How Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall Street Will Enable This Without Sheeple Investor’s Having a Clue

Reggie Middleton's picture

The Apple Forensic Analysis and Valuation is nearly complete and will
be available to subscribes in a few days. In the meantime I will
discuss a few salient points and logic that went into the design of the
model. As I have said several time in the recent past, Apple is very
similar to gold in its elicitation of passion and emotional responses
from both those that own it and those that invest in it. I am sure this
article will prove proof-positive of such as Apple fanbois and haters
jump all over the comment columns. The fact of the matter is, whether
concerning Apple or gold, allowing you emotions, passions likes and
dislikes to cloud the empirical process of analysis is a sure fire path
to losing money – Sure fire!

The Front Runners for Supremacy in the Mobile Computing and Telecomm Paradigm Shift

On that note, let me remind all that There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All. Computing and personal technology services are turning portable, thin client, and to the cloud. The
stakes are high in this one, for the winner will most likely end up
being the next Microsoft. No matter how maligned Microsoft may be in the
new millenium, no other tech company makes (or has made) as much money
as Gates, Ballmer, crew. It’s an enviable problem to have. I have
narrowed down the likely front runners for this position to be none
other than:

I follow the comment sections of many prominent, and some not so
prominent but nonetheless excellent blogs and new media sites, and
misconcpetion seems to reign above many others, and that is that Google
will not make any money with Android other than (now sparse) mobile ad
revenue. This is a total misunderstanding of the Google/Android
Strategy. For those who cannot see the forest due to all of the tree
bark getting in your way, I urge you to review Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space:

Many commenters are lamenting on the
fact that Google is not making money on Android sales since the OS is
given away for close to free while Apple is making $250 per handset
sold. Those who are looking at it from this perspective are missing the
forest due to that big fat tree that is in their way! Yes, Apple is
making a killing on its iPhone sales, and it would be difficult to
attempt to catch them with a fat margined product. They have managed to
produce both margin and volume and have wrapped it up with extreme
customer loyalty. What the armchair pundits are missing is the power of
reach. Google is developing massive reach, and developing it
ridiculously quickly. A byproduct of this reach is the commoditization
of the smart phone platform which will probably cut the fat margined
business model off at its knees. That is not to say that Apple will be
cut off at the knees, but they will have to alter their business model
for the competitor-less margin that they enjoyed for the last three
years will no longer be a given. It also means that anyone else reaching
for the crown (including Apple) will have to spend more upfront to gain
less per unit sold. This actually benefits Google, for they are not in
the hardware race, yet they benefit from each and every handset, tablet,
desktop and automotive unit sold. Google is trying to become the new

In the meantime, Google ramps up the
potential to push software as a cloud service, downloadable software and
interactive, activity/context sensitive rich media ads and services to
hundreds of millions of new users. This opens up a phenomenal
opportunity for Google, and it appears as if many are missing the point
because Google (wisely) decided not monetize it immediately, but to let
it gestate and grow. Do you remember 15 years ago when many felt the
same about search and the fact that Google wasn’t making any money
providing search (pre-advertising)?

How Google is Looking to Cut Apple’s Margin and How the Sell Side of
Wall Street Will Enable This Without Sheeple Investor’s Having a Clue

No, Google is not in the mobile space for search ads, it’s looking to
become the next Microsoft with Android as the next Windows. It is
thinking big, simultaneously going after both the consumer and the
enterprise space with cloud-based software and services – and

In the meantime, sheeple-like investors are being hoodwinked by
quarter after quarter of Apple blow out earnings. Don’t get me wrong. I
feel and fully acknowledge that Apple is executing on all 8 cylinders of
a 6 cylinder engine, but it still has its real world limitations. Apple
will start to bump up against these limitation over the next 4
quarters, and the signs of this bump are already apparent. Of course,
the signs are being handily masked by the games that Apple management
and the sell side analysts of Wall Street play, with the “Sheeple”
retail and the lazier component of the institutional investors being put
out to take the eventual bullet.

