Morgan Stanley: Apple 2-3 Years Ahead of Competition with iPhone

Apple has a two to three year lead on the competition with its iPhone, which has seen the fastest growth in adoption rates in the history of consumer technology, according to a Morgan Stanley research team lead by AAPL analyst Katy Huberty. The firm published a 92-slide presentation called The Mobile Internet Report this week, a report dominated by Apple and its success with iPhone and iPod touch.

The report is intended to as a follow up to a 1995 report the company published called The Internet Report, headed by Mary Meeker. That report concluded that The Internet would be the driving force in technology and related wealth-creation for the 1990s, and The Mobile Internet Report positions mobile computing in the same driving role for the next several years today.

Morgan Stanley slide showing growth of several technology cycle leaders,
and how many quarters it took to achieve that growth

In reaching that conclusion, the investment banking firm found that mobile computing and Internet use is growing faster than previous technology cycles, and that Apple's ecosystem of iTunes, iPhone, and iPod touch are at the forefront of this newest cycle. The firm went so far as to predict that, "more users will likely connect to the Internet via mobile devices than desktop PCs within 5 years."

Morgan Stanley Chart
Morgan Stanley slide showing iPhone and iPod touch growth

The Whole Widget

The report praise what many people obsessed by Microsoft's open licensing model have always failed to understand about Apple's pursuit of controlling the "whole widget," as Apple executive have oft mentioned.

"Apple's positioning [in mobile Internet usage] is similar to early platform leaders in that it controls its hardware + software and is aiming to require (or inspire) users to access (and pay for) their Internet-based entertainment / applications through its iTunes distribution system via a wide range of devices - iPhone / iTouch / Macintosh / PC / Apple TV / iPod / upcoming tablet."

Which, it would seem, is good for Apple. According to the report, "Both Apple and RIM have demonstrated in recent years that owning the ecosystem (operating system + hardware) is critical for success in this market. We believe Apple is in the pole position for high-end handsets for the next few years but the game is not over as carriers, handset manufacturers, and software providers endeavor to trump Apple's application / ecosystem leadership, especially in non-English speaking markets."

In fact, the report is replete with mentions to this ecosystem as a benefit for Apple that positions it well for this technology cycle.

A New Age

The firm also found that iPhone and iPod touch users represent a new type of mobile computing/cell phone/smartphone user. In the chart below we see device-usage broken down by how it is used. iPhone users are spending similar amounts of time on their devices, but that time is dominated by data use (55% data, 45% voice), whereas other platforms are dominated by voice time (30% data, 70% voice).

According to the report, this is an important shift, and one that foreshadows future patterns for this industry. Apple's success, in this case, will lead to opportunities for equipment providers and other firms who supply infrastructure equipment to cell carriers.

Morgan Stanley Chart
Morgan Stanley slide showing mobile device usage by type of usage

Hindsight is 100/75

Even after heaping so much praise on Apple, including the above-mentioned integration of hardware and software for the iPhone, Ms. Huberty's team may have managed to not put the pieces together regarding the past, where Apple's failure to hold onto its dominance of personal computing was pinned, in part, on the company's decision not to license Mac OS.

"Apple is extremely focused on not ceding its early high-end mobile platform market leadership as it did in the early days of development of the PC market," the report said. "Apple's mistake in the early 1980s hinged on two things: 1) not opening up its Macintosh operating system to other hardware manufacturers and 2) protecting its margins by keeping prices too high."

While not predicting that Apple would license iPhone OS in the future, Ms. Huberty's team did say that Apple was committed to not losing its lead with this, the current technology cycle.

"This time around," concluded the report, "we believe Apple is extremely focused on gaining wireless consumer device market share and will do what it takes to ensure it does so, including driving down hardware prices, pressuring carriers to lower or tier service plan pricing and adding new carrier and distribution partners."

Considering Apple's success with iPod, iPhone, and even the Mac itself today as closed platforms, it's very interesting that a report would praise the success resulting from Apple's approach today while suggesting that same approach was a problem in the early days of the personal computing market.

Shares in Apple closed higher Wednesday, at US$195.03 per share, a gain of $0.86 (+0.44%), on moderately light volume of 12.5 million shares trading hands.

*In the interest of full disclosure, the author holds a small share in AAPL stock that was not an influence in the creation of this article.