Apple thinks it can get much bigger in software

Apple retail store in San Francisco's Union Square neighborhood.

Above: Apple retail store in San Francisco’s Union Square neighborhood.

Image Credit: Jordan Novet/VentureBeat

Apple Music. iCloud. Apple Pay. App Store. These are some of the well-known products that fall into Apple’s otherwise amorphous Services product category, which in the quarter ending on December 31 generated more than $7.17 billion.

That might not sound like much when you note that Apple captured more than seven times that — $54.37 billion — in iPhone revenue in the quarter. But! Apple wants to really grow the Services business. Specifically, the company is seeking to double the category in the next four years, chief executive Tim Cook told investors on today’s earnings conference call.

In fact, Apple Services came through with more revenue growth than all other product categories in the most recent quarter: 18.4 percent. The iPad was the worst performer growth-wise, with a 22 percent decline. The Other Products category, which includes the Apple TV, Apple Watch, Beats, and iPod, saw an 8 percent revenue drop. The iPhone, for all the money it delivers Apple, saw 5 percent revenue growth.

Apple Services’ revenue growth isn’t unusual. It’s dropped below 9 percent just once since 2013.

Apple Services revenue growth going back to 2013.

Above: Apple Services revenue growth going back to 2013.

Image Credit: Jordan Novet/VentureBeat

Also, while you could say Apple Services is a small base relative to things like iPhone and so will have a larger percentage growth, with the exception of things like Apple Pay and Apple Music, many of its components have been around for several years now. And besides that, $7+ billion in revenue is not small. At that size, it’s doing as much business as a Fortune 100 company, as Apple chief financial officer Luca Maestri pointed out during today’s call.

To be clear, Apple top executives haven’t given up on hardware, which is ultimately the company’s golden heritage. Despite today’s results, Cook said that he’s still optimistic about the iPad — and that he believes “the smartphone is still in the early innings of the game.” But that’s not to say Apple isn’t trying to figure out how to adjust its priorities in the years to come in order to reap the best results.

Given the Services goal unveiled today, things like exclusive music and video content and iCloud enhancements will become more important. As people buy more Apple devices, the services will likely become more widely used, and people are spending more on them, too. “Obviously the quality and the quantity of content that we make available in our services improves all the time,” Maestri said.

At the same time, Apple may well decide to bring more of its applications — like iMessage and Apple News, and even its Xcode integrated development environment (IDE) — to non-Apple hardware. Microsoft’s Office apps work well on Apple’s mobile devices. Google has made sure that its most popular applications work well on iOS. Perhaps Apple will start reciprocating more.

Lest we forget, in the words of Marc Andreessen, “Software is eating the world.” That even applies to Apple.

SOCIAL

Lacking voting rights, Snap IPO to test fund governance talk

A portrait of the Snapchat logo in Ventura, California December 21, 2013.

Above: A portrait of the Snapchat logo in Ventura, California December 21, 2013.

Image Credit: REUTERS/Eric Thayer/File Photo

(Reuters) — Shares sold in a $3 billion initial public offering by the parent of Snapchat will lack voting power, testing the commitment of big asset managers in their recent fight for investor rights.

In a registration document on Thursday that it will use to pitch shares to investors, Snap Inc outlined an aggressive expansion plan for its social media network in what would be the biggest U.S. tech IPO since Facebook.

But the document shows the shares will not have voting rights – an unprecedented feature for an IPO despite years of rising concerns about corporate governance from fund managers looking to gain influence over executives.

Indeed, just earlier this week top fund managers including BlackRock Inc, Vanguard Group Inc and T Rowe Price launched an initiative to improve governance, among other things, calling for companies to give shareholders voting rights “in proportion to their economic interest.”

Technically, the framework outlined by the group does not go into effect until the start of 2018, to give companies time to adjust.

But Charles Elson, a professor at the University of Delaware who follows corporate governance, said that to reinforce their message, the big fund managers should not buy into the IPO of Snap or others that might follow.

“They should not buy common stock without a vote,” Elson said. That should even include index funds, which ordinarily buy shares to reflect the sector or group of stocks they track, he said.

For investors who do buy Snap shares without voting rights, Elson said, “You’re completely hostage to the actions of management.”

A Snap representative declined to comment. Snap’s filing states it will have a unique stock structure with three share classes, which will concentrate voting power with its co-founders Evan Spiegel and Robert Murphy.

Each of their shares is entitled to 10 votes on governance matters. Current investors such as venture capital firms will have shares entitled to one vote, and shares being sold to the public will have no voting rights. The filing acknowledges the concentrated control could impact Snap’s share price. Other technology giants have also been adding to founders’ voting power including Facebook and Google.

To be sure, Snap’s filing contains a provision to eventually grant all shares an equal vote, but only if both founders die or their ownership falls below a threshold.

In a note on Friday, Edison Investment Research analyst Richard Windsor wrote that while tight control may be justified in a company’s private early stages, it is not in large, public companies whose problems can be worsened because founders “tend to be emotionally attached to their companies.”

Ordinarily his firm would discount its valuation of a company by 30 percent, when founders keep control to offset the extra risk to investors, Windsor wrote.

A spokesman for T. Rowe Price Group said the company would not comment. Representatives of BlackRock and Vanguard did not comment.

Another backer of the new governance principles is the California State Teachers’ Retirement System, with roughly $200 billion under management.

Aeisha Mastagni, a portfolio manager for the system, said while it does not normally buy shares during IPOs, it usually buys companies like Snap once their stocks wind up in stock indexes like the Russell 3000. Avoiding Snap would only shift the risk to other parts of the portfolio, she said.

The thinking could be different for actively-managed funds, she said, especially in a case like Snap where investors would lack votes needed to change management in a crisis.

“With companies like this, you think they’re always fine, until they’re not,” Mastagni said.

CalSTRS was among a group of 18 co-signers of a letter the Council of Institutional Investors sent to Snap on Friday, urging it to adopt a single-class structure.

Other signatories came from representatives of public pension managers like the California Public Employees’ Retirement System and the Florida State Board of Administration.

As of Friday afternoon the large U.S. fund firms including BlackRock, Vanguard and T. Rowe Price had not signed the letter.

(Reporting by Ross Kerber in Boston and Liana Baker in San Francisco.; Editing by Bernard Orr)

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