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I Absolutley Dare Anyone To Read This And Still Not Consider The Probability (Not Possibility) Of Apple Suffering From Margin Compression
Last week I posed the question, “Is The Evidence For An Apple Margin Collapse Now Incontrovertible?“. I received some interesting, albeit rather passionate answers, many of which failed to address the core core issue, which is can Apple compete with the rapidly rising technological bar that is simultaneously facing rapidly dropping prices without suffering a hit to margins. Phrased differently, can Apple’s brand allow it to charge materially more for less product in the face of over 400 competing devices connected by the fastest growing and most diverse ecosystem in the business? Sounds like a tough sell, doesn’t it? This is not about who is better, who is worse, who will win, and who will lose. It is about margins. Apple may not eve be in the race if it doesn’t run, and to run may very well mean margin compression.
Well, if margin compression wasn’t “Incontrovertible” last week, it certainly should be this week. Let’s walk through margin compression as a result of excessive competition step-by-step, starting by solidifying the thesis behind the recommended updates to the Apple Margin Compression Thesis & Google’s valuation model. Subscribers, adjust your BoomBustBlog Valuation Models Accordingly:
Apple – Competition and Cost Structure Forensic Analysis and accompanying Apple iPhone Profit Margin Scenario Analysis Model – suggested use with Apple Earnings Guidance Analysis- Google Final Report and the accompanying Google Valuation Model (pro/institutional subscribers)
Apple’s iPhone launch on Verizon did a lot to boost market share, reference Apple chews away at Nokia, posts best smartphone share growth in Q1 and Android increases smart phone market leadership with 35% share. It’s success was enough to push it to 2nd place in terms of US handset vendors and 3rd place globally. Despite this success, it is still losing considerable ground to Google’s Android, reference Even With Apple’s Successful Launch On Verizon, Google Continues To Increase It’s Lead In The Smarthphone Space Friday, May 6th, 2011, andGoogle’s Android Market Share Explodes As It Expands Its Reach To Cars, Toys, Home Automation, Music & Movies – All In The CloudWednesday, May 11th, 2011 Verizon’s Earnings Confirm The Economic Impact of Android vs iPhone In Regards To Carrier ProfitabilityThursday, April 21st, 2011.
Many don’t realize why the amassing of significant dominance in market share makes such a difference. Basically, its the reason why Apple has historically been able to charge a premium (although not currently due to Android – high end Android phones are either at par or slightly more expensive than the iPhone yet Android’s market share increases at en ever more rapid pace). Apple’s key advantage lies in the network effect stemming from majority market share (embedded in its iTunes and app store ecosystems). Wikipedia on the Network Effect:
In economics and business, a network effect (also called network externality or demand-side economies of scale) is the effect that one user of a good or service has on the value of that product to other people. When network effect is present, the value of a product or service increases as more people use it.
The classic example is the telephone. The more people own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase a telephone without intending to create value for other users, but does so in any case.Online social networks work in the same way, with sites like Twitter and Facebook being more useful the more users join.
The Android market is now effectively 70% of the size of Apple’s App Store, and is growing at a faster clip. Once you pass 300,000 or so applications, you have reached critical mass. More importantly, Android has surpassed iOS, as well as Blackberry and Sybian/Windows 7 to capture majority market share AND handset activation rate. This puts it on the path to create and retain the “network effect” effectively shutting out competitive parties once users, accessory vendors, solution providers, consultants and developers standardize on Android as the de facto standard – as was done on Windows for the last 30 years, and as iOS was on the verge of becoming. In each instance increasingly excess profits were derived from increasing less investment.
What makes Android even more competitive is the extreme diversity in hardware available, all running a common and rapidly evolving OS, as compared to the relative dearth of diversity on the iOS platform. On that note, the quarter after Verizon launches the iPhone..
From Endgadget:
Verizon is seriously diversifying its portfolio today with the official in-store launch of four new smartphones. Three of them roll up in Android gear, though they all have major selling points beyond Google’s software. LG’s Revolution is the sole LTE-capable handset of the bunch, bringing with it a 4.3-inch screen and pre-installed Netflix for $250. The Droid X2 undercuts it on price, at $200, but doubles the core count with its Tegra 2 processor and ramps up resolution to qHD (960 x 540). Gaming aficionados can spend the same amount on the Xperia Playfrom Sony Ericsson, which offers a slideout gamepad and unique PlayStation Certified status. Bringing up the rear is HTC’s well-traveledTrophy, a 3.8-inch Windows Phone that accepts it’s a little late to the party and therefore slices $50 off its asking price, with a $150 levy before the obligatory two-year contract. What say you — buy, try, or keep waiting?