Riddle me this – If
Apple can consistently beat the estimates of your favorite analysts
quarter after quarter, after quarter – for 11 quarters straight,
shouldn’t you fire said analysts for incompetency in lieu of celebrating
Apple’s ability to surprise?
After all, it is no longer
a surprise after the 11th consecutive occurrence, is it? I would be
surprised if my readers were surprised by an Apple surprise. Seriously!
Apple management consistently lowballs guidance to such an extent that
it can easily manage, no – actually create outperformance. This has has a
very positive effect on their valuation. Of course, I do not blame
Apple management for this, of they are charged with maximizing
shareholder return. The analytical community and the (sheeple) investors
which they serve is another matter though. Subscribers can download the
data that shows the blatant game being played between Apple and the
Sell Side here: File Icon Apple Earnings Guidance Analysis. Those who need to subscribe can do so here.

Below, I drilled down on the date and used a percentage difference
view to illustrate the improvement in P/E stemming from the earnings

In our analysis of Apple, we are using real world assumptions of future performance derived from backing in
to the low balling this company is prone to. If you look at its history
carefully you can gauge what management is comfortable with, hence what
they may be capable of on the margin. Using these more realistic
numbers, it is much more likely Apple will deliver a miss in the
upcoming quarters in its battle with the Android! The following is the
reason why.

Apple is growing like a weed and at expanding margins, but those
margins are most likely at (or close to) their peak and will probably
drop rather quickly since The Apple “beats” analyzed above include
margins, and the company has consistently beat on margin. Keep in mind
that Apple has very strong competition in their most lucrative space
where they literally had none before. The competition is already
outselling them and offering more technical flexibility and diversity.
Thus, when (and that is an emphatic when, not an “if”) margins
“continues to drift downward, the sheeple will be clueless and probably
pile deeper into Apple stock because they will probably still be
“beating” at every earnings announcement. The NPD Group,
a provider of current consumer POS analysis is the latest in an
increasing list of consultancies that show Android taking the number one
spot in the Smartphone market (both in terms of sales growth and

The NPD Group: Motorola, HTC drive Android to Smartphone OS lead in the U.S.

Android now installed in one of every three smartphones sold at retail. BlackBerry OS share drops 9 points to 28 percent.

Riding the wave of new handset introductions and wide carrier
distribution in the second quarter (Q2), the Android smartphone
operating system (OS) continued its upward climb in the U.S. consumer
mobile phone market, according to
The NPD Group, a leading market research
company. For the first time since the fourth quarter (Q4) of 2007, RIM
fell to second position, as Android took the lead among operating
systems in handsets sold to U.S. consumers. NPD’s latest
wireless market research
reveals that Android accounted for 33 percent of all smartphones
purchased in Q2, ahead of RIM (28 percent) and Apple (22 percent).

“For the second consecutive quarter,
Android handsets have shown strong but slowing sell-through market share
gains among U.S. consumers,” said Ross Rubin, executive director of
industry analysis for NPD. “While the Google-developed OS took market
share from RIM, Apple’s iOS saw a small gain this quarter on the
strength of the iPhone 4 launch.”

Based on U.S. consumer purchases of mobile phones in Q2, the top 5 Android smartphones were as follows:

  1. Motorola Droid
  2. HTC Droid Incredible
  3. HTC EVO 4G
  4. HTC Hero
  5. HTC Droid Eris

“Blackberry 6 will soon offer
features that have been popular in recently launched Android handsets,
such as support for capacitive touchscreens and a WebKit-based browser.
However, the Blackberry Torch lacks the large screen allure that has
characterized the best selling Android devices at its price point,
including the Droid Incredible and EVO 4G,” Rubin said.

