Thursday, 22 December 2011 06:18

The Mobile Computing Wars Are At The Half Time Mark and Google Is Killing Them! Featured

About a week and a half ago I posted "The Evidence Of Android Dominance Continues To Roll In - iOS Looks To Have Stopped Growing Market Share". I think its time to expound upon this thought for the Mobile Computing Wars looks to be roughly at the 50% mark and as I anticipated, Google is wiping the floor with the competition - all of the competition. Also as I anticipated, the market has (up till now) totally undervalued Google while overvaluing its rivals (RIMM, AAPL, and potentially even MSFT).

To recap, I illustrated what some failed to realize, and that was that a major paradigm shift in communication and computing was upon us that would dwarf the ascendancy of IBM in the '70s and Microsoft in the '80s and '90s - see There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All. At the time (1st quarter of 2010) the players were evident, but the likely winner wasn't, at least for another quarter or two, then the evidence became much clearer to me. Unfortunately (or fortunately, at least for the price of longer maturity call options) the market couldn't see what saw, reference Our Uber Growth Thesis For Google Is Intact and Performing Well. Basically, Google invented a unique and new business model that is apparently unassailable by the current participants in this battle. It defined the war, and by definition, it left some obvious casualties - casualties which I instructed my subscribers to short in a very contrarian (at the time) move, reference RIM Gets RAMMED! Again... Remember That Contrarian Call 1st Quarter of 2010?.

The two potential contenders to Google's title were Apple and Microsoft, with Microsoft getting the slight nod (see An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught and Don’t Count Microsoft Out of the Ultra-Mobile Computing Wars Just Yet - remember, these articles were written almost two years ago).

Yes, I know Apple was (and probably still is to those who are not in the know) the popular favorite, but they have been outclassed by the Google negative cost business model 

Apple's decent was obvious to BoomBustBlog subscribers last year, reference  and . Now, fast forward a year later and a Google search reveals...

Android_Googe_market_share_search_copy

Yes, Google has now dominated Apple in Europe. How? Why? Well, as mentioned above Google's business model is custom crafted to take out the closed end, fat margin biz model of its competitors - see Looking at the Results of Google's "Negative Cost" Business Model Employed Through Android. As is, it is currently unassailable. No, it wasn't tech that propelled Google forward, it was business strategy. Don't get it twisted, though, the tech followed shortly thereafter. The Samsung Epic 4G Touch and Galaxy Nexus handsets are drastically, and I do mean Drastically, superior to the lately released iPhone 4. As you can see, these vastly superior and briskly selling handsets are available for as little as $79, brand new on contract! What does this portend in the near future? Sliced Apple Margins For Dinner?

 

image018_copy

 

What happens when you combine superior technology, extremely aggressive pricing, and...

samsung_galaxy

a global slowdown in economic growth???

apple_margin_crunch

You get the elimination of the fat margined business model, which is what Apple has built its empire on. Apple's loss of dominance in the handset market means much more than many realize.

  1. Samsung and Android Overtake Apple in Australia - BriefMobile

    briefmobile.com/samsung-and-android-overtake-apple-in-australia
    1 day ago - Also according to IDC, Apple's iOS market share at 36% fell short of Android's market share that increased to 49%. Read IDC's press release after the break. ...
  2. Samsung overtakes Apple in Australia despite patent attacks ...

    www.bgr.com/.../samsung-overtakes-apple-in-australia-desp...
    Zach Epstein
    1 day ago - Despite a strong iPhone 4S launch, Apple's share of the Australian smartphone market totaled 36% in the third quarter while Android's market sharejumped to ...
  3. Low prices boost Android's tablet market share ... - Android Headlines 

    androidheadlines.com/.../low-prices-boost-androids-tablet-market-sha...
    20 hours ago - The free market, in all its terrible beauty, is Apple's most friendly enemy. After 18 months of being effectively the only tablet game in town (as a.

The Google search sample above was very easy to see coming if you were objective. I predicted the market share shift, and even the companies and products that were involved, 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 forsaking 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.

Apple IS a cell phone company, as defined by both revenues and profits. They cannot afford to lose this battle to Google.

As excerpted from Slicing Apple's Margins...

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.