As noted in the post AT&T’s Q1 Record Results Show That There Is More Money In Android Than There Ever Was In Apple: How Do You Compete With Less Than Free?, one can expect AT&T, the original home of the iPhone in the US, to do the same. By selling old iPhone models at cut rate prices and significantly increasing its commitment and investment in the Android platform, AT&T actually INCREASED its revenues and earnings AFTER losing iPhone exclusivity to Verizon. With this knowledge under the respective carriers belts, one could wonder what they feel abut the ROI on Android.
Last week, I wrote New Taiwanese Tablets Show What So Few Have Suspected: Apple’s iPad 2 Is An Expensive Toy!, as excerpted:
Several months ago, amid all of the hoopla of the iPad 2 launch, I illustrated that, although Apple will sell a lot of tablets, those sales will come at increasing decreasing margins. Those who have not read it or do not follow the logic are recommended to reference Competition Heats Up In The Mobile Computing Space On Many Fronts – Prices Driven Down Once Again By The Big Players and more importantlySteve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof! and The Tablet Pricing Wars Have Commenced, Targeting Apple’s iPad 2 Which Is Not Even For Sale Yet…
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New subscriber material available for immediate download: Also of interest: |
The comparison of the iPad 2 to that of a toy was not an exaggeration. You see, the iPad 2 excels at content consumption, but literally sucks at content production. Enter a product with margins cut (meaning lower prices) that bests the iPad at both content consumption and production. And this product is just the 4th out of about 400 to be launched in the next year! Here is an example of said Taiwanese Android tablet, which is currently the cheapest Honeycomb tablet on the market – by far – at $400. For those that don’t know, Asus makes this tablet. They are the company that totally disrupted the PC world by introducing the concept of the netbook. Nothing has been the same since as margins have collapsed and form factors have changed dramatically towards the ultraportable. Did you really think they would not get into the tablet game with an incentive such as a free, revenue sharing, best of breed OS such as Android? Keep in mind that Apple (wisely) reinvented the tablet category in an effort to staunch market share loss to the netbook category. Apple did not want to get sucked into a pricing war and damage its historically fat margins. They achieved their goal through the iPad, which sports 42% to 53% margins (multiples of that of netbooks) while remaining relatively unchallenged until the introduction of Honeycomb. Now Asus is bringing the netbook margin compression game to the tablet arena. The tablet space is very strategic to Apple for that is the major revenue driver expected to assist the company in diversifying out of its heavy reliance on the iPhone (itself facing very heavy competition, as referenced above) for over 70% of its profits).
The revenues and margins of the iPad are already slipping, and we have just seen the introduction of only 1% (roughly 5 out of 400) of the Android Honeycomb tablets slated to be released over the next year. Production issues stemming from China and Japan don’t help any.
Competition is about to surpass intense!
This is an example of how this Taiwanese tablet that undercuts the cheapest Apple product by a full 20% ($100) can easily be used to do REAL WORK in terms of content production as well as recreational activities such as content consumption. It can literally serve as a Wintel desktop/notebook replacement for 70% of the computing populace. As an iPad owner, the biggest drawback (by far) is the inability easily create content. The Asus Transformer is literally an ultra portable PC with an 18 hour battery! I have pushed my personal device to 24 hours with modifications!
Now you can see how the comparison of a very inexpensive device such as this literally reveals the fact that the Apple iPad is a fat margin toy in comparison. Although it does a lot to enrich Apple’s coffers, it does relatively little in terms of actual productivity. Herein lies the danger to Apple. If Google and its hardware partners, Samsung, Asus, LG, HTC, Acer, Motorola, et. al. succeed in marketing and spreading the word, Apple’s market share will plunge unless it sinks significantly more of its resources into R&D and/or drastically cut prices. Either one (or both) will have the same results whether they win or lose… MARGIN COMPRESSION! Compression will occur whether Apple succeeds or fails in its bid to drive off competition. It’s a given. Hence, my proclamation from the iPad 2 launch date:
Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof!
