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Is Apple losing its cool?

iMac, iPod, iPhone. Pretty much everything that Apple [AAPL US] has touched and given a name starting with “i” has been a storming success. However, with the release of iPad Apple seems to losing its touch and rivals have not been idle. Is Apple losing to Microsoft [MSFT US] and Google [GOOG US]?

I admit, I’ve never been an Apple fan. Mostly because I don’t like being told what I can and what I can’t do, what music to listen to, what movies to watch and what books to read. However, I have to admit that, if you agree with Steve Jobs and the rest of the Apple team, Apple products work without to much hassle, most of the time. Over the last few years you can even say that the design is beautiful. All the i-products have given consumers what they want, seamless integration in a clever ecosystem. There’s something missing though.

With the launch of iPad Apple missed the target. It did a Microsoft – released a slightly different version of an already successful product. Staple food for Bill Gates and they guys for a long time, but Apple? They’re supposed to surprise the world with new interesting and alluring devices and services every now and then, usually with some limitations and flaws in the beginning, but generally with a whole new way of approaching a problem. iPad has none of that. Essentially its a slightly larger version of the iPod Touch with a limited book shop thrown in. What’s cool or innovative about that?

Elsewhere, Google has launched the Nexus One to really show the market how Android is spelt. Overhyped and not the roaring success we saw at the iPhone launch, but with a big difference – the cloud. Google’s cloud strategy is very clear in Nexus One. Study what you can do with Nexus One, Gmail, Google Maps, Docs and the rest of Google Apps, how it all fits together very cleverly and you start to wonder why you you haven’t converted already. Google has a completely different kind of ecosystem to Apple, one that doesn’t include handing over your credit card every five minutes, but one that is focused on being productive, creative and communicative rather than just being entertained. It is this ecosystem of services firmly in the cloud that gives Google its edge over Apple’s rather one-sided i-stores and i-devices. Microsoft has thrived on a similar ecosystem for decades, where creativity is rewarded, with thousands of software developers creating new ways of using PCs to solve peoples problems. Google is now leveraging its search and computing power to bring truly useful services to consumers and corporations through cloud computing.

In Microsoft-land, Steve has managed to rally the troops and the giant has created a number of very non-Microsoft-like products recently. Windows 7 is getting rave reviews and people seem genuinely excited about PCs again. Project Natal is in the pipeline, which will send Wii back to the dark ages. Bing is giving Google a run for its money, with lots of clever tweaks possibly making it into a real decision engine. Windows Phone 7 Series is a complete rethink of smart phones and focused on the user and what the user want to do rather than what application it should use to do it. That is true innovation. Microsoft has even embraced the cloud with Office Live and other services. The real embarrassment for Apple comes with Microsoft Courier though. It runs circles around the iPad. Courier is a completely new way of working. It’s an Apple device – produced by Microsoft. Just have a look at this video.

Around 50% of Apple’s value is derived from the iPhone, i.e. roughly $100bn or twice the revenue of the global smart phone market, including all competitors. At a bubble-valuation like that we are usually looking at a company with a dominating market position, superior margins and growth rates, with high barriers to entry and a rate of innovation well above the rest of the market.

The dominating market position can be debated, with Nokia still the king even in the smart phone market, with a 39% market share. Apple is third with 14%, albeit eating into the competition’s share. Operating margins look good just below 29%, not best in class (MSFT at 37%) but respectable.

The market thinks Apple will grow around 19% p.a. for the long term. If that’s true than a P/E of 18x doesn’t look to demanding, even with the competition trading in low to mid teens, with growth rates to match. However, Apple’s sustainable growth rate is the real question here.

Apple has a solid ecosystem in terms of music in the iTunes/iPod combination, which creates stickiness and entry barriers. The iPhone is more debatable. The App store is important with +140,000 apps and counting, but the iPhone still has a small corner of the market and there is an opportunity for someone else to get in there and really compete. The iPad was the opportunity for Apple to show that it could build on its success and tie it all together in one super device that would just be the real killer application, like Windows or even DOS many years ago. It wasn’t.

The question is then if Apple has lost its magic touch and become to complacent or if this is a temporary setback. With Google busy carving out its position in the cloud and Microsoft more innovative than ever,  creating new ways to work and communicate, Apple doesn’t have a lot of time to get back on track. It’ll need do do a lot more than an upgraded iPad to claim back its coolness, leading position and defend its valuation.

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