Month: September 2018

· The EU is on a path to create copyright laws aimed at helping publishers of content (e.g. journalists, musicians etc.) get a bigger piece of ad revenues that go to companies like Google and Facebook.

· The EU parliament voted in favor of the directive a couple days ago, but there are several more steps for this to pass.

· The new rules would give publishers the right to ask for paid licenses when a platform shares their stories (i.e. Google News) or video clips. Some are calling it a “link tax." The rules would also put the obligation on platforms to identify what is copyrighted by making them liable for copyright infringement.

· The implications aren’t entirely clear yet. For example, the rules would apply to “commercial platforms” but it’s not clear whether that applies to blogs etc., which would widen the impact.

· Other countries like Spain and Germany tried similar rules in the past and they failed. Google’s response was either to shut down Google News or just remove any news sources that wouldn’t give it free access…which meant traffic to those sites collapsed.

· The regulation might actually reinforce the dominance of the strongest players. The cost burden of this regulation would be easier for large firms like Google to absorb as it would require firms to build technology to identify and filter copyrighted content. Thus it might have the unintended consequence of strengthening Google (and other platform giants) relative to smaller firms/startups. In fact, Google already largely complies with these rules on YouTube with their “Content ID” filter.

· Opponents also say that complying with these rules would limit the free access of information that the internet is designed to offer.

· If this directive keeps progressing their will likely be more vocal industry resistance, as many who have been critical of the big tech firms don’t support it. For example, Tim Berners-Lee (inventor of the world wide web), who has spoken widely about the risks of Google’s and Facebook’s dominance, is ardently against these potential regulations.

Sarah Kanwal

Equity Analyst, Director

Direct: 617.226.0022

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

Yesterday Apple held an event introducing their latest devices. A few big takeaways…

1. Higher iPhone price points and a wider price point range.

a. They have 3 new phones – will range in price from $749-$1449. XR, XS and XS Max. iPhone 7 price dropped to $449.

b. The iPhone XS Max – most expensive of the 3 (starts at $1099) and largest (6.5”)

c. Overall this should help ASPs – this is key because ASPs are driving their growth right now as units are flattish.

d. There’s some concern the cheapest of the 3 new models might be gross margin dilutive. Changes are evolutionary, but I think likely to drive enough uptake of more expensive models to offset any margin dilution from cheaper ones.

e. Way more memory. Most expensive XS models will have over half a terabyte of memory. That’s enough for 200k photos.

f. A12 Bionic Chip – “the smartest, most powerful chip ever in a smartphone.”

i. Industry’s 1st 7nm chip (Huawei has a 7nm chip announced too, but Apple’s ships first)

ii. Up to 50% faster than the A11.

iii. Enables more powerful apps…like augmented reality gaming.

g. All use face ID, no home buttons.

h. Waterproof to 2 meters, up to 30 minutes.

i. Camera is again improved.

2. New functionalities of the Apple Watch

a. Fall detection – if the watch detects a fall, it readies for a one-swipe 911 call. If you’re motionless for longer than a minute, it will automatically call 911 and send an alert to your emergency contact list.

b. New heart monitoring capabilities – can detect atrial fibrillation and perform an electrocardiogram. The president of the American Heart Association got on stage and said capturing meaningful real time data this way “will change the way medicine is practiced.” FDA clearance has been received on this.

c. 30% larger display (40mm & 44mm). New price points: $279-$499

3. Dual SIM

a. Makes it possible to have 2 phone numbers on one phone.

b. This is expected to be in high demand in international markets, especially China.

c. Accomplished by adding an eSIM card – basically a virtual SIM instead of a physical one (some international markets are 2 physical SIMs).

d. eSIMs may increase carrier churn and lead to more plan deflation because they make switching carriers easier, leading to more price competition.

4. Sustainability Presentation

a. Apple’s head of Environmental and Social issues got on stage and talked about their initiatives with renewable energy and using recycled parts.

b. For example, the logic board is now made of recycled tin and the cover has glass that’s 32% bio-based plastic.

Sarah Kanwal

Equity Analyst, Director

Direct: 617.226.0022

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

Today Apple is announcing their new product lineup at a 1pm launch event – 3 new phones are expected. Analyst expectations around the new device launches are ratcheting up, with some increasing price targets. This is despite developments on the tariff front that are looking more threatening to Apple. Last week the White House took comments on the latest round of impending tariffs (up to 25% tariffs on $200 billion in Chinese goods). This would be on top the $50B of Chinese exports already hit with 25% duties (which didn’t effect Apple’s products). Apple submitted a comment letter indicating the $200B round of tariffs would affect the Apple Watch, AirPods, MacMini and Apple Pencil. These items account for <5% of Apple’s revenue. So, not a big hit yet. In the letter Apple said, “tariffs increase the cost of our U.S. operations, divert our resources and disadvantage Apple compared to foreign competitors.” The letter also reiterated a lot of what Tim Cook said on Apple’s last earnings call – essentially that tariffs are a tax on the consumer and that they can have broad unintended economic consequences.

Next Trump threatened another $267B in tariffs and suggested Apple should move their manufacturing to the US. In June, the Trump administration said they would not impose tariffs on iPhones, but this next $267B suggests otherwise as that basically implies a duty on all goods imported from China. This could be used to influence Apple to move some manufacturing to the US. Most of Apple’s assembly occurs in China (only about 5% of Apple’s manufacturing takes place in the US) and to shift this would take a lot of money and time. Labor supply in the US would also be a limiting factor. Trump hinted at tax incentives that would help offset the cost of doing this. If more assembly moved to the US, it seems likely that most of the higher labor costs would be passed on to consumers via higher prices. Most estimate price increases in the 15-20% range to offset higher labor. While Apple has a lot of buyer power, their suppliers generally operate on thin margins making it more difficult to push some of this higher cost burden to them. This is illustrated by the chart below from The Economist of Apple’s 42 biggest suppliers (representing 75% of Apple supplier gross profits). Apple and the chip suppliers occupy the high value added, high margin portion of this value chain and command 90% of the profit pool. Interestingly, this disparity also illustrates potential risks that come with their complex multinational supply chain. That profit concentration could lead to structurally weaker participants that may have a hard time weathering these trade tensions. The not Apple and not chip (i.e. not US) portion of production has most of the employees and requires lots of capital for PP&E and inventory, but they capture only a small sliver of the profits. Because of this, there may be some financially weaker players in the supply chain. Combining low margins and capital intensity (likely have debt to service) could put some suppliers at risk if costs rise or business from Apple slows as trade issues get sorted out.

Sarah Kanwal

Equity Analyst, Director

Direct: 617.226.0022

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com