Here are some anecdotal examples of said proof. The first video was taken by me via smartphone as I strolled into a local BestBuy in Union Square, NYC. it’s pretty much self explanatory and illustrates the vaunted, allegedly unassailable Apple experience originating from Apple’s most capable marketing gurus. A cute couple was considering buying one, and they just so happened to be next to me as I was running the iPad through its paces in comparison to the Asus Transformer (the modified BoomBustBlog Optimus Prime edition):
The post, New Taiwanese Tablets Show What So Few Have Suspected: Apple’s iPad 2 Is An Expensive Toy! contained other 3rd reviews of the Transformer vs the Apple Ipad 2…
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Click for video IT Pro Portal The Asus Eee Pad Transformer has been a very popular tablet – even topping Amazon’s best selling tablet list – for two main reasons. Firstly, it provides great value for money; it is both cheaper than the iPad 2 and has a bigger screen with a better display resolution. Then there’s the fact that it has a rather affordable accessory that can convert it into a fully fledged netbook with a 16 hour battery life altogether. The device, which runs on Android 3.0 Honeycomb, is powered by Nvidia’s Tegra 2 chip and comes with 1GB RAM as well as 16GB onboard storage. Apart from Wi-Fi, it has USB, HDMI and Bluetooth connectivity. |
This space will get even more competitive as Asus has form factor disruption on tap. It looks to be creating a super-powered Android smartphone that powers a thin tablet, which in turn has a keyboard attachment. Thus, consumers don’t have to choose between, or purchase, all three form factors (smart phone, tablet PC, or notebook). Ingenious, and guaranteed margin killer to boot! And if that fails, there are other innovative launches in the upcoming months coming from HTC, Motorola, Acer, LG, Dell, HP, RIM, and about 115 other vendors. The competitive field looks quite dangerous, indeed!
Of course, despite all of the evidence produced which clearly delineates material margin compression is in the cards for America’s favorite company – Is The Evidence For An Apple Margin Collapse Now Incontrovertible? Thursday, May 19th, 2011 – there are still many who ascribe to Apple’s magical user experience as a differentiating factor. I am an owner of an iPad, and have bought my son several iPods. I can attest to the fact that the superiority of this “user experience” is more a manifestation of marketing than actual fact. This is good for Apple short term (actually, an increasingly shorter term), for it is a marketing master, but medium to longer term its a very significant risk. Even in the short term, as competition gets its marketing act to together consumers and businesses alike may see that the Apple emperor hath no clothes! Samsung, who controls the production of chips and LG who controls the production of screens that go into over 75% of Apples profits, have both decided to withhold superior technology for their competing Android products rather than produce them for Apple. The Samsung Galaxy S II is a perfect example, sporting the proprietary Exynos chipset which is both faster and more power efficient than all of the current tech being mass produced. I suggest interest parties read the review of this in comparison to the iPhone. It is a very precarious position to be in when one relies on one’s most aggressive and largest competitors to supply the most important components driving 75%+ of your profits! Apple is currently in said position.
Other links of interest:
- New subscriber material available for immediate download: Apple – Competition and Cost Structure. I urge all professional and instutional subscribers to contact me directly if you have any questions or comments regarding this research and analysis. I am available via phone or email.
- Looking at the Results of Google’s “Negative Cost” Business Model Employed Through Android Monday, May 2nd, 2011
- My Thoughts on Roger McNamee’s View of Google and Mobile Computing Sunday, April 17th, 2011
- Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google Tuesday, April 19th, 2011
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Lord Reggie,
Many years ago when the ipod was announced I wrote a long letter to an investment advisor explaining why they should take their clients all in AAPL. My thesis was AAPL was about to rebrand weak products that were platform tired and ripe for imrprovement. Having a machine age kinship with an object isn't a bad thing, there is no reason why an on off switch should end a relationship with a piece of electronics. AAPL products have now become extensions of being rather than externalized trinkets of productivity.
There is no end to objects that can be AAPL'fied. An AAPL washing machine? AAPL electric vehicle? AAPL airlines? The best part about it is AAPL will rebrand familiarity slowly, they wont crash into the wall and flood the market with too many low quality products. You will as Banzai said move into the AAPL ecosystem and find that you are not buying into it but its growing around you.
Margin compression and competition will do its damage but it will not result in a one way trip for the stock to go south. At best you will get a global crisis heavy dip or margin compression slash. Eventually AAPL will recover and continue. Margin compression will shift into margin growth via new products. The only real threat as you say is an android infrastructure destroying AAPL growth but if android can disrupt platforms then AAPL can also possibly defend.
Reggie could eventually be right or wrong but what I find astonishing is how people forget or do not know history....it is sadly true that as humans, in general, we have a very short memory span.
Apple almost got destroyed in the 80's in a similar situation...they were the first and they were cool....a closed architecture until the Microsoft-PC combination nearly obliterated them......exactly the same thing could happen now in the mobile computing arena...the similarities are evident.....so to all Apple defenders and worshippesr...it already happened once folks....