Model selection and promotions continue to play a role in the race for carrier dominance. According to NPD’s Mobile Phone Track,
Verizon Wireless has maintained its lead among top carriers for the
last three quarters comprising a third (33 percent) of the units sold in
the U.S. mobile phone market in Q2, followed by AT&T (25 percent),
Sprint (12 percent), and T-Mobile (11 percent). In Q2 Verizon Wireless
continued their buy-one-get-one (BOGO) offers on all smartphones,
including both RIM and Android models.

In spite of an overall decline in the
number of mobile phones purchased year over year, the ongoing
popularity of both messaging phones and smartphones, which are generally
more costly than standard feature phones, resulted in slightly higher
prices for all mobile phones in Q2. The average selling price for all
mobile phones reached $90, which is a 3 percent increase since Q2 last
year. Smartphone unit prices, by comparison, averaged $143 in Q2 2010,
which is a 9 percent decrease over the previous year.

Data Note: The information in this
press release is from Mobile Phone Track – NPD’s consumer tracking of
U.S. consumers, aged 18 and older, who reported purchasing a mobile
phone. NPD does not track corporate/enterprise mobile phone purchases.

Now, Apple will not sit on its laurels while Android eats its lunch,
but their are only three realistic ways in which Apple can compete.

  1. They can compete on price, which they now have the scale and volume
    to do, but is the antithesis of the “Premium Apple Brand” that they have
    worked so hard (and quite successfully so, may I add) to create over
    the last few years. More importantly, it will materially (and potentially drastically) impact margins.
  2. They can compete on features and technology. This will be very
    difficult to accomplish due to the sheer extent of competition they are
    facing. Apple will effectively have to out engineer Samsung, Motorola,
    HTC and about 70 other manufacturers on the hardware side and
    simultaneously outrun Google’s Android and its army of hundreds of
    thousands open source contributors on the software side.  This is highly
    unlikely. Doable but improbable. More importantly, it will materially (and potentially drastically) impact margins.
  3. They can license their OS along with minimum hardware specs to third
    parties. This seems to be the most logical step to the possibility of
    longer term dominance, but also apparently flies in the face of both the
    company’s culture and the company’s history. More importantly, it will materially (and potentially drastically) impact margins.
    If you remember, this is how Apple lost the PC wars, by refusing to
    license the OS as the PC became commoditized and prices fell through the
    floor. Microsoft benefited immensely from this occurrence for it did
    not make hardware, but it did benefit from every piece of hardware sold.
    Does this sound even remotely familiar (hint: Google cloud services) to

So, what is the recurring theme in all of these decision branches? Let me help out those who are still not getting it: More importantly, it will materially (and potentially drastically) impact margins. So,
as Apple’s margins dwindle due to competition from the Android, they
will consistently beat expectations since the sell side analyst
community continues to play this non-sense game. As for those who don’t
believe it can happen so quickly, take a look at Apple’s margins for the
last quarter…

For more on this topic, visit Apple on the Margin!

More on the Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Smartphone Wars!

  1. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All
  2. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift
  3. An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
  4. This article should drive the point home: 
  5. A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone
  6. After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play
  7. Android is gaining preference as the long-term choice of application developers
  8. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  9. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  10. Apple on the Margin
  11. RIM Smart Phone Market Share, RIP?
  12. Motorola, the Company That INVENTED the Cellphone is Trying to Uninvent the iPad With Android
  13. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space

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Grand Supercycle's picture

DOW and SP500 bearish megaphone wedge charts continue ...

Jason Bourne's picture

Quick and Dirty commentary on RIMM, Google and Apple

Rimm is shit - and has been for almost 2 years.  The leaders there are not able to compete in a world where someone else has done a better job on their little bullshit email machine.  They are now trying to compete in an environment where they have never shown competence against people who live breathe innovation.  Imagine 2 - 50 year old guys taking professional DJ lessons and then trying to find a job in a hip nightclub...get it - RIMM is shit.  The only (ONLY) reason its a slightly scary short is that Microsoft or Nokia or Google might wake up some day and buy it to access a small part of its technology.  Otherwise sell RIMM its shit...

