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On Thursday, 12 August 2010 I penned 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
. In said piece I unequivocally detailed the process and mechanism with which Google would systematically slash the profitability of the fat-margined OEM hardware and software vendors. I was the ultimate contrarian at this time for there was not a single well known analyst, investor or media personality that espoused a similar viewpoint. Apple was the "the next big thing" at that time.
This time last year I took time to go into detail in regards to how Google is able to go about this...
Eariler this year, I delved even deeper into the details of how Google will cut the fat-margined companies (read as Apple, et. al.) off at the knees!
As coincidence would have it, Google management has now come out in public with affirmation of the business model that I have attributed to them these last few years, as reported today by the Financial Times on their front page
Google is preparing an attack on Apple’s iPhone with a device that is more aware of its surroundings and smart enough to anticipate how it will be used next, according to the head of the internet company’s Motorola subsidiary.
The gadget, called the Moto X, will be made in the US and will be part of a campaign to drive down the cost of smartphones and end the high profit margins companies such as Apple have enjoyed, said Dennis Woodside, the Google executive installed to run Motorola after it was acquired in late 2011.
Mr Woodside’s comments, made at the D11 conference in southern California, marked the first official confirmation by Google that it would launch a “hero” phone, or flagship handset capable of competing with devices such as the iPhone and Samsung’s S4.
I have also said on several occasions that the current market sweetheart, Samsung, is not immune to the hardware margin compression woes. As a matter of fact, no hardware vendor in this segment is. It's quite evident now that Google's plans for Motorola is precisely to drive down the margins of all OEM vendors - even their Android partners who are also competitors. A complex relationship, eh? Let's face it, Smartphone Hardware Manufacturers Are Dead, Long Live The Google-like Solution Providers
(and Computer Hardware Vendors Are Dead, Part Deux!
). I commented on the predicament that Samsung is in now as it reaps increasingly large profits, just like Apple did - Samsung Will Be Ready To Do That Fruit Thing, Just Like Blackberry & Apple - Courtesy Of Google, #MarginCompression!
Mr Woodside hinted that the new handset would go on sale later this year and be priced well below the iPhone 5, adding that the sort of steep price declines seen in consumer electronics from personal computers to televisions were overdue in the smartphone market.
Without naming the iPhone directly, he said: “Those products earn 50 per cent margins. We don’t necessarily have those constraints. Those [margins] will not persist.”
... He added that Google was confident that the device, which will be “broadly distributed”, would be a big seller because “the experiences are unlike other experiences out there.”
For those who actually think that Apple's share price can afford such a battlle, I bring you this graphic from "Is It Time To Buy Apple As A Valuation Play? The Contrarian That Called The Top In Apple Weighs In
Click the graphic once to view, twice to enlarge to printer quality...
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Putting stock market performances aside, the question du jour is, "Is this negative margin attack working?". Quick answer, hell yeah! I opined on margins by means of the market share vs profit share debate over the last two days, reference"
- Blackberries, Apples & Fruit Borne Successitis - The Problem With Excess Profits Is Hubristic Management Tends To Take Eyes Off The Prize!!! and
- Is Tim Cook Cooked? Market Share vs Profit Margin, part 2 - Follow What I Do, Not What I Say!
This strategem employed by Google was visible at its onset and could have been mitigated had Apple been less greedy in terms of short term profits (it was one of the, if not the most profitable companies in the world) and gunned for ubiquitous distribution. You see, over time, every company's margins get cut. The pertinent question and the inflection point into the next paradigm centers around the next logical questions, "Will you be the one to cut your own margins or will you allow your competitors do it for you?"
As long as the market leader actively and religiously cuts its own margins it essentially trades incremental profit margin for incremental market share growth. From a long term cash flow perspective, it actually averages out to about the same. The problem is if you fail to cut margins often and early, you reap large cash flows in the beginning of the cycle to forgo them through margin compression towards the middle and end of the cycle, characterized by market share loss at the onst.
I've been using Blackberry as an example of this...
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All of the former tech titans and market leaders have fallen the same way - Nokia, HTC, DEC, Polariod, etc.
Google Q2 2013 Update: Valuing Possibly The Most Powerful Co. In The World?
Is It Time To Buy Apple As A Valuation Play? The Contrarian That Called The Top In Apple Weighs In
Short Term Gain Brings About Long Term Pain? A Roadmap To Apple's Resurgence That Management Is Ignoring!!!
See also: Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
For paying subscribers only:
Recent Apple Valuation Reports
Subscribers, download the Q3 2013 valuation reports (click here to subscribe
The update from two months ago is also of value for those who haven't read it. It turns out that it was quite prescienct!
Recent Google Valuation Reports