Furthermore, it is tricky when a big part of your product appeal is being "cool" (Crocs shoes anyone??) when your customer have some sort of emotional attachment (borderline cult like for Apple).....consumers are fickle, they can flip on a dime.....I would bet that Oracle position with its customers is more secure than Apple....in the corporate world people run cost-benefit analysis before considering a switch.....consumers, not so much....
Keep the good work going Reggie, thank you
This is a superb article. I respect Apple products for their innovation, marketing, etc. However, I prefer PC's (both Linux and Windows) and Android devices.
Fact is, is that any Apple product is very overpriced for what they are. Apple machines are basically a customized version of Linux, I simply prefer NOT to pay for using Linux. When the time came (recently) to buy a new smart phone I went with an Android phone, although getting an iPhone was a serious consideration. When shopping for a phone the iPhone did not offer anything that I could not get on the Android device I eventually bought. Personally I like the Android market far better than the app store for iPhone, for its broader range of applications (in my opinion), for the ease of development of the Android platform (without all of the restrictions the the Apple platform has always had)
I think this author makes several great points, particularly in regards to margin compression. Competition is fierce in the aforementioned market and will become more so. Congrats for objectively taking on the Apple culture, probably much to your own peril.
Note: I have been an avid ZH reader for many years, this being only my second post. Let the beat down begin.
Linux and Apple's OS X are cousins with Unix roots.
Apple is oriented for consumer non-computer literates ("dumbed down" version of Unix/Linux). Great if you only want to use computer without worrying much in how the inners work.
Linux is mainly oriented for computer geeks, and server powerhouses. Ubuntu has gone a long way trying to make it easier for consumer to adopt, but reality is that still it is necessary to get into the console and customize some scripts, make hardware run or recompile the kernel. Worst, you have to replace the entire OS every six months if you want to have the latest and greatest features. Canonical has made Ubuntu free, but still it is steadily moving away from what mainstream Linux was, though now most kernel/hardware efforts are Ubuntu influenced, due to its popularity. Recently Unity interface appeared, it is the worst dumbed down version of linux desktop I've used, yet, for 2011 it was selected as the new standard interface. I sometimes think Canonical has a fixation to break Windows monopoly and because of that, it has missed some basic marketing tactics and user feedback. Its consumer side is still catching up. Recently it opened Ubuntu One Store, lets see how it goes. Netbooks were a great opportunity missed. Those puny little computers needed Linux to feel snappy. QuickWeb and Google's Android made the better move on this niche.
Currently I like the rolling version of LinuxMint based on Debian, though I hate all the updates, I have a relatively slow internet connection speed and takes hours to update sometimes, every week or so.
Apple has done a much better job in introducing full integrated experience for end users, plus a "it just works" solutions. Add that to nicely designed hardware and you have a winner. Apple is a profit oriented, public, successful company. It re-engineers products and packages full solutions into nice shiny consumer gadgets. For me all the "cult" thing is part of the marketing.
Tablets have been around for years. Apple made it mainstream. Look at the long list of Windows tablet versions. They suck. I have a full featured HP Windows Tablet (2008) and it sucks. Touchscreens are a joke and are basically a Wacom tablet adaptation. Tablets have been at least a decade around. The current Dell netbook/tablet transformer is a joke.
I used touchscreen technology since the 90s, on DOS, Windows 3x (NT, etc) and OS/2 on HMI industrial applications. All those worked in the most demanding enviroments. Current command gestures and multi-finger sensing were not invented or considered possible yet.
I still think that the worst for Apple is the dependance on Steve Jobs, specially now with his evident health issues.
Apple made a comeback because Jobs was bold developed the NeXT computer and OS when he was overthrown from Apple. In 1989 I had the opportunity to use these computers. PCs and Macs were instantaneously obsolete. Nice screens, speedy powerful nice OS and desktop interface, 256MB (laser? re-writable portable media), full featured multimedia functionality. Unfortunately Next computers were very expensive and relatively scarce. I was thrilled I could do symbolic math (Mathematica) there without resorting to a Risk terminal and use the Mainframes.
Oh, I forgot this is a finance forum. Apple is doomed if it loses the "Steve Jobs" philosophy. I think APPL is overpriced. Positive: Apple has a small market share on most product niches, so there is room to grow if margin compression is a problem. Look how many GE Fanuc robodrills are installed at Foxconn DAILY just to keep up with Apple products demand.