Google - great (and evil) company very dangerous, until they actually have a phone at least one phone that is actually awesome to use...yeah whatever.  Yes Microsoft made it supplying software but not really getting into hardware, but oddly enough (even though it seems backwards in terms of the open source movement) - the people want and need at least one flagship product that is totally wired to the maker of the software.  It is so much easier and natural to buy a apple laptop and deal with one company for software and hardware - no one to blame the other for something not working.  When Google buys somebody and actually starts "making" phones - then they will be a real player with a future.


Apple - They are LUCKY they have great products.  Contrary to popular belief their distribution system is shit (for consumers).  They will need to quickly get "un-evil" about how they distribute product.  Announcing a product (that is essentially vaporwarish - because you can't actually buy it with any reasonable waiting time) is going to hurt them.  They think big line ups at the stores are good....NO they are not good - what they are doing is removing all the good will about themselves and slowly but surely getting the place where they are only great because they make great products.  Whats wrong with that - nothing, for most companies - but when you get a company that has a know arrogant attitude (and Apple definately does), and you combine that with laying an egg (they havent yet) - you have the beginnings of a hole in their armor.  Apple by a mile has built the best eco system (App store) and the best product/software/service/applestore network - and NOBODY is even close or will be until maybe Google buys a handset maker.


PALM - all of the leaders that have been there for more than 5 years - you KNOW who you are - should be ......(fill in the blank).  A GREAT product way ahead of its time married itself to the devil (microsoft).  "We" all knew with the announcement that it was a STUPID move....instead of innovating and staying ahead of the market Palm took its best people and WASTED them porting shit to windows mobile.  Nice work.  Probably the worst handled move in smartphone history.  The old leaders who were part of this decision should be labeled with that one.

Oh and the new Palm Pre - "we" (the early adopters who end up being the influencers) were SO EXCITED when the Pre was being developed....then we saw it was NOT going to be carried by a GSM carrier - wow MONSTER F&*^%ing FAIL.  I can honestly say after that announcement a sadness and an invisible filter came over "us" and Palm Pre news was ....yeah whatever - hopefully they will release a GSM version in before they die and bad death.


For now sorry - NOT a fanboy, but Apple is clearly in the lead - despite the fact that they are getting evil-er and evil-er each day.



Eric Cartman's picture

Ha, just reading the comments tells me everything I need to know. Study it inside and out until you're blue in the face but you'll never know until it's decided. So place your bets and step aside. 

jimijon's picture


Everything you say may be true but you are missing the big picture, especially when it comes to "smartphones". The issue is "phone". Apple can push down last years tech for cheap while all its users will be using the same intuitive software.  And the most important thing is truly ease of use. I want to call now, text now, etc., Not see a thousand pieces of crapware installed on a phone confusing the heck out of users. In other words, the PCiszation of the smartphone.  

You talk about open source and seem to think it only applies to Google. This is another incorrect assumption. Developers like myself use open source everywhere and are pushing a lot of the apps into the more obvious use of of open source... html5/css. What, you think that open sourcing of the Android iOS is going to create superior phones? A phone is a phone is a phone.

And as Apple keeps pushing very sophisticated apis that the developers are now just digesting, Apple will be able to leverage up, down and sideways... iTouch, iPod, iPhone, iPad, iNext... and no matter what.. you will know how to use it.

So they are even executing on 8 retail type cylinders too.

Throw in new products announced and unannounced and you have a lot of growth there that delivers cash. 

Meanwhile they too are strategically executing on mapping and search. This is where they actually are even thinking about Google. 

cheers and keep up the research

monkeyfaction's picture

I work in software development. Almost every single one of my colleagues has bought a HTC Desire running Android in the last few weeks. Some have even switched from apple.

The HTC Desire running Android is basically the geeks' iPhone. Tons of settings to tinker around with and you can have a go at writing apps using the desktop PC you already own.

