Apple Inc, is involved in lawsuits relating to the use of its operating system software on computers with PC hardware. According to this article "German Mac clone maker claims immunity from Apple" is selling Intel loaded computers with Mac OS X operating system software pre-installed. An entry-level computer sells for about $643, relative to the entry-level iMac selling at $1199. The issue is that the end user license agreement (EULA) for the operating system 'forbids' the user from installing the software on non-Mac hardware.
But for Apple's valuation, we have a bigger issue in play, what happens if the anti-trust lawsuits prevent Apple from 'forbidding' the installation of their software on non-Mac hardware? Is the EULA an effective barrier to entry?
Clearly, Apple's strategy is likely to remain the same - product differentiation - rather than them trying to compete in low cost alternatives. Does this news, however, change your expectations of future ROE for Apple? How would you expect the profit margin and asset turnover ratios to change in the next few years? How would this affect your forecasts?
In a best case scenario: Apple's ROE would be slightly lower, due to a decrease in net income. The decrease in net income would stem from a reduction in asset turnover, as Apple loses some sales to competitors. In this scenario, Apple wins the lawsuit, and can go after the imitators for compensation (I'm unsure if they could enforce this in the EU). The imitators would have their cost strategy compromised, and would probably cease operations after a year or two.
ReplyDeleteThis would leave a small decrease in expected future earnings, as overseas competitors chip away at sales.
In a worst-case scenario, Apple loses the lawsuit, and multiple cost-based competitors spring up to service the market (Existing computer makers could cash in on this as well). Apple would then have to either find a new source of differentiation, or resort to cost competition. Either is bad news for Apple, and ROE would fall considerably, as both profit margin and asset turnover would fall.
Although, on the flip side, if the worst does occur, Apple could attempt to become more like Microsoft, by increasing the adoption of its operating system to the PC market, and abandoning the manufacture and sale of the units themselves. Considerable risk here, however.
Apple had better get some good lawyers.
Greg Kahler
Microsoft was able to gain from the separation of hardware from the OS. Allowing the Apple OS to be installed on lower cost hardware would likely lead to lower ROE over time. Hardware sales may need to be discounted in future forcasts and this is a large part of a machine sale. OS sales may actually increase as those who think an Apple machine is too expensive may now find it affordable.
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