Review & Outlook

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Barron’s: Sky is the Limit for Apple’s Cloud Business

Apple’s stock recently reached its all-time high, and the company is on the verge of a major product announcement in September. All eyes are on Apple’s next move.

A lot of speculation has focused on a new smartwatch or TV, and last week I wrote about the company’s interesting health care initiative called HealthKit. Barron’s over the weekend, however, had an interesting piece on the company’s cloud business, saying that it could be a major catalyst for further growth.

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(Source: Apple.com)

Apple’s cloud services, first called MobileMe and then iCloud, have not been particularly successful. The company has not kept up with successful cloud start ups such as Dropbox, which Steve Jobs unsuccessfully tried to acquire in its early days. The article explains  that the main reason Apple has failed to provide a really compelling cloud service is because the physical storage it offers on its phones is enormously profitable. If Apple offered a really good cloud storage system, it would cut into that profit the company makes from selling phones with more storage. Everyone would store their music and pictures on the cloud and so they wouldn’t buy the extra 64 gig model that costs an extra 200 dollars.

Apple has shown in the past that it is not afraid to cannibalize its current businesses for the sake of long term opportunities. This is what the Barron’s writer, Alexander Eule, thinks Apple will eventually do with its cloud service:

Starting this fall, Apple is also planning to bring a Dropbox-like option to iCloud. Mac and iOS users will be able to save any type of a file in a folder that then gets stored and synced via the cloud.

Consumers might be willing to pay up for that kind of offering, especially if it means constant access to their growing collection of photos and videos across all Apple devices. Katy Huberty, who covers Apple for Morgan Stanley, estimates that iCloud has 450 million users, though it’s unclear how many are paying for upgraded storage. If Apple can persuade those customers to pay for 20 gigs of storage, the company would add $5.3 billion in annual revenue and 32 cents a share in earnings, Huberty estimates.

Apple is increasingly shifting from being a company that makes devices to one that also provides ongoing services such as iCloud. The acquisition of the streaming music service Beat’s also fits with this theme. If Apple is able to offer more compelling services along with its products it could enhance the appeal of its existing devices while also drawing an increasing revenue stream from its vast network of users in the way that Netflix or Amazon Prime or Spotify does with its subscriptions. In time this could more than replace the profit Apple gets from selling phones with extra storage space.