Tuesday, July 22, 2014

What does the Apple/IBM partnership mean for the world of mobile?

On Tuesday, July 15th, at the end of trading, Apple and IBM announced a partnership to build iOS apps for businesses. I'm quite bullish on this move. Both companies have been languishing the past couple of years.

IBM does not have a good reputation among techies. (Trust me, I've worked with quite a few.) They do have very good relationships with higher up management who do not grok technology. IBM has a massive, talented sales force. A good friend of mine who I met at the University of Virginia, Darden School of business (WAHOOWA) just joined. This guy could sell ice to eskimos. But I digress. IBM brings enterprise software experience to the table, as well. Most of their systems are backend. They sell ERP systems, logistics management systems, CRM systems, databases, application servers (such as Websphere). Now, none of there software is best of breed, but the sell a lot of it thanks to their fantastic account management.

It's pretty obvious what Apple brings to the table. They bring a fantastic mobile experience as well as far and away the top brand in mobile. It is a luxury brand despite the fact that iPhones are ubiquitous. Apple also brings security. In the very young enterprise mobile market, there only two companies whose phones are secure enough to be allowed through Fortune 500 firewalls; Apple, and R.I.M (Blackberry). But the Blackberry is rapidly dying due to its poor U/X. Google won't be a competitor in the market in the foreseeable future. Android devices are too insecure. Google has given too much access to app developers. My contacts at Google say that won't change. Thus Google isn't a true competitor in the enterprise market.

Apple has nearly reached saturation in the domestic market. Nearly everyone in the U.S. owns a smartphone. 41.9% are iPhones. 52.1% are Android. The two OSs move up and down from time to time, but there's little growth there. Apple is pursuing an aggressive China strategy by partnering with China Mobile. Meanwhile Google's android OS is used far more broadly from set top boxes in China to drones in the US to dirt cheap smartphones in Africa. Google's position in frontier markets is very strong. Apple is unable to pursue this market without risking its premium brand. Instead it is pursuing higher margins and is focusing on the nouvelle bourgeoisie in the BRICs. Although this strategy is solid, it won't make the market sing.

So what growth strategies are available to Apple? Heisenberg-level geniuses are cooking up magic at 1 Infinite Loop in Cupertino, but despite much espionage and clairvoyance by Apple fanboys and bloggers, we don't know what new toys are on the way.

We DO know that Apple is making a major play in the mobile enterprise market.

The market is ripe. There are no apps for accessing internal corporate systems beyond email. Of course companies want their employees to be as productive as possible. They WANT to hand out iPhones which enable employees to work 24/7.

The interaction will work like this, IBM will sell these apps. Apple will write some. IBM will write some. They'll collaborate on some. Some will be standard. A secure shell app is a secure shell app is a secure shell app. Others will be custom development. For example, Exxon-Mobile might want a special app which will allow geologists to access its own system for tracking deposits. The important point is this:


If that isn't an argument for buying Apple, I don't know what is.

When I heard about the news, I rushed to buy. I bought a lot.

I didn't buy any IBM. Why? Well my initial answer was that IBM isn't a good tech company and I didn't care to have them in my portfolio. But there's a better answer: IBM is most assuredly the junior partner. Apple could walk away and go to Oracle. Or depending on any the particular contract, it could partner with both. Or with SAP. Now IBM is probably a good play for the time being. Apple is unlikely to get in bed with anyone else until the initial partnership agreement is fulfilled. Still, Apple is definitely in charge.

So why hasn't the market reacted more strongly? I gave this tip to an anonymous family member who gave me a bad stock tip a while back. (I bought very little and then told him thanks for the tip. The stock took a nosedive.) It amused me that he quoted the efficient market hypothesis at me. So if this partnership so great, then why has AAPL lost a percent or two since the announcement?

Market confusion. I spoke with a couple of colleagues in the industry who didn't like this deal. They cited culture class, IBM's poor reputation in building quality software, Apple's inexperience with managing Enterprise contracts. Culture class is a problem. Other than that, this partnership provides a lot of synergy to the two companies. And by the time cultural problems really hurt Apple, it will have developed a lot of very close relationships with very big clients.

More and more business is moving onto mobile devices. People travel and have lives. They work more but sit at desks less. Microsoft owns desktop corporate IT. Apple and IBM will own mobile corporate IT.

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