The Department of Justice (DoJ) announced this week that it is taking action against Apple Inc. (Nasdaq: AAPL) for e-book price fixing. Jaw-dropping, isn't it? Price-fixing e-books, the nerve!
But this is kind of funny. E-books are a tiny slice of Apple's immense business. What about the fact that Apple has methodically dominated almost every other industry in which it has ever competed?
Apple is probably the best business competitor in the world. And when you win, eventually you will have to deal with anti-trust accusations, much as Microsoft dealt with in operating systems in the 1990s. Anti-trust actions are famously difficult to prove, but I think in the coming years you'll hear more about it with Apple because it controls huge amounts of business.
Apple has been growing its profits so rapidly because it has taken gigantic chunks of profit out of entire industries. Apple has gradually taken over the entire music industry by aggressively controlling and managing thousands of app developers, and dictating the future of the global telecommunications market.
While Apple doesn't own the smartphone market outright, it enjoys fatter profit margins because of its vertically integrated model -- which has come at the expense of telecom providers who must subsidize customers' never-ending thirst for iPhones and iPads.
I mean, let's face it: Whether you can prove it or not, Apple pretty much runs everything now, including having the largest single influence on the entire stock market. Let's just look at these basic facts:
Apple has single-handedly boosted the stock market. Bloomberg tells us that Apple alone has accounted for 8% of the S&P 500's rise since the 2009 bottom. And Barclay's analysts recently pointed out that Apple has had an outsized influence on the markets, accounting for 15% of the growth in all of the S&P's rise this year. They estimate Apple contributed four times its weight to the index by having outsized profits. So maybe the government should launch an inquiry into Apple controlling the stock market.
Apple's profits account for most of recent profit growth. According to FactSet research, if you subtract Apple's earnings from the market in the fourth quarter 2011, profit growth for all of the S&P 500 was -1.6%. With Apple profit growth added back in, overall profit growth was flat. That's right folks -- without Apple, there would be no growth in profits. It alone accounted for all of the profit growth in S&P 500 in the last quarter last year, and FactSet expects Apple to the be the largest source of earnings growth in Q1 2012.
Apple leverages major telecoms through subsidies. The retail price on a new iPhone can be as high as $600. A telecom carrier will sell it to you for $199. Think about Apple's core sales channel: telecom operators. Apple has so much leverage that it can largely dictate the terms in these relationships so that telecom operators subsidize sales of its devices.
In extreme cases, such as the deal with Sprint, the subsidy is a simple transfer of wealth from carrier to Apple. Sprint tagged its subsidy expense at $1.7 billion, up from $1.2 billion a year earlier. Some analysts predict this can't last, that Apple has to give back more of its profits to carriers. But Apple's immense leverage means it can dictate the terms.
Apple is taking over all of retail electronics. Blog site Zero Hedge recently calculated that Apple's market capitalization now surpasses that of the entire retail industry. How is this possible? Well, as i-devices have added functionality such as music, communications, and video, they have eliminated entire segments of the industry. Maybe this is contributing to Sony's recent woes. Once you have an iPad, you need a portable DVD player?
Apple's winning the smartphone profit battle. Though it's having a see-saw battle with the Android-powered mobile phones and can't quite gain majority market share, Apple recently gained some share back and now represents 43% of the smartphone market to Android's 53%, according to the NPD group. But more importantly, Apple makes more money in this market. Keep in mind that Google does not profit on Android directly because it gives its operating system away for free to phone manufacturers, whereas Apple controls its own manufacturing from the Operating System (OS) to the memory chips. Apple's model results in more profit, because it can charge more for all of the components in its product, including the OS. Even though it's not winning top market share, Apple is winning on profitability.
Apple controls digital music. Remember the music industry? Apple's influence and control of digital music is still growing. It now accounts for 69% of all digital music sales. Amazon is a distant second with 8 percent, according to the NPD group. Apple's growth in digital sales means it now serves up about 25% of all music units, which includes physical units (even though Apple sells no physical music units), according to the NPD group. That's up from 14% in 2007.
So... back to e-books, even though it's a mere tiny slice of Apple's gigantic expanding force. I have seen estimates that this may represent, at most, $100 million dollars of Apple's revenue. This is a company that makes $30 billion per year in profit! So when we worry about Apple's dominance in so many industries, are e-books the thing to worry about?
I think that Apple's growing power and dominance in a number of industries is likely to be a topic for trade regulators for some time. The regulators have plenty of areas to mine, most notably Apple's control of the relationships in the telecommunications sales channel.
Will they make any progress? It may take years and years, but eventually you may see more legal action against Apple in the realm of anti-trust actions.
Don't get me wrong: I think Apple earned the control of markets that it has. It has better products, and it's a better company. We're also not crying because Apple is one of the leading components of our IU25 Index, which is up 35% in one year.
But it's not just about e-books. Apple's immense control now extends to the broad range of the entire business universe.
There are companies going belly up for every new innovation. We shall not blame the digital camera manufacturers for the bankruptcy of Kodak, nor blame Dell for the death of the many small computer stores. If the company does not bring value to its customer, it does not deserve a profit from its business.
It is the label companies who got hurt by Apple, not the artists. As a middle man, label companies squeeze both consumers and artists at the same time. The relationship between record labels and artists is a difficult one in most case, and artists are usually weak on the bargain table against label companies. The iTune store offer a wonderful channel for talent artist to reach his/her fans.
By the way, Apple started to sell DRM-free songs in 2007 and removed DRM from all songs it sold on iTunes since 2009. Nowadays you can play the song you purchased from iTune on any devices.
Apple really does see something in ebooks, they even have a free publishing software you can get to publish your ebooks directly to iBooks. I had read someplace that they are marketing it to academics to try and get more textbooks exclusivly on ibooks, kind of a smart idea.
But at what cost, @ValueHiker? How many other companies did Apple kill building that business model? And what about the artists? At the same time, maybe the low cost is an illusion. What was you getting for 99 cents? Just the right to listen to the song through an Apple device, really.
I have no problem on the Apple's dominance on many fields - as long as it benefits the consumers. One example is the Apples' dominance over music downloading business. Apple forces the music industry to lower its price to a very reasonable level. Now everyone is happy, Apple makes decent profits, Media companies sell more songs, and consumers paid less for the song they want.
Amazing when you think of all the tentacles. isn't it? And equally amazing that this e-book suit is the first regulatory action against Apple, considering its grip on, well, everything.
Before Apple got into the ebook business. Amazon basically forced the ABA (American BookSeller Association) to drop the Agency Model, and lowed the price of both physical and electronic books for consumers.
When Apple revealed its iPad, Jobs knew he had no position on ebook sale. To break the dominance of Amazon, Jobs cut the deal with ABA and revived the Agency Model. The result is consumers got ripped off and ebooks are sold at higher price than physical book.
For the battle between Apple and Amazon over ebook market, I strongly support Amazon.
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