The widespread adoption of HTML5 for Web apps could cut Apple's operation profit growth by 30 percent, with Microsoft, Google and carriers benefiting, Bernstein Research predicted.
The financial researchers envision widespread adoption of HTML5 will affect iPhones and iPads, reducing margins for the former and lowering market share for the latter.
"Rough scenario analyses says that even a modest impact in each of these areas could cut our estimated Op. profit growth forecast for Apple through 2015 by about 30%," senior analyst Toni Sacconaghi Jr. wrote in a research paper issued last week. This could reduce the compound annual growth rate (CGAR) from roughly 19 percent today to 13 percent.
According to Sacconaghi, the emergence of HTML5 apps is "an important, longer-term issue for Apple investors to monitor." HTML5 technology has the potential to undermine profit margins and market share in Apple's iPhone and iPad franchises.
HTML5 is appealing to developers and businesses because it can be used to build Web apps that target all mobile platforms at once. This is more cost-effective and less labor-intensive than building different native apps for iOS, Android and Windows Phone.
It also allows developers and publishers to circumnavigate the 30 percent commission charged by Apple and Google for selling apps through their app stores. Furthermore, Apple also takes a 30 percent cut on subscriptions sold through the App Store. Both cuts could be obviated with HTML5-based apps, the report pointed out.
These are the main reasons why Amazon, the Financial Times and Twitter have each announced Web apps. Executives from Apple, Microsoft, Google and Facebook have all praised HTML5's virtues, Bernstein Research noted.
Jeffrey Hammond, principal analyst at Forrester Research, also thinks HTML5 will have an impact on the mobile ecosystem: "With more and more companies investing in HTML 5 clients -- or even hybrid apps that combine HTML 5 and native code -- what you will see is a reduction in porting costs to support other platforms like Android and Windows 8. This will erode, but not eliminate Apple's first mover advantage," he said in an email responding to questions.
"The primary beneficiaries will be Microsoft and Google and their OEMs. Examples of companies taking this approach include LinkedIn, Salesforce, the Financial Times and Amazon. There are many others as well," Hammond said.
Bernstein's research also painted a possible rosy future for Microsoft and Google. HTML5 apps could help to neutralize Android's advantage in third-party developer support. Also, "commoditization could lead to lower pricing, which could in turn cause some unit elasticity, potentially benefitting Google," according to Bernstein's research.
Carriers in turn could benefit from reduced handset prices and as a result, lower handset subsidies. The researchers expect that HTML5 apps would also cache data, which means that data usage is not likely to increase and the average revenue per user (ARPU) would not be affected. The increase of HTML5 usage would, however, have an overall negative impact on mobile device makers.
There are advantages for some manufacturers. "While no one would be unaffected, relatively speaking such a shift would favor larger and lower-cost vendors," said Bernstein's research. Asian mobile device manufacturers like Samsung, and to some extent LG, could benefit from the consolidation. Bernstein compares this effect to the consolidation in the PC business.
The switch from native apps to HTML5 apps will not happen overnight. At the moment, HTML5 apps have some problems that native apps do not. HTML5 apps are typically slower than native apps, which is a particularly important issue for games. An estimated 20 percent of mobile games will most likely never be Web apps, Bernstein said.
Furthermore, there are currently differences in Web browsers across mobile platforms that can raise development costs for HTML5 apps. They can also pose a greater security risk. This can result in restricting access to underlying hardware by handset manufacturers to reduce the possible impact of these risks.
Taking all this into account, Bernstein Research reckoned that HTML5 will mature in the next few years, which will in turn have an impact on Apple's revenue growth. Nevertheless, the research firm, which itself makes a market in Apple, still recommended investing in the company.
"We believe that the emergence of HTML5 apps is an important, longer term issue for Apple investors to monitor, given its potential to undermine margins and share in Apple's iPad and iPhone franchises," Bernstein concluded. The research firm believes that Apple stock is "compellingly valued at current levels" and that "ultimately some of the risk of pressured margins and slowing growth is captured in its prevailing valuation. Bernstein said: "Apple remains our top pick and we rate it outperform with a price target of $510."
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