You need to buy an Apple Mac to do iPhone development. You just need a PC running windows or Linux and some free open source software to develop for Android. You don't even need an actual phone - the dev. software comes with an emulator.

The biggest advantage that the iPhone has over Android is the number and quality of the apps. In less than a year from now this won't be true. Us geeks will all be developing on Android.

earnyermoney's picture

"Google is not in the mobile space for search ads, it’s looking to become the next Microsoft with Android as the next Windows."


I have no doubt this is their goal. Open source is a Trojan horse to commoditize your competitors high margin products. Of course if Google can use open source to commoditize their competitors products, the same can be said of Google's competitors. They'll have more than 2 competitors.

oddjob's picture

Debates over smart phones are akin to rearranging the deck chairs on the Titanic.

Brain Cancer bitchez!

TBT or not TBT's picture

But a lot of ZHers NEED to be able to hit refresh on the go.   Our self-estime rises and falls with the accuracy of our calls.

Ying-Yang's picture

Oh... I forgot to add "Googlization Baby"


ZakuKommander's picture

Remind us again of all of Google's successes outside its search engine core.

Mercury's picture

Computing and personal technology services are turning portable, thin client, and to the cloud.

I don't know about the "cloud" part.  Memory and processing power are always getting smaller and why do you want to outsource that and in the process, insert more failable technology, connectivity infrastructure and dumb customer service people between you and your programs/data?  Sounds like a step backward to the mainframe days.  Ever notice that when the market's going berzerk it's almost impossible to log onto your online retail brokerage account?

Ying-Yang's picture

"Ahhhhh Grasshopper, when you can take this pea from my hand....."

You now understand Reggie. Well done and well stated.

You may now leave the Shaolin Monastry.


Calls and Putz's picture

Just like PCs 30 years ago, Apple's closed model will eventually cost them the edge in phones - two Apps on Android that everyone raves about are Swype and Tasker.  Neither will ever, ever be available on an iPhone because Steve Jobs will never give up control of the OS.

The iPhone is already a badly dated and behind-the-curve device. Android FTW!

Skeebo's picture

Not a virus, not even a significant threat vector.  A Russian security company (admittedly with a fairly good reputation until now) planning a product for the platform "finds" the first ever malware application for that platform?  Hmmm...


Let's not forget the small fact that you won't find this "virus" on the Marketplace, you have to manually install it, and go past the warning screen that tells you what abilities and access rights the app has in order to be "infected".


So let's review, to get this virus, that a company about to push a security product just happened to find, you have to

  1. Go find it off the Marketplace or get an unsolicited link to it
  2. Manually install the app
  3. Ignore the message telling you that the app has the ability to send text messages and access to your private information stored on the phone

Uh yeah... don't install Apps that aren't hosted on the Marketplace and you'll be just fine.

Rogerwilco's picture


Have you been asleep for the past oh, thirteen years? Jobs announced in 1997 that the "war" with Microsoft was over. AAPL takes care of its shareholders, not pimple-faced gear heads.

It's really very simple. Its 2001, one investor puts $10K in AAPL, and another investor puts $10K in MSFT, which one is happier today?

thecooler's picture

Coming from an apple fan boy and stock holder I can tell you that after using an HTC Incredible on verizon for about a week now, yes, google will continue to eat away at Apple. I was not a believer until recently. HTC, Samsung and Motorola are going continue to push out these new Super Amoled hummingbird dual core phones this fall and the long awaited Verizon iPhone in Jan. will be a non event, Apple waited to long. So I decided to sell my beloved iPad, why? I can only imagine what these hardware manufactures will do with the new Android software and the upcoming Android 3.0 gingerbread in a tablet. For now, the obvious play for me is to sell RIMM, they really put up a goose egg the other week with the Torch. 6.0 is basically the same and the hardware specs on it are a joke, from 2008 at best. Horrible!

