It wouldn't be quite right to say that there's been a sea change in Apple's (AAPL) investment and M&A strategy. But the company does seem more willing to strike nine- and ten-figure deals than it used to be, especially when it comes to parts suppliers.
On Dec. 13, Apple unveiled its largest deal to date for its $1 billion U.S. manufacturing fund: A $390 million agreement with optical component/module vendor Finisar (FNSR) meant to help the company "exponentially increase its R&D spending and high-volume production of vertical-cavity surface-emitting lasers (VCSELs)." In an SEC filing, Finisar says the deal doesn't involve an equity or debt investment, and adds (without clarifying) that it "represents anticipated future business between the companies over a period of time."
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Finisar, along with Lumentum (LITE) and to a lesser extent II-VI (IIVI) , is believed to be supplying VCSELs that are used in two of the infrared modules -- a dot projector and a flood illuminator -- used by the iPhone X's TrueDepth front camera system. Finisar's shares rose over 20% on news of the Apple deal. Lumentum and II-VI initially saw steep losses, but closed with more moderate declines. Raymond James defended Lumentum, arguing the company could remain a major Apple supplier and also do brisk business selling to Android OEMs working on alternatives to TrueDepth.
Innovation in the heart of Texas! Proud to team up with @Finisar, the latest recipient from our Advanced Manufacturing Fund. Their new site will create hundreds of jobs building iPhone components in Sherman, Tex.https://t.co/SYgP3VvIgr— Tim Cook (@tim_cook) December 13, 2017
The iPhone X's dot projector and flood illuminator, along with an infrared camera, a standard front camera and Apple's machine learning algorithms, enable its Face ID unlocking system, as well as augmented reality features such as Animojis. Apple notes that in the fourth quarter, it will "purchase 10 times more VCSEL [semiconductor] wafers than were previously manufactured worldwide over a similar time period."
With recent reports suggesting Face ID will be supported by both the iPhone 8 and X's successors next year, as well as by new iPad Pros, Apple's laser needs are likely to rise further. And apparently Finisar, which last week announced the purchase of a large Texas plant that will help it ramp VCSEL production, will account for a large portion of Apple's future VCSEL orders.
The Finisar deal comes seven months after Apple invested $200 million in long-time iPhone/iPad Gorilla Glass supplier Corning (GLW) . And less than three months after Apple joined several other firms in contributing funds to an $18 billion Bain Capital-led deal to buy Toshiba's giant flash memory unit. There was also a Korean media report in July stating Apple is in talks to invest $1.75 billion to $2.62 billion in LG Display (LPL) production lines that would be used to supply OLED panels for future iPhones.
Meanwhile, on Dec. 11, Apple confirmed that it's buying popular music app Shazam. Shazam's app, claimed by the company to have "hundreds of millions" of users, identifies songs and other content picked up by a mobile device's microphones. It also features music-discovery tools based on a user's listening preferences and the recommendations of popular artists, and a visual recognition tool that plays back content related to scanned objects such as movie posters. TechCrunch reports the deal is worth $400 million.
In a statement, Apple declared Shazam to be "a natural fit" for Apple Music, and that it has "exciting plans in store." Shazam already supports the ability to add discovered songs to one's Apple Music or Spotify playlist.
The deal follows a pair of acquisitions of AI technology startups, Turi and Lattice Data, that each reportedly featured $200 million price tags. And comes three years after Apple spent $3 billion to buy high-end headphone maker Beats Electronics and its Beats Music service (would help provide the foundation for launching Apple Music).
Apple has long been providing funds to key suppliers to make needed investments, as well as making purchases of startups possessing promising technology. But the number of large deals being made in each realm has picked up over the last couple of years. And in their own ways, each trend has a lot to do with Apple's incredible scale.
With Apple's combined annual iPhone and iPad shipments having surpassed 250 million and perhaps a couple years away from reaching 300 million, securing needed supplies of parts going into all or most of those devices can prove quite the challenge. And for a component market for which Apple previously wasn't previously a big customer, a decision to start using that component -- say, VCSELs or OLED panels -- in a new iPhone can stretch suppliers beyond their limits.
All of that ups the incentive for Apple to sign off on large manufacturing-related investments to secure needed supplies. And in situations like the Toshiba deal and the reported LG Display talks, it also doesn't hurt that Apple can tap into its $250 billion-plus offshore cash balance to pay for deals.
Likewise, the tremendous scale of Apple's various services, along with the competition those services face from Alphabet Inc./Google (GOOGL) , Spotify, Amazon.com Inc. (AMZN) and others, gives it more reason to cut large checks for technology that could strengthen them.
Spending $400 million on a pair of AI acquisitions is easier to justify when the technology can be used by several apps and services with nine-figure user bases (Siri, the App Store, the Photos app, Apple's keyboard app), as well as by machine learning programming interfaces (Core ML) available to iOS developers in general. And spending another $400 million on an acquisition meant to strengthen Apple Music becomes easier to justify when Apple Music (judging by a disclosed subscriber count of 30 million) appears to be at or near a $4 billion revenue run rate.
So does, for that matter, setting aside (according to reports) a $1 billion budget for original video content likely to be bundled with Apple Music. In several different ways, Apple's investing habits appear to be getting more aggressive and ambitious.
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