They say AAPL is going to bring out a new product called donky tonk... Its going to be android compatible and will bring the margins down of all smart phones by making smart talk a rich man's dream... we will all talk donky tonk for free and then the google gaga and the smart phone tra-la-la will sound like the lololololoing song. Utterly irrelevant as we will all be broke. Margin crunch for smart phones will be like dim sum for the greeks. Its good to feel high on chardonnay. That is not subject to margin crunch as long as men love the feel of bubbly.
LOL on the onomatopoeia.
Reg keeps trying to take Apple down, but technical analysis doesn't work for brands that people hold emotionally dear. Especially what Interbrand Tudhope recently listed as the globe's #1 most powerful brand.
Thanks for the detailed analysis. You do provide an objective analysis. Doesn't make me want to short AAPL as we speak, however your salient point is flawless. There will be margin compression for AAPL.
However, it does beg the point ...how does GOOG make any $ with Android?
Shorting AAPL at this point, based upon fundamentals (probably get junked for using that term), is like shorting tulips during the Tulip Craze.
CRM has "0" GAAP earnings yet still trades @ 150 p/e (based on non GAAP earnings), because it has growing Revenues and a low cost product that people like.
The Fed don't use fundamentals, the Treasury don't use fundamentals....why should investors?
This analogy has been used before.
Apple skates to where the puck is going to be.
So the margins get squeezed in markets they helped establish,
isn't that inevitable as more competitors get in?
60 Billion in cash still goes a long way towards getting good pricing and advanced access to new components.
Who had Intel Nehalem processors in a consumer shipping product first?
A week before Intel announced it to boot?
Pretty sure there are new products in the pipe for new markets.
That being the case, I wouldn't bet against them either.
To be fair most Apple haters have been trying to short since about 190. How's that worked out for anyone yet. At some point, yes, I agree Apple's stock will take a giant hit, along with every stock in the universe but don't you wish you would've picked it up at 79 during the crash of 07-08 when it was thought that no one would buy an Apple product due to shrinking bank accounts and wages. How'd that play out. Picking tops and picking bottoms is a fools game. You assume that the IPAD is the last innovation that Apple will ever come up with. At this point it is the greatest RETAILER and INNOVATOR on the planet. One day, just as a broken clock, you will be right but for the last two years anyone short AAPL has either filed bankruptcy or jumped out of a building.
If you can assure me they're innovation team becomes morons then I would be more inclined to jump on the bandwagon. But track records have to mean something. Ipod was a game changer that was supposed to suck. Iphone just wasn't worth a damned. Mac's, nobody would use them. IPAD, preposterous to think they could sell 5 million units and it wouldn't affect the bottom line, yet somehow it was another game changer. Just what other company has invented and manufactured successfully this many game changing products in the last decade. Oh and Itunes. That will never make it.
Am I saying buy the stock here, absolutely not, but anyone that bought below 200 and ridiculed for it are the one's laughing all the way to the bank.
Everyone short the stock if it sucks so bad and good luck with that. Bet the farm and become gazillionaires on that deal. All I know is that they haven't shafted anyone with Vista as of yet.
It's just a ridiculously bad call by Reggie, which he started mentioning for no reason a few months ago.
Now to save face, he just keeps pounding on it.
Not even so much a "bad call" (obviously he's made no actual call, just total vagueness), rather just a "silly topic" for someone knowledgeable about Real Estate.
once again - it's just a PLAIN SILLY topic he started gabbing about for no good, reason, and now to save face he just keeps gabbing. It's really a shame.
it's become really embarrassing. It's so sad when someone goes haywire, through ego or trying to leave their own (excellent) field of expertise.
The vagueness is so sad. Every month he is utterly wrong. Eventually APPL stock (and/or the whole mrket or segment!) will drop a little, and he can yell about how right he was.
It's truly silly.
Actually my friend, my expertise is forensic valuation with a strong concenration in tech/internet and the FIRE sector. Being as you don't know me it is impractical to tell me what my expertise is.
I don't really see how you can find anything a bad call when practically everything that I said for the past year came to fruition within two quarters.
Contrary to you comment, every month I've been rather accurate.
Reggie, I find it hard to understand how the hordes of fans so passionately attached to Apple products could possibly be good investors.
The one asset Apple has is the herding behavior of its fans willing to stand in line for each new apple product. Many also own the stock, thus providing a safety net for institutions when distribution time arrives (as it obviously has at present).
Back in the 1970's when I began investing, I discovered "The Prince Racquet Effect" - the propensity of boomers and yuppies to buy the stock of producers of fad products that happen to fill their hand at the moment. With so many asset managers investing the same way, I always target these stocks for shorts, waiting for their prices to turn.
