Wednesday, 16 March 2011 11:55

Shorting Apple and Why Software Developers Can Make More Money On Android

I have finally started dabbling with Apple shorts and puts. My OTM S&P put positions were profitably stopped out due to trailings yesterday when the market recovered some of its losses. I have decided to use Apple in the place of the S&P puts for the time being. Medium to long term, the trade is more evident and obvious to anyone who is objective and follows BoomBustBlog. It is significantly more risky shorter term. Alas, there are marginal gains already, and once they accrue to the point of indemnifying my trailing stop, I will add more. After I finish the current leg of my global real estate research to be disseminated to institutions, I will offer tidbits of the modeling (I have already offered subscribers significant info on why I think Apple is a risky long play). From a contrarian standpoint, it may be safe to go short with tight stops, after all although Apple Gears Up To Combat The Margin Compression That Apparently Only It, Google & Reggie Middleton Sees Coming, we still have those guys over at West Street... I have taken Farther, Apple’s Closed System Risks Failure! Listen, everyone, regardless of what investment positions or tech products you may have in your stable, needs to ask themselves the appropriate "What if's". I have spurred the conversation with "Will Google Win The Mobile Computing War? Let’s Walk Through Where They Stand Now & How To Value Them"

Remember, I may not always be right, but it does pay to look at the track record...  Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? More attention should be paid to the little guy, after all by now it is Now Common Knowledge That Goldman’s Investment Advice Sucks! Didn't you get the memo? I'm sure many traders have spurned Apple due to the Japanese market being cut off right at the launch of the iPad 2, but the issues go deeper than that. I will cover it in depth at a later date, though.

Last Thursday I illustrated several software game developers who finally admitted that Android was a strategic part of their business from a financial perspective. One of the developers actually admitted that Android was much more profitable than iOS and has decided to put all of their advertising dollars into Android vs iOS - see One Reason Why Software Developers & Tech Firms Should Pay Close Attention To Research Boutiques Such As BoomBustBlog. There were many statements of disbelief from the software development community, and all I could say to myself was "Damn, the marketing prowess of Apple actually goes so far as to convince what would be  otherwise competent business people to literally deprive their businesses of revenue for the sake of the Apple company line". The Apple head of marketing made an appearance on Apple's Youtube channel, and that guy should be on the must have list for every Fortune 500 company and headhunter firm in existence. Given that all metrics from practically all metric measuring companies show Android not only ahead in market share but expanding the rate of the lead gain, I find it nigh unbelievable that Apple still engenders so much blind loyalty. See Comscore’s Latest Stats Show Android Wiping The Floor With Its Competition, Besting Apple & Everyone Else By Ever Greater Margins.

What this portends is a very rare and unique opportunity for the right entrepreneurial team to specialize in Android apps on a very large scale (Sony has already started with their Playstation line, see Sony Bites The Bullet & Joins The Android Camp, Adding Its Entire Suite of PSOne Games To The Android Platform - but their is definitely room for much more). Anyone who spends a lot of time looking at the numbers should see a remarkable opportunity here...

Both the rate of growth and the installed base of Android eclipses all of its competition by an increasingly large margin quarter after quarter, particularly as of two quarters ago. The real test of market share delta is OS penetration. Companies such as RIM are benefiting primarily from the rapid growth in the smart phone market, even though they are rapidly losing market share. This is a more tenuous situation than many realize because once the market growth slows down or reverses.... BAMMM!!! As you can see below, even with overly generous assumptions in terms of market penetration and pessimistic overall mobile OS market growth, Android is the platform to be on if you want to reach the most people. Android has handsets on the very high end, medium end and low end of the functionality curve and an entire army of tablets are coming out this quarter and next to bring Android where it never had presence before while simultaneously bring Apple's iOS some much needed (and very stiff) competition. See

In addition, Google is not nearly as draconian as Apple is once it comes to revenue sharing and ad design/control - at least not yet. Google's business model is based on high volume. Google also compensates retailers an vendors through revenue sharing which generates significant enticement, and explains Android's explosive growth. As excerpted from Comscore’s Latest Stats Show Android Wiping The Floor With Its Competition, Besting Apple & Everyone Else By Ever Greater Margins.

