’t they just focus on the software and services? Apple is successful when they’re vertically integrated. They want a hand in the design, in how the software communicates with the hardware, what are the right components and technologies to use. And so, well, yes, any big technology, the most significant value is in terms of profit dollars but also in terms of alpha-generated by investors and in software and services for sure. But Apple will just as much focus on the other elements—building, designing, what that vehicle looks like, how the components and the software operate together—as it will on the services.
So, I want to reiterate that because it comes up so often. And ultimately—and they proved this with the phone just recently—that services in total has become more than 20 percent of Apple’s revenue. Still the iPhone is half of the business. So, they can’t be successful in services until they’re successful in selling the device that this new type of computer and services sit on top of.
So, I wouldn’t put the cart before the horse. Yes, there will be an important element around what services will become available in an automobile once the driver’s focus and attention is freed up, but first they have to get the car right. You and I have debated this before. I wouldn’t be surprised if Apple comes to market with an EV, right? A car that looks similar to automobiles that are on the market today with a steering wheel. They did this with the iPhone where in the first iPhone, there was no app store. It was first about getting the hardware right. How do you differentiate on the hardware? It was a larger screen that ultimately paved the way to watch Netflix and play video games and what-have-you on that device. I think the focus right now, I’m sure, is on design and the vehicle itself, but with well thought out plans around what services could emerge longer term.
My take: The cart, in this case, is software and services, and the horse, paradoxically, is the car.