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Apple Roundup: Music, HomePod, PC Market Share, Regulatory

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Apple’s (AAPL - Free Report) secretive approach to new products has been betrayed by employees in recent years and management isn’t amused. The company warned that leakers could be terminated immediately and be hard pressed to find alternative employment because of the negative publicity. An internal blog that said it had caught 29 leakers in the previous year, of which 12 were imprisoned, was however quickly leaked to the media. Here are some other titbits from last week-  

Apple Music Gains

Apple continues to gain ground on Spotify, as the music service now has 40 million subscribers plus 8 million on free trial. Apple loyalists have stuck with the company even as the cost of its devices continued to increase. This, along with its stand on security and privacy has led to a large installed base that Apple can then offer its services to. Apple’s advantage with its installed base is the main reason it is gaining on Spotify, especially in the U.S.

Spotify (SPOT - Free Report) remains very strong internationally, which probably explains why Apple is bringing in somebody like Oliver Schusser as the new VP. Schusser has been with Apple for 14 long years; he has launched services like the iTunes store, App Store and iBooks for international markets; and has considerable experience managing the company's relationships with publishers and music labels outside the U.S. This is a challenge to Spotify, which still leads the subscriber numbers with 71 million paying customers (it also has an ad-supported tier).

Apple HomePod Sales Disappoint

Apple’s HomePod sales leave a lot to be desired, according to a recent report from Bloomberg. And that isn’t really surprising given that its features leave a lot to be desired. Apart from market-leading sound quality, Apple’s not bringing anything new to the table at all, despite its late entry.

It appears that Apple doesn’t view the HomePod as a product category in its own right, doing everything that home automation devices like the ones from Amazon (AMZN - Free Report) or Alphabet (GOOGL - Free Report) do because its app ecosystem is practically nonexistent. Instead, it’s more like an accessory to its other devices.

This doesn’t mean that Apple won’t make changes. It will. In fact the most important step in this direction has already been taken with its poaching of Google’s AI executive. Siri after all is where the work needs to be done and once that’s fixed, the app ecosystem will quickly fall in place.

As it is, pre orders for the product were high, with Apple taking a third of the market in the last week of January, according to data by Slice Intelligence. But within three weeks after launch, that share dropped to 4%. Apple couldn’t sustain the momentum as users were disappointed with its limited functionality.

Still, Apple watcher Gene Munster expects sales to pick up during the holiday season, helping Apple end the year at 7 million units even as Amazon sells 29 million and Alphabet 18 million units. In 2019, the three companies are expected to sell 11 million, 39 million and 32 million units, respectively, according to Munster.

Apple PC Share Drops

Both Gartner and IDC have come out with first quarter shipment numbers and both agree that there was some inventory buildup in the prior quarter that impacted buying decisions. Anticipation of new models based on Intel’s new chips in the second quarter also impacted the numbers.

As always, there are some differences due to differing calculation methods, but both agreed on the top vendors being HP (HPQ - Free Report) , Lenovo and Dell.

Public sector demand in China appears to have hit a pause as state owned companies postponed updates and new purchases in anticipation of changing policies. India and Indonesia were stronger than expected.

According to IDC, the stabilizing trend was attributable to continued commercial renewal activity driven by Windows 10. HP, Dell and Lenovo benefited. In the EMEA region, demand for premium notebooks strengthened while gaming and commercial purchases also pushed demand for desktops. Apple, which saw limited benefit from these trends, saw its share dipping to 6.6% (from 7.0% in the first quarter of 2017). Apple finished fifth, behind the top three and Acer.

According to Gartner, HP, Lenovo and Dell are followed by Apple, Asus and then Acer. Apple’s shipments grew 1.5 points to 6.9% from 6.7% a year ago.

Apple Loses Case Vs VirnetX

Apple was handed another loss when a Texas jury announced an 8-0 verdict against it in a legal battle spanning eight years. A 2016 jury found Apple guilty of infringement, after which Apple attempted a redesign of its Facetime and VPN on Demand features that this jury again found to be inadequate. The amount payable as damages is also rising every year. Just last year, Apple was reportedly ordered to pay $440 million and already, the damages payable is up to $502.6 million. But since an amount of this size is a drop in the ocean for Apple, the Cupertino-based company continues to appeal the courts’ decisions.

Meanwhile, the Patent Trial and Appeal Board has invalidated the patents in the U.S. Court of Appeals for the Federal Circuit in Washington although the Federal Circuit didn’t stay the jury trial because it was nearing its conclusion.

Some have described VirnetX as a patent troll, i.e. a company with no product of its own that buys patents to make money from litigation. But it’s probably also worth remembering that it was born out of government contractor SAIC Inc that develops secure communications for the Central Intelligence Agency (CIA) on the off chance that Microsoft would buy it. But Microsoft (MSFT - Free Report) instead settled with it for a total $223 million back in 2010.

Apple On Wrong Side Of Korea FTC

The South Korean Fair Trade Commission (KFTC) has concluded its investigations into Apple’s practice of foisting its advertising and repair costs, running into billions of wons, on local telecom operators. The investigations have been going on since 2016. The Korea Herald reported that the KFTC has come to the conclusion that Apple is guilty, particularly with respect to some ads run by telecoms SKT, KT and LG Uplus. Accordingly, they intend to fine Apple once its Korea branch has responded to the charge. This isn’t the first time Apple has resorted to such tactics; the company earlier did exactly the same thing in Taiwan and France.

 

 

Apple shares carry a Zacks Rank #4 (Sell). See the the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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