When it comes to Prince Raquet Effect fad stocks, AAPL is best of breed!
boycott israel, boycott motorola.
http://www.mylinkspage.com/israel.html#COM
white text in youtube is not the most legible.
Reggie, have you seen some of the lateset apps for the iPad such as Interactive Brokers (not that great, but they will improve) ThinkorSwim, Yahoo Finance, Etrade, Fidelity etc.. there pretty great. I don't use my iPad for surfing the web because pretty much every company has an app and if they don't (like Zerohedge.com) I just create a web bookmark and it's just like an app. My point is that every company is mainly focusing on developing apps for the iPhone 1st.. iPad 2nd ..and Android 3rd, They haven't even considered Gingerbread. I just found out last month my local credit union, Alliant, has a beautiful iPhone app for mobile banking, I don't expect an Android version anytime soon. So yes, I will gladly pay a mere $100 more for and Apple tablet than Gingerbread. I have no position in AAPL,
Here at work, the brand new boss wants all dept. heads using iPads because he did it at his last job, without the least bit of consideration for any other tablet. He's even served as a CIO in the past, so it isn't like he has no familiarity with them.
No, just like nobody got fired for buying IBM, or Microsoft, now you can add Apple to the list. Also, there are local universities and primary schools mandating iPads in some instances (because to them, it is still "cool," and looks good in the paper).
So now, I get to add iOS to the list of devlopmmet environments that gives me a headache. Yay, me.
*returns to Javascript debugging hell*
Reggie 600 buy Googleton. We are all still waiting for you to post your returns over the last two years.
The problem is comparing any tech company against Apple is like comparing apples with the number 7. Comparisons are simply not valid as tech companies are -- tech companies and Apple is a religion.
sunny
Thanks for using big fonts!
If the automobile insurance industry had any brains, they would institute a policy change on all auto policies that would deny coverage to a driver using a cell phone or other electronic device while driving. What would that do to margin compression?
The fundamentals indicate margin compression but
it's still tough to short. i've got an AAPL put graveyard
uunder my desk.
I want to meet Mimi, and take her out for some rice and pork. Maybe some rice wine as well. Who know's maybe we'd be good together and I could get lucky.
I don't give two crap's about the gadget/toys. I have a PC at home. When I want to use it, I will go home and use it. This whole idea of promoting one tool over another is a bit ridiculous to me. If the thing is affordable, and it work's for you, buy it. If it turn's out to be absolutely garbage, return it if possible. If return is not possible, just take head to read reviews and never buy the latest and greatest from said company again. Most of all learn lesson's from each purchase.
All company's have personalities they display in their devices. Sony is extremely intrusive with their software. Apple has a very powerful OS, but their hardware sucks. Asus quality control is tempermental at times. I had one of the original 7" EEEPC's when they were first released in Asialand. It was crappy.
Brand Loyalty is for schmucks with more money than brain's.
"brains" is simply a plural.
Plurals do NOT have an apostrophe. You should edit it out.
Apple's strategy seems to be to come up with something new while its rivals are playing catch-up. At the introduction of iPhone resp. iPad, Apple was about 12 months ahead of any competition. Because Apple dictates where the innovation is, it can profit from being the first.
They can jump to state-of-the-art components while others are stuck with mediocre stuff, thereby being the only ones in a new supply chain. They can carve out lucrative, long term, high-volume contracts and make sure that most of the supply goes to them, not their competitors. Once the contract is up for negotiation and price increases are imminent due to surging demand from competitors, Apple has moved on to a new supply chain.
A friend of mine reported being at a conference a few weeks ago (some computing stuff, I forgot), and he mentioned something that may be even worse than the margin squeeze, that is that among the folks in attendance there it seemed that the iPhone is considered increasingly uncool. It was like people were gossiping about all kinds of devices, just the apple stuff was like "ah yes, so what?"
Another signficant risk in retail... Fads. It works strongly in your favor, then it doesn't! It causes lifestyle companies to reinvent thier brand constantly. Dangerous, volatile, often unpredictable, but also potentially profitable.
It'll be interesting to see how this plays out. I mean that stuff is like an expensive car; very few people buy it just for what it is in itself while many pay the extra premium only if they only if they also buy themselves some prestige/admiration.
I mean, I wonder how many people will be willing to fork over $500 for a telephone(!) when they hear: "Oh I think that Apple stuff is sooo 2010?"
Don't get me wrong, they build beautiful devices and are top notch in technology, but that alone doesn't explain the growth and margins.