Mitchman's picture

I agree with you on RIMM.  I have a corporate-issued Blackberry Curve and the thing stinks.  It is slow, has a small screen and the keys are fit for the fingers of a two-year old.  I still say that company is toast in 18 months.

Rogerwilco's picture

Sold your iPad? Wow that was quick. The good news is you can go out and buy one of these:

Im guessing it's not quite what most Android folks had in mind for their "iPad killer", but hey, it has a USB port! Enjoy.

thecooler's picture

um no I don't buy china knock offs, be patient the Android tablets are coming and there gonna be big. But hey, if that thing runs apps in the background it just may be an iPad killer your looking for.

Sudden Debt's picture

so it will be one BigBubble company against the other BigBubble company. So the big winner will become the Super BiggestBubblefoam company of the world and when that one goes bust it will have the same effect like the dotcom crash but with only 1 stock name and the same kind of damage.



Thoreau's picture

Apple lost the initial PC war because they allowed Gates to rip-off virtually every innovation they - Apple - created. Ain't gonna happen this time. Apple is more cutthroat this time around for good reason. I don't like it anymore than anyone else; but Job's is simply looking out for his baby.

As for Google, I use and enjoy their email service; but I'm getting sick and tired of their Big, Bigger, wannabe Biggest Brother posturing. They're going to have some serious PR issues in the future.

Rasna's picture


Remember back to how the whole Windows GUI movement started... Xerox PARC (Palo Alto Research Center) developed the whole Windows/Icon based paradigm... Apple (Jobs and Woz) and Microsoft (Gates) came in and saw it an BOTH ripped  it off from Xerox... I'm not sure, but I'll guess that neither Apple nor MS paid any royalties.

Johnny Bravo's picture

And how is Apple not like big brother?

"You cannot use the music you buy from us on other devices"
"You cannot use our software on other computers"
"We will not allow people to make software for our devices without using our development tools"
"We will continue using proprietary technology to try to corner the market."

Big brother indeed.

Rogerwilco's picture

Good analysis Reggie, but there is another element you need to add to the mix. Apple has the best supply chain management people in the business. On top of the inventory balancing and logistics, they have cleverly "managed" to ensnare key suppliers with long-term deals for crucial parts like flash memory and touch screens. This gives Apple huge economies of scale and it eliminates the uncertainties that routinely face their smaller competitors. Are they perfect? No, and the white iPhone fiasco is an example where one simple glass facia is costing them tens of millions in lost revenue. Dell used to be the king of the hill in this area, but Apple now shows the rest how it's done.

Johnny Bravo's picture

Yeah, work your workers to death, kill 20 of them, and force them to work 34 hours straight without overtime pay.

Apple sure has the "supply chain management" DOWN.

LePetomane's picture

Damn.  I'm a sheeple.  :(

JohnKing's picture

Apple only needs to enter the search game to do a google smackdown. I really don't see how destroying a business model with open source OS benefits google, to the contrary, I think they are heaping hot coals on their own head.

dlmaniac's picture

As a pro in the field for long enough, I can guarantee this whole 'thin client' thing is a fraud. People want rich client, or they'd be using text-based commandline consoles all along. Investors should not fall for that propaganda.

Johnny Bravo's picture

Apple is already in the search business.  It's called Safari, and 6% of people use it.

JohnKing's picture

Safari is a web browser, I was suggesting Steve Jobs might just enter the search engine business, the barriers aren't that high and I know that he does play a mean game of pay-back. Google has burned pretty much all of their alliances that got them where they are today so don't underestimate the hubris factor, when these guys go down, they'll go down hard.


There's an old saw that goes something like: "Be nice to folks on the way up, you'll meet them on the way down."

earnyermoney's picture

I thought Safari was a web browser not a search engine. I'll let you discover the default search engine for Safari.

TBT or not TBT's picture

Safari is a browser.    Like Firefox or Internet Explorer, or so many others, reaching back to Netscape.