Key Takeaways From The WWDC And Their Impact On Apple’s Strategy

Apple (NASDAQ:AAPL) kicked off its annual Worldwide Developer Conference (WWDC) on Monday, with a keynote presentation that saw the company finally introduce its long-rumored streaming music service and unveil subtle but important improvements to its iOS, Mac OS and Watch OS platforms. In this note, we focus on some mobile-related developments at WWDC and what they could mean for Apple’s broader business strategy.

Our $144 price estimate for Apple is about 10% ahead of the current market price.

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iOS 9: Bolstering Apple’s Grip Over Search and Increasing The Appeal of iPad

iOS now represents the most important part of Apple’s software ecosystem, and its annual updates are crucial to Apple, as it looks to maintain consumer interest in its high-margin iDevices, while also ensuring that software developers continue to churn out attractive applications for the platform. While iOS 9 lacks any major design and user interface changes, Apple has improved some of its core functionality in addition to improving the performance, battery life and security of the platform. There was one prominent theme in the updates, with Apple looking to gain greater control over pieces of the smartphone software and services ecosystem – such as search, maps and context-sensitive assistance – that are still dominated by third-parties such as Google (NASDAQ:GOOG).

For instance, Apple overhauled the native Spotlight search on iOS, allowing users to search within applications, in a move that could make Spotlight the go-to search for many iOS users, potentially reducing their dependence on Google’s dominant search engine. Apple introduced a search API (Application Programming Interface) that allows developers to index and link-out their applications, making their data discoverable through the native search interface on iOS 9. The company also introduced a proactive assistance feature, which brings context sensitive features to iOS, much like Google Now, giving the iPhone some predictive capabilities based on a user’s activity, location and the time of day. Apple also enhanced its native Maps application, allowing users to access mass transit directions, in a move that addresses one of the key shortcomings of the service.

Apple is also looking to give its struggling iPad franchise a boost with iOS 9, making the device a lot more attractive for productivity-focused applications. For instance, Apple finally launched true multitasking on the iPad, allowing users to have two apps open and active at the same time through a split view and via a picture-in-picture mode for video. iOS 9 also offers a new on-screen keyboard that can double up as a trackpad, in a move that should make long-time PC users more comfortable with using the device. The new software features could also indicate that Apple is prepping to launch a larger-screen iPad targeted at professional users. iPad shipments declined by 23% year-over-year during FY Q2 to about 12.63 million units.

Apple Music Will Ride On The Coattails of The iOS Ecosystem 

Apple finally launched its much-anticipated music streaming service dubbed Apple Music, to take on the likes of Spotify and Rhapsody. The service offers about 30 million songs for streaming, in addition to a new 24-hour global radio station called Beats 1. The service will also have a social media aspect to it, allowing artists to connect with their fans. The service, which is priced at $9.99 a month, will be available on Apple devices and Windows PCs beginning from June 30, with an Android app expected to follow this fall. While Apple Music looks slick and incorporates a lot of curated content, the competition in the market is likely to be intense. Most streaming music services operate on the same basic premise of providing extensive catalogs of (mostly the same) music, so the differentiation between services is fairly minimal. Moreover, services such as Spotify offer free, ad-supported versions which are very popular with users. For instance, Spotify has reported that it has over 60 million users, of which around 15 million were paying customers. That said, Apple’s large and affluent user base (with over 1 billion iOS devices shipped) and the 800 million credit cards that it has on file should make it easier for the firm to sign on paying subscribers.

Apple Pay: Scaling Up With Discover, Square and U.K. Launch

While Apple has been tight-lipped about how Apple Pay, its fledgling mobile-payment service, is faring, the company does appear to be gaining traction as it builds up infrastructure and expands partnerships. Apple said that it would bring in support for Discover credit cards beginning this fall, in addition to adding support for rewards programs and store-issued credit and debit cards. The progress on the merchant end has also been quite encouraging. Apple expects 1 million locations to accept Apple Pay by next month, up from just about 220,000 locations when the service launched late last year. While this is still a fraction of the estimated 12 million payment terminals in the United States, the growth is impressive. Apple is also looking to improve penetration of the service with smaller local vendors, announcing that Apple Pay would be compatible with the Square wireless reader, which would make it possible for any business with a tablet or smartphone to accept Apple Pay. The company will also be taking the service international, with plans to roll out in the United Kingdom in July. While we don’t see Apple Pay as being a major revenue driver for Apple in the medium-term, its potentially high margins and growth prospects should provide incremental value upside for Apple in the long-run.

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