Wednesday, 05 October 2011 02:20

Sliced Apple Margins For Dinner? Featured

Let's make this quick and clean. After all, a picture is worth a thousand words, and I have crowed for over a year now that Apple has been handily outgunned in the smartphone race by Google and its hardware vendors.

Click any image to expand to printer size...

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Of course, I have met more flack, resistance and general hateful rhetoric than for any opinion I have given on any company, ever. Needless to say, that doesn't negate the facts on the ground, does it? I can legitimately say I almost the only Apple skeptic, and by far the most vocal. So, on the eve of Apple's flagship iPhone 4GS announcement, we see the MSM report: Apple's New iPhone 4S Leaves Some Fans Disappointed...

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The maddening pace of Android technology development is simply too much for Apple to keep pace, or at least keep pace with while maintaining those fat margins. So what do they do? they release a marginally improved product that has yet to match the 6 month old Android flagship tech that is about to be refreshed/replaced/updated in exactly ONE WEEK!

I was the lone Apple vs Google realist that I know in the blogosphere. Go to 3:40 in the video below to hear the truth that no one else on CNBC would tell you. As a matter of fact, after you do that, go to the beginning of said video to hear more truths that no one else on CNBC would tell you, like what was said in my Hunt for the Squid!

Simple math, simple business logic, simply common sense, yet the Apple hordes attacked relentlessly. Listen, what Google has created to compete with Apple, RIM, MSFT and Nokia, was not a new technology - but a new way of doing business. Less than free was their new business model and it proved to be pretty damn effective.

Armed with such a weapon, Amazon is selling tablets (24 hours after launch) at a rate of 50,000 per DAY. That's right! Per day! Amazon is also selling them 60% cheaper than Apple's cheapest offering over a retail network that has both broader reach and matching if not more content.

Samsung has set records with their Galaxy S II phones, which are drasctically superior in nearly every way to the iPhone 4 and apparently (from what I have gleaned thus far) the iPhone 4GS. These phones are in very high demand, and if Apple does get close in functionality, Samsung is announcing a dramatic upgrade to this best of breed device... Next week!

Is that not enough margin bashing competition for you? Well HTC, Motorola (just purchased by Google, itself) and LG are coming with their own superphones, you know... The product that supplies ~ 70% of Apple's profit. Being that subsidized iPhone 3GS are being given away for free now, the margin compression theory makes sense, no?

As excerpted from Apple on the Margin:

Writing about Apple is like writing about gold, despite the fact that there is a strong fundamental argument for or against it, the emotional response and lack of empirical outlook clouds the fundamentals, ex. Apple  and the iPhone vs Android or Gold and fiat currencies/inflation. I am not a Apple hater, and I am probably one of the most advanced iPad users you know of. Apple has its pluses and minuses, but people (including many professionals) are failing to look at the facts and instead are joining their respective "fanboi" clubs. Thus, in continuing with my attempt to educate my readers on the folly of believing Apple's position to be unassailable, I am illustrating exactly how vulnerable Apple is to either a compression of margin on the iPhone or a slow down in sales. Apple is just penetrating the market and has a fertile field to conquer, it is just that it will not be able to pursue that field devoid of competition as it has over the past 3 years. This should dictate an adjustment to the highly optimistic aura attached to the multiples used in forecasting economic results.

The graph below illustrates the importance the iPhone represents to Apple's franchise. Believe it or not, this graph actually understates the importance of the iPhone to Apple for while it brings in 45% of the revenues, it is responsible for about 70% of the profits. Apple has become too reliant on one product, although that reliance was borne from the fabulous success of said product. While Apple will probably derive some much needed revenue diversification from iPad sales, the iPad will face the same hurdles that the iPhone is coming up against - and that is competition from Android-based devices and potentially even Windows Mobile 7 8 (albeit this is an admittedly much more speculative statement).

Breaking the argument down even further, you see how the iPod and the iPhone have literally transformed this company. While I am sure it will continue to be fantastic company with cool products, I doubt very seriously that it will be able to grow in the future as it has in during the last 7 years.

The saving grace is that the smart phone and portable computing market will grow quite quickly, allowing companies with dwindling market share to still capture increasing revenues. The ugly reality is that those revenues will have to be burdened with increasing R&D, marketing and distribution costs since the amount of competition will probably scale faster than the market itself. That, my friends, is a very good thing for you and I, the consumer!

All paying subscribers are welcome to download the mini-model which shows Apple's earnings sensitivity to margin compression through competition. This is the very crux of determining the extent of Apple's success or lack thereof, in the near to medium term. Click here to download (File Icon Apple iPhone Profit Margin Scenario Analysis Model), and click here to subscribe.

