Sunday, 18 August 2013 12:12

Have We Reached "Peak Premium Smartphone"? Featured

Quartz.com has an interesting set of articles on the topic of the peaking of the smartphone market. Let's start with thier commentary on Samsung, "Yes, Samsung is acutely aware that we’ve reached “peak trophy smartphone” - as excerpted:

South Korean electronics giant Samsung reported soaring profits on Friday, but despite the company’s attempts to manage expectations, the results undershot estimates and its stock dropped almost 1%. That’s on top of a 13% slump in June that wiped $26 billion off Samsung’s value—a bigger loss than Sony’s entire market capitalization.

This may seem odd, given that its flagship smartphone, the Galaxy S4, has flown off the shelf, supported by a super-sized marketing campaign. The problem is that amid steep competition, there aren’t many customers left who can afford flashy trophy phones and don’t already have one.

As a result, Samsung’s management is beginning to pivot away from its current reliance on the Galaxy series—it announced a $1 billion increase in investmentexpected to go to other businesses on Friday—even if it is still keen to tap into some developing markets still hungry for shiny high-end telephonic gadgets. It already leads the world in televisions, chips and displays, and recently launched a high-end OLED television. Its memory chip business announced a 71% increase in operating profit from last year, and it has a powerful reputation in many emerging markets.

Of course, BoomBustBloggers were on this at least a year and a half ahead of time, referencing Samsung Will Be Ready To Do That Fruit Thing ... and Computer Hardware Vendors Are Dead, Part Deux! As excerpted:

I warned in plenty of time to both avoid loss and profit on the short side for each company:
rotten blackberriesrotten blackberries

Research in Motion in early 2010: 

Rotten plus GreenAppleRotten plus GreenApple

Apple from 2010 till the ultimate short call in October just past: Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All

andriod-vs-appleandriod-vs-apple

I also laid clear the path to Google's prominence as far back as 2010, when there was not a peep from the sell side, see Google's Q4, 2012: This Looks To Be The Leader Of The New Distributed Information Paradigm .

Now, Samsung seems to be the most innovative of the handset vendors to date, but if I'm right, they will end up having to innovate in a commodity space just like the traditional PC manufacturers (Dell, HP, etc.) have to do now. Why?  Because of point number Three...

The new PC is not even a PC anymore, its a multi-tiered, multi-function, distributed cluster of interactive, location aware, multimedia applications sharing your social activities and data through a network of servers - in short, it's the cloud!

For right now, GOOGLE IS THE CLOUD! See my video descriptions of Google's business models above.

 Quartz then went on to write "Tim Cook is right. Smartphones haven’t peaked", as excerpted:

Tim Cook on peak smartphone: "I don't believe that."

There’s been plenty of concern lately that the market Apple arguably created—high-end smartphones—is approaching the saturation point. Quartz has written a ton on the dynamic, whether it be the ongoing importance of lower-priced feature phones for social media or the recently leaked photos of what’s rumored to be a new “cheap” iPhone.

Goldman Sachs’ chief Apple watcher Bill Shope raised the issue with the man himself, Apple CEO Tim Cook, in the company’s after-earnings conference call yesterday. Here’s the exchange. (Highlights ours.)

Shope: Despite the fairly substantial iPhone upside this quarter, there’s been increasing concerns that the high end of the smartphone market is reaching saturation point and that growth may be harder to come by for really for all vendors. What’s your perspective on that and the current industry dynamics? And Tim, do you think there are new innovations and services in the pipeline that can reinvigorate the premium segment of the market, after what’s obviously been a bit of a tough 2013 for that segment for the industry?

Cook: From a growth point of view for Apple, our key catalyst will always will be new products and new services. And these are both in existing categories that we’re in and in new categories. In addition to this, we have opportunities in distribution from carrier relationships to expanding our retail stores, expanding our online store and continuing to expand the indirect channel. And we also have a market expansion opportunity.

Peter (Oppenheimer, Apple’s CFO) mentioned enterprise in his comments and the share positions that we have there, over 60% in both iPad and iPhone and I think we’re at the very front-end of that, and so I think we have lots of growth opportunities. And I don’t subscribe to the common view that the higher-end, if you will, the smartphone market has hit its peak. I don’t believe that, but we’ll see and we’ll report our results as we go along.

For the record, some argue that there could still plenty of iPhone growth to be had in the US. Wonky analyst Horace Dediu notes that the latest ComScore survey data shows some 98 million Americans older than 13 (that’s nearly a third of the country) don’t use smartphones as their primary phone. And he argues in this recent post that even with 60% smartphone penetration in the US, “the rate of adoption of smartphones is not slowing in any perceptible way.”

Obviously, I beg to differ. First of all, the rate of adoption and overall growth rate is slowing. This is natural and to be expected, though - particularly since the market is still experiencing healthy growth. It is by far not the biggest issue at hand, and I feel the article is missing the bigger picture. Even if the high end smartphone market is still matching its historical growth projectory (which it is not), the margins on said growth are shrinking, and shrinking rapidly. Apple's financial dominance, it's share price and much of its cache are predicated on being able to sell pretty widgets at 50%-70% margins. Google's extreme success with Android, it's negative margin business modeland the natural law of economics and business market maturation guarantee those margins are a thing of the past as I've promised in years past - Right On Time, My Prediction Of Apple Margin Compression.

Steve Cook preaches innovation, but Apple is being out-innovated at a ridiculously rapid clip. Not only are the Andriod phones and tablets producing hardware/software configurations that are making the iPhone (and to a lesser extent, the iPad) look historical and dated, but Google is at the forefront of the next generation form factor for the new "smartphone". 

In addition, Apple is losing market share in a market whose growth is slowing. I warned about this two years ago. There is a positive correlation between margins and market share, and chances are when you start losing much of the latter, the other will follow suit.

As excerpted from "Is Tim Cook Cooked? Market Share vs Profit Margin, part 2 - Follow What I Do, Not What I Say!" 

... the financial metrics, over time and in handset companies, heavily favor market share over initial profit margin. As a matter of fact, I demonstrated that as market share decreases margins drop commensurately, or in other words "Quantity is quality in a fast moving, technologically dynamic market!"

In early 2010 I warned on Blackberry (then RIMM), with market share loss to Android being the prime determinant... . I put significant data out in the public domain to illustrate my point and put explicit price points out for subscribers, ie. RIM Smart Phone Market Share, RIP? Was I right?

Blackberry market share vs margin correlation analysis

The has been the case with IBM, Nokia, Dell, HTC, Apple, Blackberry, etc. Mr. Cook, take the advice of Mr. Jobs if you don't wish to follow Mr. Middleton. I actually do believe that Cook understands these dynamics and is just putting on a dog and pony show for the media but his corporate actions don't bear this out. I strongly suggest they start spending that $174B cash horde on something other than massaging hedge funds.

So, does Mr. Cook's lack of adherence to Steve Jobs wisdom portend a potentially uber-successful company misunderstood by the markets (meaning time to buy stock) or is this the beginning of the end of an iconic corporate era?

 See also I See A Game Changer Through Google Glass. You see, the smart phone market is naturally morphing into the contextual computing market, but some of the big boys simply don't know it yet. We might as well stop calling them phones.

I refer my subscribers to the research documents below for the answers... 

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!

See also:

What Sell Side Wall Street Doesn't Understand About Apple - It's Not The Leader Of The Post PC World!!!

 The short call - October 2012, the month of Apple's all-time high and my call to subscribers to short the stock:  Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All

Subscribers, see also... 

 
Last modified on Monday, 19 August 2013 10:04

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