Yes, but try to lure people into buying their apps all over again on an Android tablet. Once you've bought a bunch of apps it becomes hard to switch, you'll have to spend your money twice! If Android were to be first on the app market instead of Apple, the reverse could have been said.
Actually, I did it. Much of the functionality that you have to pay for in iOS is free on Android. Those apps that I did pay for I have absolutely no regrets. As a matter of fact my iPad 1, 32 gb 3G is up for sale if you want it. Perfect condition. The only thing that was holding me to it was Netflix for the kids, to be honest. As wierd as it sounds, that is what kept many others waiting to make the permanent switch.
Fair enough. I do think that Apple --above all-- knows when their gadgets are becoming a fad--they know when it's time to move on. They are ruthless in abandoning their current products in favor of new ones. Their edge is to be the first mover: see iPhone and iPad which were miles ahead of the competition at the time.
I have both android and the latest iphone ( business purposes!) and i prefer the droid.
Margin compression is inevitable someday. Even apples second in command said that about a year ago in a conference.
I'd guess that margin compression is inevitable in any maturing industry (notwithstanding government interference). It is the signal that production is satisfying demand, so the producer knows to invest elsewhere if they desire to maintain a similar margin. It's just a tool to help aid the efficient allocation of capital.
While Apple's fanboys (and girls) will always pay some premium, it is doubtful that there are enough of them to maintain margins while keeping their current market share.
I definitely agree with Reggie about the content production ability. Even typing a ZH comment on my iTouch 3 is an exercise in frustration. The freaking onscreen keyboard doesn't even have a delete key! You have to drag the cursor around (without triggering other commands), then use the backspace key. While it's the best MP3 player I've had, text editing is all but impossible. Oh, and Safari blows (likes to crash when I select the ZH tab, for some reason).
have you considered that they might just ditch the product rather then fight on costs ?
Or do nothing and watch the late-comers fight for decreasing margins? I know I didn't buy my 3rd iPhone because of any "improved technology". I do not give a crap what is inside it. 95% of the value of their product is user-interface standards. the other 5% is the battery life.
Honestly none of the user interfaces out there are great. They are clunky and annoying when u use them heavily.
The most annoying is my screen automatically flips to a call even if i am working on something important like a zero hedge post.
Read their own published UI standards white papers. an eye opener for sure. UI design is more about the space between icons, distance to click, and screen edges than usability scenarios. imho, I'd rather be interrupted with the call. the post doesn't disappear when you go back to the browser.
I don't care. I want the iphone.
Oh my gosh. Is this clown still babbling?
YES apple stock is probably overvalued, for sure. (As with many stocks, and the whole market.)
And YES android is a total piece of shit. There's always a cheap alternative for cheap people who can't afford a Mac or an iPhone or an iPad. So what? It's no amazing mystery.
For hell's sake - many more copies of "windows" were sold in that era that MacOS. So what?
Find an "andoird" app where you can do this ..
http://www.youtube.com/watch?v=_ZGDusXgFOg
OK we're all waiting. Still waiting.
For that matter, just type the name of ANY SIGNIFICANT GAME that started on "android"
(Something like - you know - flight control, angry birds, real racing, fieldrunners, blah blah blah blah blah .. any android examples?)
Or wait! Let's have the name of ANY developer who makes money on "android" - what's that? it's a developer-useless platform that nobody makes any money on?
For hell's sake. It's so embarrassing when someone (in this case Reggie M.) who is so competent in his own field, makes an ass of himself in a different field.
And it's doubly embarrassing when someone starts making a ridiculous case, and just keeps hammering on it instead, of shutting up and letting it go away. Good grief.
I don't have a bet on Apple, but I wouldn't bet against Apple.
I am short AAPL.
The relative strength of the stock vs. SPX has been declining since early March.
How about some disclosure here Reggie, lemme guess..... since you don't disclose the obvious
He's right Reggie...at least it sounds that way.
At the moment I'm quite neutral in terms of positions. It's a shame that it doesn't sound as if I feel few recognize the risk of margin compression in Apple, because I think that's what it says. Let's quote the introductory paragraph:
Reggie, the answer is 'Yes' Apple can charge more for less product - at least for now. The cache of the brand has made it a status symbol, couple that with a less than educated consumer base who don't understand how to use all the functionality anyway and Apple will be able to maintain margins, at least in the short-run. I agree the numbers tell a different story. However, envy and trendiness will not show-up in the financial metrics. Your analyses are always great, but maybe step back from the data once in awhile. I can't tell you why, but right now, people are IN LOVE with Apple and will pay whatever it takes to be part of the club...
