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Apple's $51 Billion Question

By Richard Adhikari MacNewsWorld ECT News Network
Oct 27, 2010 5:00 AM PT

Apple has announced that it's teaming up with Unisys to go after markets serving United States government agencies and enterprises. Unisys, long a supplier of computer hardware, software and services to these markets, may just have the clout to help Apple broaden its market beyond its consumer base.

Apple's $51 Billion Question

Meanwhile, speculation is rife as to what Apple will do with the US$51 billion in cash and convertible assets it's sitting on. The latest rumor had it looking to purchase Sony.

This week has also brought some less welcome news to Cupertino. For one thing, Google's Android Marketplace has hit the 100,000 app mark, a milestone that further underscores the threat Android poses to Apple.

For another, Research In Motion demoed its Playbook tablet to approval from at least one analyst, which sent its share prices up more than 9 percent at one point.

Business Wheeling and Dealing

Apple's partnership with Unisys may help it sell more to businesses and U.S. government agencies.

Unisys has deep roots in government -- it has contracts with several government agencies and large enterprises. Further, not only has Unisys adopted the iPhone as its corporate smartphone, but it also develops apps for the device.

These include one used by the U.S. Department of Homeland Security.

Unisys will provide maintenance and other services to companies and government agencies that buy Apple devices, Gene Zapfel, a managing partner at Unisys, told Bloomberg News.

The partnership might indeed help boost Apple's sales beyond its traditional consumer market, Rob Enderle, principal analyst at the Enderle Group, told MacNewsWorld.

"Dell used to use Unisys for services before it developed its own services unit," Enderle pointed out.

"Unisys is one of the few remaining companies that can provide enterprise-class service across a broad spectrum of companies," Enderle explained. "If Apple wants to sell its product into the enterprise space, it has to provide the solution with a service provider that can play there, because it can't. Unisys should allow companies to embrace the iPhone and iPad as strategic products."

Spending Money Is Hard to Do

Could Apple also be looking to make more strategic purchases with the wads of cash at its disposal?

During its Q4 earnings call last week, Apple reported it has $51 billion in cash and marketable securities, and CEO Steve Jobs once again told a questioner who asked him why he didn't pay out dividends that Apple would be looking to make strategic purchases when the opportunity came along.

There's a long list of speculative targets: Netflix, Electronic Arts, Facebook, Adobe, Yahoo, Sirius XM, TiVo, SanDisk, Disney, and Sony, among others.

Here's the thing, though: Apple only buys companies that fit into its plans. Here's a select list of some of its purchases: Fingerworks, a company developing gesture recognition software, acquired in 2005; P.A. Semi, a semiconductor manufacturer, acquired in 2008; music streaming site Lala, which it has since closed down, purchased in 2009; and this year it bought the Quattro mobile advertising firm and Intrinsity, a semiconductor company.

Chances are, Jobs will buy a smaller company rather than a larger one.

"Jobs doesn't like a lot of complexity, and buying big companies is something he doesn't want to do," Enderle remarked. "The speculation was he's going to buy Sony, which I really doubt."

Large-scale acquisitions put a company in crisis mode for two to two and a half years while it works through the acquisition and integration, Enderle pointed out. "Given his historical dislike of large acquisitions and the state of his health, Jobs likely isn't looking for the stress. He might buy a few small companies."

So, what's Apple going to buy next? Expect the unexpected. But expect it to provide good value to Apple and its investors.

The Looming Threat of Competition

Perhaps investors have been spooked these past few days by news that Apple's competition is thriving.

Take RIM, the sales of which Jobs criticized on Apple's conference call last week. RIM has unveiled its Playbook tablet, which sparked a "buy" recommendation on the company's stock by MKM Partners analyst Tero Kuittinen. That sent RIM's share prices surging by up to 9.5 percent at one point.

Meanwhile, Google's Android Marketplace now has 100,000 apps, according to a tweet from the Android Developers' blog. That makes Android just that much more of a danger to iPhone and iPad.

Apple's Jobs acknowledged that Android is a threat in his comments at the Apple Q4 earnings call.

Meanwhile, publishers are reportedly flocking to the Samsung Galaxy tablet. Certainly, Apple's iAds mobile advertising platform is not doing as well as Jobs had previously claimed when he said it had sewn up $60 million worth of mobile ads until the end of this year. During the earnings call, Apple executives skimmed over iAds.

Coming Off the Earnings Call High

Or perhaps investors have calmed down since Apple announced record sales in various sectors at the company's Q4 2010 earnings call and painted a pretty glowing picture for the coming quarter.

Barclays Capital analyst Ben Reitzes wrote of the accelerated halo effect Apple's new software, the coming App Store for the Mac and new models in the MacBook Air family would create.

Strong demand for the iPad and iPhone, significant international expansion and new innovations will drive Apple shares, Reitzes said. He pegged Apple's share price target at $390.

Gleacher analyst Brian Marshall pegged Apple's share price target at a more modest $355 but agrees that a CDMA iPhone and continued strong demand for the iPad will drive Apple's shares.

Riding the Bull

Still, close scrutiny will show that Apple's got a strong hold on the market.

The MacBook Air laptops announced last week are expected to set the market on its ear. For one thing, the 11-inch MacBook Air is priced at $999. The sub-$1,000 offering can only strengthen Apple's position, Richard Shim, a research manager at IDC, told MacNewsWorld.

Further, the new features in the MacBook Air, such as FaceTime and iLife, and its instant-on capabilities are just what the customer wants, and they take MacBooks into the future.

"Apple's starting to incorporate a lot of features that are popular in its mobile offerings such as FaceTime into its computers," Shim pointed out.

"Once again, it's moving the bar up. The funny thing is, Apple's doing exactly what consumers have been asking it to do. Consumers want instant on, long battery life, thin and attractive designs. It's not as if Apple's the only company they've been saying all this to, it's just that Apple has been delivering," he explained.

Tomorrow, the Stars?

The new MacBook Airs don't have traditional hard drives; they have flash drives, and this is another step toward the future.

"We found that most consumers need only 60 to 80 GB of storage, especially on a mobile PC, because the increase in content has followed a linear pattern per consumer, and not an exponential one," Jim McGregor, chief technology strategist at In-Stat, told MacNewsWorld.

"Apple's correctly placing its bets that things are going to the cloud -- all your information will be stored in the cloud on the Internet," McGregor added.

Apple's plan to introduce an app store for the Mac in the new version of OS X, code-named "Lion," is another step toward the future.

"As everything is moving to the Internet, you're seeing changes in architecture, in the hardware, and in the business model," McGregor said. "You should be able to download apps for your PC just like you do for your mobile device, and your PC should be able to effectively use the ecosystem just like a mobile device instead of being an all-in-one product. Apple's betting on these changes, and rightfully so."

This transition to downloadable apps for the PC will take about two to three years for the Apple ecosystem, Carl Howe, director of anywhere consumer research at the Yankee Group, told MacNewsWorld.

More than that, moving to an app store mode of software distribution could make Apple a lot of money.

"The concept of an app store for Macs is great, and Apple's going to get maybe 30 percent of every sale," Al Hilwa, a program director at IDC, told MacNewsWorld. "If you're a software developer like Microsoft and you're selling through the retail store channel, you're already discounting your application by 30 percent, and the retailer then marks it up. Jobs will get to keep that markup and, if he keeps this up, Apple could get to do $100 billion in sales a year."

Apple shares closed on Tuesday at $308.05, down 79 cents.

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