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, and Google’s Android Market Share Explodes As It Expands Its Reach To Cars, Toys, Home Automation, Music & Movies – All In The Cloud Wednesday, May 11th, 2011 Verizon’s Earnings Confirm The Economic Impact of Android vs iPhone In Regards To Carrier Profitability Thursday, 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:
Summary: I called it the coming RE Depression in 2007! I put MY money where my mouth was and sold off all of my investment real estate. I put YOUR money where my mouth was and shorted all that had to do with real estate (REITs, banks, builders, insurers). I called almost every major bank collapse months in advance. I warned the .gov bubble blowing does not = organic economic recovery. Now I'm saying we need to, and will, continue what's left of the crash of 2009, with ample global company. There will be no RE recovery this year, and there will be a crash. OK, you heard it here!
First, let's go through the headlines for the day then proceed to breadcrumb trail that clearly led us to where we are now and where we will ultimately end (oh yeah, In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse Wednesday, February 23rd, 2011)
Commercial Real Estate
U.S. commercial property prices fell to a post-recession low in March as sales of financially distressed assets weighed on the market, according to Moody’s Investors Service.
The Moody’s/REAL Commercial Property Price Index dropped 4.2 percent from February and is now 47 percent below the peak of October 2007, Moody’s said in a statement today.
The national index has fallen for four straight months as sales of distressed properties hurt real estate values. Investor demand is strongest for well-leased buildings in such major markets as New York and Washington as vacancy rates decline and the economy grows.
The index “continues to bounce along the bottom as a large share of distressed transactions preclude a meaningful recovery of overall market prices,” Tad Philipp, Moody’s director of commercial real estate research, said in the statement. “Indeed, the post-peak low in price has been reached in the same period as a post-peak high in distressed transactions has been recorded.”
So-called trophy properties in New York, Washington, Boston, Chicago, Los Angeles and San Francisco are helping those markets avoid the drag caused by distressed asset sales nationwide, Moody’s reported. Prices of properties of $10 million or more have risen 23 percent since their July 2009 low, according to a separate report issued today.
No Recovery Signals
The overall index shows “no sign of recovery,” Moody’s said.
Almost a third of all March transactions measured by Moody’s were considered distressed, meaning the properties’ owners faced foreclosure, had difficulty covering their mortgage payments or experienced other financial problems. It was the largest proportion of distressed property sales in the history of the index, Moody’s said.
For all of those wondering how CRE can be doing so bad while REITs are doing so well, well I explained it in explicit detail several times in the past. Once we eliminate rampant fraud and bring back mark to market, all will be good again...
For all of those who felt I was too bearish on the Euro region in 2009 and 2010, thus far nearly every proclamation that I have made has come to light or shown a direct path to doing so. I believe I was unequivocally clear in my assertion that Greece will default at least a year or so ago (even if said default would be marketed by some other name for the sake of political expediency). I would consider this a must read for anyone in the mainstream media reporting on this topic, or any investor/stakeholder who may fear the Grecian domino effect, even if you feel you have seen some aspects of it before.
Well, now its time to call Greece out on its perversely circular reasoning being used to justify its alleged stance that it will not default. I read a humorously crafted ZeroHedge article this morning which immediately cause the following image to pop into mind...
For more on the origin of said circle, I first refer you to an article ran yesterday in Bloomberg:
Several BoomBustBloggers inquired as to my opinion of what apparently was an overpriced acquisition of Skype by Microsoft. At first blush, it appears as if the management of Microsoft has lost their mind. A second look (as well as access to our proprietary research) reveals a more interesting perspective. To make a long story short, Microsoft is trying to replicate Google's cloud services.
If you reference pages 29 to 36 in our the Google valuation report from 8 months back (63 pg Google Forensic Valuation - tutorial, [Google Final Report 10/08/2010 to download] to plug in your own assumptions see Google Valuation Model (pro and institutional), you will find the answer to why Microsoft is willing to pay $8.5B to buy Skype. Skype, like Google Voice which is tightly integrated into Android, will be folded into the mobile operating system to give full mobile VOIP capabilities that will most likely tie in with Microsoft’s server products ex. Exchange server for storing voicemail along email, voice recognition, transcription services, etc.) , just as Google purchased Grand Central (page 55 on, in the report) to turn it into Google Voice to move vast amount of profitable mobile telephony services out of the reach of telcos and totally to Google’s cloud – leaving only data services to the telcos. This is happening now, reference Sprint’s wholesale adoption of Google Voice by offering users to switch transform their Sprint numbers into GV numbers without breaking their contract. As excerpted from the afore-linked source:
Google was already a competitor
Communications services, especially voice services, are rightly seen as the last bastion of clear telecoms operator advantage over alternative means of offering such services, with the telephone number itself being the key enabler.
In many other areas, such as applications and content, telecoms providers are already losing out in terms of service usage and brand loyalty to aggressive, software-driven players such as Google and Apple. Verizon may previously have partnered with Skype for similar-looking services, but Skype is not Google; as an Internet voice specialist, Skype’s ability to impact the telecoms value system is nowhere near as profound as Google’s.