The reasons for Android’s ascendence are multi-fold, but the two primary factors and a tertiary factor that many may not believe – performance and capability. Yes, as capable as Android is, tech is not the reason for its success. It is the business model upon which it is predicated. Since Google is primarily a services and ad company, it can afford to give away such technology and wait patiently for contingent returns as the market eats at itself until margins are dropped to near zero. No other competitor (except for possible Microsoft, who had anti-trust issues and big company-I can’t get off my ass-itis) could have afforded such a long term, binary option strategy. Now Google, as did Microsoft in the ’90s, can benefit from both rampant growth in the market and destructively competitive margin cutting as it sits back and reaps the benefits of its longer term investment. This is one of the best attributes of this company – it invests strategically for the long term and ignores performance now for this quarter to please Wall Street fever. Youtube, Android, Admob and Grandcentral (Google Voice) purchases have positioned this company to do very well in the mobile space – which according to Steve Jobs is the new PC space. Here’s why Android has taken over the smartphone space and why it will quickly take over the tablet space as well.

    1. The Android OS replaces a deep and ongoing cost of research and development for hardware vendors with a null line that costs them close to nothing and probably has a negative costs since Google splits revenues with them.  Android also engages in revenue sharing with carriers. Which OS would you rather sell, iOS which charges you a participation fee as a carrier or Android which actually kicks back revenue? Which would you rather do as a vendor, dump money into an OS which has been getting beat up by iOS or outsource it at no cost to Google, and still benefit from a humongous app store and state of the art tech – all the while getting a cut of revenues? As you can see, there is a very legitimate reason why every major (and minor) carrier is carrying a whole portfolio of Android products. There is also no mystery as to why so many hardware vendors are jumping on the Android bandwagon -  particularly since so many carriers actually lost money selling iPhones despite high volumes.
    2. Android is progressing very, very, very quickly. It has development cycles that literally run circles around ALL of its competition. The major reason is because it is a popular open sourced product, hence benefits from literally hundreds of thousands of developers and coders adding to and perfecting its code base. No single, or even group of companies can compete with that. The result: A development year for Apple or RIM is akin to a development quarter for Android, and that’s being pessimistic.
    3. As a result of number two, the Android tech is now constantly cutting edge – no actually bleeding edge. Any distance that it has gained technically over Apple, Microsoft, Nokia and RIM will simply be exacerbated as more and more sources such as XDA and Nookdevs add features and ideas to the code base that are incorporated over (a very short) time or added unofficially through cooked ROMS and kernels which serve as proofs of concept for the next iteration.

Just imagine if Google offers to give retailers a slice of ad and service revenues in exchange for carry its products. Android everywhere. Instead of buying ad space they will simply purchase the retail space directly. This is the power of the Google model! This unique and powerful business model is taking its toll on market darling Apple (and to a much greater extent, RIM – but I will get to that in a later post), but that toll is invisible to many due to the extraordinary growth in the mobile computing market.

We have created a revenue model that empirically compares the revenue generation potential to a software developer on Android and on Apple - assuming equal efforts are applied on both platforms! The last phrase is key. The results should be obvious to most, but alas there are probably many who may find it hard to grasp...

As of the last two quarters, the Android would have thrown off significantly more cash than iOS for a given app. That is not all. The assumptions used to derive these figures were heavily, heavily in favor of iOS. While there may have been objective cause to tweak heavily in favor of iOS due to the ubiquity of the Apple App Store in the past in comparison to the nascent nature of the Android ecosystem, Android's Marketplace now has between 150,000 and 200,000 apps and is reportedly adding 50,000 apps per quarter. Adding that to the fact that Android has the world's largest installed base AND the largest growth rate in the industry and this should be a no-brainer. Alas, in order to err on the conservative side if to err at all, we tweaked heavily in favor of iOS.