Now to Apple management's credit, they have recreated the tablet industry to dominate that with higher (than the competition) margin products, albeit products whose margins are lower than the iPhone and iPod. Due to the relatively lower margin of the pads, Apple has to sell a lot of them to maintain profit growth as competition lights up in the smart phone category. Guess what, though... Competition is heating up in the tablet category even faster than in the smartphone category, and Google has captured 40% of the tablet market in a year! Damn, that's quick, eh? Was this hard to see coming? Do you remember when pundits declared that the iPad would dominate for several years?

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 

 As of last week, Android is activation over 700,000 handsets, PER DAY! That is amazing growth, up from 225,000 per day last year. As a matter of fact Android is the only OS outpacing smartphone growth, meaning that it is the only OS that is growing - translation: it is taking share from ALL of the other OSs! Does this surprise anyone? Hopefully not anyone that knows a BoomBustBlog subscriber. We told you this LAST year! As excerpted from Apple on the Margin, the prescient proof from last year is available for download as an Excel model to BoomBustBlog professional and institutional subscribers, here: File Icon Smartphone Market Model - Blog Download Version. Those who wish to subscribe or upgrade their subscription can do so here:

I often scan the comment sections of many blogs and websites to get a feel for the readers' perspective. One premise I see espoused often is that Android is succeeding at the expense of Nokia, RIM and MSFT, and not that of Apple. Both I, and the facts, disagree with this notion. As it stands now, Android is literally eating Apple's smart phone market share, and as of last quarter - which does include a partial month of the big sellers from both the Apple (iPhone 4) and Android (Evo, Samsung Galaxy, Droid X) camps - Apple's phone sales are actually growing slower than the market is expanding. In comparison to the near parabolic growth of the last few years, it is evident that that growth is going somewhere. Where do you think it is going? The potential for lag in phone sales right before a major hardware upgrade should be taken into consideration, for there was probably a lull in Apple phone sales in anticipation of the iPhone 4 release, but the same can be said for the Android handsets as well (all around the month of June).

Below is a graph showing the longer term trend of Apple market share in the smart phone space. It illustrates the explosive growth Apple has had through its iPhone series, and it also shows some seasonality (ex. lull before hardware upgrade season, etc.). As you can see, the growth trend, viewed either directly or as a moving average, shows marked downward momentum. Of course, it is highly unreasonable to expect a company to continue to grow at the pace that Apple has, but that is exactly what many Apple valuation models that I have come across have - literally hard-coded in. This is folly, in my opinion - particularly considering the effect of the Android competition that is already showing up. If you look closely, Apple's smart phone market share is already showing NEGATIVE growth!

 

Since I know that the chart may be a little difficult to read at the tail end encompassing several years of data, I have taken the liberty to drill down to the past year to get a closer look. Remember, Android sales didn't really get started until 8 months ago, and the big surge didn't occur until the Evo/Droid X/Samsung Galaxy series were launched in June, July and August - most of which is not captured here. The same is to be said for Apple and the iPhone 4.

Click to enlarge to printer size!

Despite increases in both the overall mobile market and more importantly, the smart phone contingent's penetration of said market:

  1. Apple's smart phone shipments are showing a negative growth trend
  2. and more importantly, Apple's smart phone market share is experiencing a very sharp downward trend as shown by both direct observation and that of the 2 period moving average.

By trailing the actual growth of the smart phone market, it is far from a foregone conclusion that Apple, nor any other company for that matter, can necessarily tread water by relying on the expansion of the smart phone market. It is quite possible for the winner in this space to capture enough market share to put a material hurting (in terms of valuation multiples) on the loser, primarily if that winner becomes a de facto standard (ex. Android OS, MSFT OS, iOS or even Nokia's Symbian OS) that can lock out the users of the competing devices for much of the smart phone functionality.

I will be exploring this concept in illustrative detail with the release of the Research in Motion forensic analysis and valuation within roughly 48 hours.

We all know how that RIM forensic research worked out... Last but not least... The Only, and I Mean the Only, Investment/Research House To Warn Of An Apple Miss Is Vindicated!!! Friday, 14 October 2011 04:54

In the 3rd quarter of last year, I said that Apple will deliver a miss and start to exhibit the stress from the competition from Android with 4 to 8 quarters. I also said RIM was toast with Blackberry jam, and I sad that Google will be taking over mobile computing. Well, let's take a look at how accurate I was EXACTLY 4 quarters afterward...

GoogRIMMAAPL

'Nuff said! The early story is available here: The mobile computing wars!

 

Last modified on Monday, 23 January 2012 06:12

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