Look to my writings from last summer to determine the common sense reasons why Apple is at risk despite the lovefest that the media, the sell side of Wall Street and the equity markets have for it: . After nearly a year of showing nearly incontrovertible evidence that Apple has seen its heyday, the mainstream media is catching on. First a quick overview of my thoughts...
    1. Look & Listen Closely As The Solitary Margin Compression Theory Slowly Bears Fruit: Apple to Drop Flagship iPad Prices?
    2. Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof! 
    3. Is The Evidence For An Apple Margin Collapse Now Incontrovertible? 
    4. I Absolutely Dare Anyone To Read This And Still Not Consider The Probability (Not Possibility) Of Apple Suffering From Margin Compression 

What Google has created to compete with Apple, RIM, MSFT and Nokia, was not a new technology - but a new way of doing business, reference "Looking at the Results of Google's "Negative Cost" Business Model Employed Through Android". Less than free is their innovative new (and old, since they simply applied their cloud services model to the smartphone OS) business model and it proved to be pretty damn effective. Armed with such a weapon, Amazon is selling tablets (24 hours after launch) at a rate of 50,000 per DAY. That's right! Per day! Amazon is also selling them 60% cheaper than Apple's cheapest offering over a retail network that has both broader reach and greater access to content and native retail shopping. Not only does this threaten the iTunes/App Store ecosystem, it threatens the iPad and itself!

Samsung has set records with their Galaxy S II phones, which are drasctically superior in nearly every way to the iPhone 4 and apparently (from what I have gleaned thus far) the iPhone 5. These phones are in very high demand, and if Apple does get close in functionality, Samsung is announcing a dramatic upgrade to this best of breed device... This Month!

That not enough margin bashing competition for you? Well HTC, Motorola (just purchased by Google, itself) and LG are coming with their own superphones, you know... The product that suppies ~ 70% of Apple's profit. Being that subsidized iPhone 3GS are being given away for free now, the margin compression theory makes sense, no?

 Check out the progress of "Google's "Negative Cost" Business Model Employed Through Android" in this table sourced from Endgadget, which displays the prowess of Apple's yet to be released flaghsip phone with the arleady dated and aging Android flagships -- the results are pretty clear cut!

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As excerpted from "Is The Evidence For An Apple Margin Collapse Now Incontrovertible?" 5/19/11:

This is going to be a much tougher fight for Apple than even that of the smartphone market, and you see how well Android did in that category as the current market leader in both footprint and growth rate. Literally98% more competition is coming down the pike this year, and products are already widely reviewed as at parity or superior in Apple's chief diversification segment (remember, derives ~70%  of its profits from the iPhone). With that, even the iPhone is supremely challenged by Apple's own parts vendors, Reference :

Apple's biggest suppliers (the most important parts vendors for the products that contributes about 75% of Apple's profits) and the companies that Apples is currently embroiled in global litigation with (no wonder why) also produce similar products, ex. the LG Optimus 3D and the Samsung Galaxy S II.

Speaking of the Samsung Galaxy, this newest refresh is nearly universally thought of to be the best smartphone available, including the Apple iPhone. I haven't found a single review yet that has said otherwise. This is an impressive feat considering how "Apple-centric" the media currently is. Reference this snippet from Endgadget:

For a handset with such a broad range of standout features and specs, the Galaxy S II is remarkably easy to summarize. It's the best Android smartphone yet, but more importantly, it might well be the best smartphone, period. Of course, a 4.3-inch screen size won't suit everyone, no matter how stupendously thin the device that carries it may be, and we also can't say for sure that the Galaxy S II would justify a long-term iOS user foresaking his investment into one ecosystem and making the leap to another. Nonetheless, if you're asking us what smartphone to buy today, unconstrained by such externalities, the Galaxy S II would be the clear choice. Sometimes it's just as simple as that.

Endgadget is not the only reviewer to go head over heals over Android super-powered phones. Check it out, courtesy of onlinesocialmedia.net:

    1. Dan Sung of Pocket-Lint rates the phone with 4.5 out of 5 stars and calls it a “cracking experience” and like Engadget, “better than any other Android smartphone.” Very minor complaints included the 1080p DLNA streaming, which was noted could be better, plus minor quibbles with the camera lens but overall the conclusion is that “no one buying this superphone will have anything to complain about.
    2. Chris Davies over on Slash Gear. Guess what, Davies also says, “this could well be the best Android smartphone on the market today” and noted that iPhone users that were shown the Galaxy S II said they could have their heads turned by it. There were minor criticisms, such as the keyboard, but these were said to “pale in comparison to the Samsung’s strengths.” In conclusion Davies says “we’re running out of reasons not to buy the Galaxy S II.”
    3. Electric Pig by Ben Sillis, who gave the phone a staggering 5 out of 5 star rating and says “Samsung has triumphed again with theSamsung Galaxy S 2.” There are some quibbles about software in this review but not enough to get in the way of it being a “surefire contender for phone of the year,” and again the superb display gets a special mention.