The importance of these figures should be obvious to developers and other vendors in the space, but there is a larger meaning for consumers and investors as well. Once Google obtained the pole position in market share while maintaining the lead in growth as well, they have pretty much captured the winning flag in this battle. The question is - "Can they keep it?". You see, the depth and breadth of the app store and the uniqueness of the hardware/software combo of the iPhone/iPad is what gave Apple the insurmountable advantage that its competitors kept banging their heads against. Google has removed the bulk of that advantage through Android and its instant competitive eco-system model, all for free and open sourced.  If Apple iOS products cannot counter the cost advantages AND the technology gains over the next several quarters, expect them to fall considerably further behind Android. The nature of the competitive ecosystems leaves a distinct disadvantage to numbers 2,3 and 4 in the game, while flowering a big advantage to the number one player. Just ask Apple and all of those companies that tried to compete, pre-Android.

Below is a web-based version of the model used to create the charts above. Feel free to go through it. Practitioners and vendors in the space can gain full access to the model to modify and custom it, as well as access to all of the other models (ex. market share analysis for handset and OS vendors on both a quarterly and annual basis)at will by subscribing to the blog.

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Click here to read up on all of Reggie Middleton’s Mobile Computing War opinion, analysis, and research or follow my Mobile Computing War series here.

Other related reading:

If You Need More Proof Of Apple’s Inability To Keep Up With Google’s Android & Over 100 Other Android Hardware Vendors…

Last modified on Wednesday, 16 March 2011 12:34


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  • Comment Link gjk313 Wednesday, 16 March 2011 21:45 posted by gjk313

    This is another great analysis. Thank God someone actually has the gumption to be objective about AAPL. I always find it sickening how a lot of times I am reading news or watching news and the reporters specifically point out someones iphone rather than just call it a phone. Here is an example from an article in todays WSJ:

    "When the first wave hit, it lifted all the cars up and dragged them out," he said, before pulling out his iPhone to take photos of the sludge, stones and lumber the waves left as they retreated. "The waves kept coming until there were no more cars."

  • Comment Link frank Wednesday, 16 March 2011 19:52 posted by frank

    Good stuff but Apple has seduced far too many.

  • Comment Link Wolfie Wednesday, 16 March 2011 17:55 posted by Wolfie

    i meant broken Support, not Resistance...major oops!

  • Comment Link Reggie Middleton Wednesday, 16 March 2011 16:12 posted by Reggie Middleton

    Thank you very much sir.

  • Comment Link Wolfie Wednesday, 16 March 2011 15:58 posted by Wolfie

    Excellent, as usual. Call me a conspiracy nut, but its almost like you should always do the OPPOSITE of what the big boys tell you to do. Its almost like they allegedly want to dump positions on peons by asking others to buy when the biggies are selling. I saw it happen in 2008 where my sisters pension (United Federation of Teachers) had a ton of crappy positions while any 3 yr old could of spotted broken resistance.

    I do not trust big mutual funds, wall street big boys and "analysts" at these big companies. If these analysts were any good, wouldnt they trade on their own? Or at least build a book of business on their own? These major corps like to hire robots, GPA monsters who lack common sense, integrity and any rational thinking ability.

    Kudos to you, your mind and your great research!

  • Comment Link Reggie Middleton Wednesday, 16 March 2011 14:03 posted by Reggie Middleton

    Watch as the wave gains momentum. Just remember where you heard it first! From CNBC:
    Look outside.

    OK. Did you see any pigs flying?

    Hmm. Neither did we. Yet, one analyst has done the unthinkable.

    JMP Securities analyst Alex Guana downgraded Apple [AAPL 332.09 -13.34 (-3.86%) ] to 'market perform' from 'market outperform.' Guana said Hon Hai — Apple's largest manufacturing partner in China — has experienced sales-growth deceleration in recent months. Guana isn't sure why sales dropped off, but said Hon Hai's slowdown doesn't bode well for Apple.

    Apple has said it's seeking to use other manufacturers, which could explain a drop-off in Hon Hai's sales. But outside of Apple manufacturer Foxconn, Guana said other Chinese tech manufacturers are only slowing down. So if Apple is going to other manufacturers, he isn't sure who.

    Patty Edwards, chief investment officer at Trutina Financial, is somewhat concerned about Hon Hai not tracking well. Edwards said she doesn't know a lot about Chinese manufacturing, but if an analyst has enough conviction to issue Apple a downgrade, she thinks that's noteworthy. Given Hon Hai's slowdown and how disaster has struck Japan, she recommends caution in the tech space.

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