As such, Sprint’s inviting of Google into the telecoms inner sanctum, through this formal partnership to offer Google Voice, might therefore look something like throwing the baby out with the bath water.
But may prove a better friend than foe
So, what does this really mean?
Here's my latest with Max Keiser along the requisite related background opinion. Please scroll 13 minutes into this clip for my latest interview with Max Keiser discussing Goldman Sachs (remember, I was the first and original public Goldman Bear), the race to the bottom three (or the Triumvirate of super states looking to crash the other two), the banks as the "new tobacco companies" and the accuracy of my call that banks are choking on Bernanke's ZIRP flavored medicine...
You just don't hear this stuff in the mainstream, do 'ya?
Anybody who has been following me since 2006 knows me to be a real estate bear. I was massively bullish from 2000 to 2005, after which I started selling off my investment assets. No, it wasn't perfect timing, luck or a gift from God. It's called a spreadsheet. Simply do the math and the truth will be self-evident! The Wall Street Journal and Bloomberg ran articles earlier this week on the home market tumbling further in the US: Home Market Takes a Tumble - WSJ.com.
I warned thoroughly of this occurrence throughout last year and this - see The Latest Case Shiller Index – Housing Continues Freefall In Aggressive Search For Equilibrium Monday, February 7th, 2011. The .gov bubble blowing accomplished the mission of taking observers eyes off of the fundamentals and macro environment and back into optimism central. To Bloomberg TV's credit, they gave me the opportunity to call it like it is.
When I say that much of the EU is lying about their financial prospects and Greece (among other countries) will restructure or default, you may or may not listen (quite possibly to your detriment). When the ratings agencies (who are always accurate and timely) say restructuring is on the horizon (a year after me) and the head of the Euro-zone finance ministers finance ministers outright says 'Of course we're lying', then what do you do? There are rumblings and most likely a tacit agreement that Greece will get its emergency loan debt restructured. Reference:
- (Reuters/CNBC) S&P Cuts Greek Rating; Moody's Warns of Downgrade - ... Standard & Poor's slashed the nation's rating to B from BB-, while rival agency Moody's announced that it put Greece on review for a potential downgrade of its current B1 rating. "In our view, there is increased risk that Greece will take steps to restructure the terms of its commercial debt, including its previously-issued government bonds," S&P said in a statement, warning that more downgrades could come. It said its projections suggest that principal reductions of 50 percent or more could be needed to restore Greece's debt burden to a sustainable level. Greece, whose fiscal slippages triggered Europe's debt crisis, is rated junk by all three major rating agencies. [BoomBustBlog research considered Greece junk a year before all three ratings agencies took appropriate action.] Moody's placed Greece's B1 sovereign credit rating on review for a possible downgrade after the country revised upward its general deficit for 2010, increasing uncertainty about the sustainability of its deficit. Moody's said a multi-notch downgrade is possible if it concludes that Greece's debt metrics are on an unsustainable path. "In Moody's view, such conditions would materially increase the risk of debt restructuring over the short to medium term," the agency added. "Fitch rates Greece at BB+ with a negative outlook. The agency does not comment on market speculation," it said in a statement.
As one of the earliest proponents of Android's chances of taking over the smartphone space, I have received my fair share of doubts and criticisms. Fast forward a year or so into the future, and you will find evidence that Google may lock up the smartphone market within a year! Any who proclaim that Android is not making money must not be looking very hard at the numbers. Android is propelling its vendors sales, earnings and market share through the stratosphere while at the same time cementing Google's control over the fastest growing and largest computing segment in history. I am at a loss as to what is so difficult in seeing this. As you read through the tally's
Yesterday, I revisited the US employment vs inflation situation, which itself was an extension of my warnings on Employment and Real Estate Recovery. In the second post, I included the story from a BoomBustBlogger who was an investor of a large multi-family properties. As a BoomBustBlogger, he uses math to make decisions and the math simply doesn't pan out. Of course, due to .gov bubble blowing, unintended consequences often occur and this time around it is a bubble within a bubble burst in multi-family housing. The dilemma is, do you pull the trigger m/f investments that have increasing net effective rents even though we are almost certain to have higher interest rates (see Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate), more of a depression in housing (In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse), stagflation (Inflation + Deflation = Stagflation ~ Lower Real Estate Values!) and most importantly... obvious activity that is indicative of rampant speculation that goes against the fundamentals...
I will try to use math to address this conundrum in my next post as I'm running out, but realize that the recessionary (depressionary) pressures of s/f housing is not going anywhere soon. Let's look at the data taken from the February 11. 2011 HUD FHA Portfolio Analysis report:
A reader wrote me complaining about the nonsensical bubble blowing in multi-family properties before the last bubble was even finished bursting. I feel his pain. Let's run through a quick pictorial of how I see the macro climate for real estate as of right now...