Be aware that Samsung builds the chips for Apple's iPad and iPhones, is embroiled in a 4 or 5 country IP lawsuit with Apple, and also happens to build their own proprietary chip for the phone above and most likely the chips for their new (thinner, faster, lighter and possibly less expensive) tablets as well. It appears as if the stuff they build for their own Apple-competing products are cheaper and faster than what they produce for Apple. This puts Apple in a bind as they not only compete directly and sue Samsung, but will have a problem as they cannot quickly jump to another vendor that can produce the volume and tech that Samsung does. What happens when your biggest and most valuable vendor becomes your biggest biggest competitor and you start suing them? What happens when they produce superior tech for their own competing products? Well, we're about to find out. We may also find out what happens when your second largest and most valuable supplier does the same, for LG is going full steam ahead with high end Android tablets and phones as well, supplying equal or superior screens for their devices as well.

This also begs the question, "What happens when the market tightens up on either the supply or the demand side?" I anticipated this several months ago when I penned, "Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof!". Well, in the news (due largely to the issues that Japan has faced), "Component shortage to hit tablet makers". When things get scarce, whose products and enduser customers do you think LG and Samsung will cater to first? Their own or Apples?

And there you have it, logic and common sense. Lower prices and/or higher technological bars will lead to lower margins. For those that are paying attention, it is evident that it is already happening.  The disappointment felt throughout the web at the release of the iPhone 4GS was not due to Apple releasing a subpar product. It was due to Android raising the bar so high that pple simply could not match it without busting its extremely fat (72%) margins. Google knows this, hence Google is firing ahead at a technology refresh rate that is not only unprecedented and unheard of, but makes Moore's Law appear to be behind the times, Matrix style Bullet time effect.

Let's reference the model behind the subscriber document File Icon Apple - Competition, Cost Structure and Forensic Valuation and go through the basic fundamentals, step by step for the iPad and iPhone (together nearly 80% of Apple's profits) are very strategic segments for both Apple and the industry.

Now, I've told you before, and I'm telling you again, and I'll probably have to tell you several times in the future... I'm Hunting for Squid!

 

Reggie_Middleton_hunting_the_Squid_Known_As_Goldman_Sachs_GS

 

It Should Now Be Common Knowledge That Goldman’s Investment Advice Sucks???

I'm not going to bother to mention that Goldman advised clients to by European banks in direct contravention to my Pan-European Sovereign Debt Crisis research. Hopefully, you see how that ended - And The European Bank Run Continues... An equally egregious offense is daring to go against the BoomBustBlog grain on Apple...

Of course, that doesn't necessarily mean that there is any credibility in said proclamations, though. Reference this priceless nugget in light of the links above...

And as a reminder...

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Fear not, oh ye deprived consumers of the truth! Subscribers can access unfettered, unbiased analysis on Apple's situation and prospects, by the numbers: File Icon Apple – Competition and Cost Structure Forensic Analysis and accompanying Apple iPhone Profit Margin Scenario Analysis Model – suggested use with Apple Earnings Guidance Analysis

More on the Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing 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. RIM Smart Phone Market Share, RIP?
  8. Android is gaining preference as the long-term choice of application developers
  9. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  10. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  11. Apple on the Margin
  12. RIM Smart Phone Market Share, RIP?
  13. Motorola, the Company That INVENTED the Cellphone is Trying to Uninvent the iPad With Android
  14. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  15. More of the Android Onslaught: Increasing Handset Revenues and Growth
  16. The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download
  17. The Complete, 63 pg Google Forensic Valuation is Available for Download
  18. iSuppli Continues to Validate BoomBustBlog’s Original Thesis: Android as the Viral Game Changer!
  19. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours, true blowout earnings unlike JPM
  20. As I Warned in June, DO NOT DISCOUNT Microsoft in This Mobile Computing War! Their Marketing Campaign is PURE GENIUS! and it Appears as if the Phone Ain’t Bad Either
  21. Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He?
Last modified on Wednesday, 05 October 2011 12:23

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