Itsgood someone took the time to actually grazp the question being asked. I actually agree with you, but the definition of "short" time frame is getting shorter by the minute. For every 5 people who seemeusemygadgets, about 3 convert. Nobody wants to willingly get less for their money and Android is starting to take on the cool status.
What you are speaking of is incremental loss of market share as more competition catches up. And they have lots of catching up to do.
Apple has their supply and production chain down to a fine art. Look at how they have positioned an iPod device for every price point. They can do that with everything they make without diluting their brand. That is quite an accomplishment.
I noticed today that Consumer Reports gave them their highest rating on all Lap Tops except the 14 inch category, because they don't make a 14 inch. Now there are still quite a few people who buy based just on that alone.
For disclosure purposes, I own no APPL stock. But I do own two Lap Tops, two Mac minis, an iPad, an iPhone 1 and various iPods going back to version 1. All of them are still in good working order, which is much more than I can say for all the PCs, Nokphones, MP3 players, camera phone PDAs and other similar junk I have purchased over the years.
Why is this relevant? Because people know this and when their pocket books are stressed their inclination will be to buy a product that has a longer useful life.
So when everyone is getting bashed by more competition, Apple will be much better positioned than all the Johnny Ketchups.
Macbook Pro rocks indeed.
Asus is a force though. They support SVI multiple video output in a unbelievably cost effective option. I see this playing out going forward.
Think about a trading station. Granted the SVI card has only one DVI output with one HDMI and one VGA. But the Asus motherboard can hold two SVI cards so you get two DVI.
If they can ultimately squeeze this all into a tablet look out.
No, it's actually significant loss of market share
Actually, Android has already surpassed Apple in nearly every aspect.
That was the argument made last year when the first Android tablets came out above the Apple price points. Now, you see them come in 20% lower and you find that this is not the case. Apple's major component suppliers are their biggest competitors. Fine art or not, that is a precarious position to be in and it puts margins at risk. There are not a lot of companies that can supply the volume that Apple needs, and those that can actually compete with Apple now via Android.
They are doing a very good job in the laptop category, but this article and the high growth venue is ultra portable computing.
I have purchased 3 iPods (for my teenager), all which have had either hard drive failure or mechanical failure at the headset connection. I own an iPad which I have no mechanical complaints with and was best of breed when I bought it, but pales to the materially cheaper competition - particularly for a power user such as myself. I must admit for those who do not wish to puch their equipment or demand more, the Apple may be the better solution at equal price points, but they are not at equal price points.
My experience says otherwise. I have three Asus products (netbooks), and all but the first (6 years old, dropped by my 7 year old nephew) is running good as new. None of them cost more than $320, save the Transformer which is $399.
I'm with williambanzai7 on this one. For many years the windows hegemonic world literally suppressed AAPL's upside. It took many months after the original iPhone for the stock to pop up. (I know I was into AAPL Calls) After years of "why would anyone pay a premium for Apple products?" People finally figured out why? when they used them via the iPod halo effect. and Like williambanzai7 says I have original iPod and Mac Books etc, original iMac, own MacPro, Iphone 4's and an iPad 2, and they ALL still work for me too. I own no Apple stock but believe there is much to the brand loyalty, the design, and to the quality, and the retail store experience, that any competitors will have to overcome that... If brand meant nothing then generics would replace all brands. But people believe there is a value, and will pay more. And in this case I would and have happily been paying more, and having more productivity, and enjoyment. (I own many wintel boxes and laptops, and other products cell phone gadgets, Sony Vaio, PS3, etc...)
BTW, Really like your Real Estate views and interviews Mr. Middleton. Spot on analysis. I just think thing this falls outside of the numbers or analysis because of the halo effect and Apple "fan boy affect" -like I guess, I must appear.
I have the Asus mini Lap Top with the memory stick slot which I bought in 2004 before I bought my first Mac. It still works because I used it for 5 months and said that's it I've had enough of Windows. I kept it to archive my windows files.
I am not including any purchases for family members (substantial) in my number. Kids blow through their hardware faster than my cat spreadsheets who loves to play the cat piano in my iPad. He gets this one when I upgrade.
Reggie, APPL are not even at their Apex. What the stock market does and how that effects their price has nothing to do with it.
I have tried all the toys. I am a maniac when it comes to this stuff. If I saw a compelling reason to try and switch I would do it.
But I do not see it. And most other people out here appear to feel likewise.
And tgis is whats so hard to understand. Android has clearly surpassed iOS in market share AND growth rate yet so many peiple swear as if its the otberway around. It is obvios that more people prefer Android, and at an inceasing rate.