Tuesday, November 6, 2012

The Apple is Ripe

The Apple is Ripe

The Challenge

An executive reshuffle recently took place at Apple's Cupertino offices, let me suggest that there is more work in addressing Apple's present challenges, if you could call the company challenged. Today, in some products Apple is charging 30 to 70% above the competitive price of comparable products while as of recent, it has been unable to out-innovate the competition. In the absence of innovation, market share will soon suffer.

Apple's fast followers

Amazon, Google and Microsoft have this year all copied Apple's vertical integration and way of designing products. Therefore, whatever magic market disruption Apple comes up with in the future, these companies are ready to follow suit quickly. It took Android three years to catch up with the iPhone, 2.5 years for the iPad, and replicating Apple's next magic product is likely done in less than two years. This means a shorter time for Apple to charge a premium while maintaining market share.

The Mobile Service Situation of 2013

Apple introduced the product of the last decade, the iPhone, in 2007, followed by the product of the first half of this decade, the iPad, in 2010. The iPhone, providing half of Apple's revenues, has been an extremely profitable franchise based on the premise that most of the iPhone price is covered by a mobile service provider, with consumers paying a higher price for two years' service. The iPhone revenue model is threatened in 2013: there is reputable competition providing phones for $130 rather than Apple's $650, and service can be obtained for $30 per month rather than $80 on contract. To an American consumer , this means $680 less cost per year for mobile service other than the latest iPhone. Apple so far started selling it's two-year-old iPhone model for $200 (54% above competition), but the market price will go lower.

Are there consumers that would want to save $680 or 50% per year for comparable mobile service?
I believe there are plenty.

On a side note, in world wide markets where subsidies are not prevalent, the iPhone market share is in many cases below 10%. To Apple this means a further reduced market share as smart phones becomes commonplace in additional countries unless there is a change in strategy.

What's Next for Apple?

Apple is an electronics hardware company. If you look around the electronics in your life, where Apple isn't already, it's not going to be appliances or stereo equipment, why the prevailing speculation is TV. TV fits the bill price and product wise and there is innovation to be made in how remote content reaches consumers. However, to make money like the iPhone, Apple would need something like a $1,500 device with a $20 monthly Apple-charge to go with it. That sounds unlikely to happen.

There are perhaps too many tablets but surely too few phones in the product mix. With iPad 4 up-to-date, aspects are hurting for innovation: iOS, new accessories, Apple tv integration. And beyond the iPad and the iPhone, there are lots of products to retire.

Here's the problem

Whatever Apple does, it's not going to be as profitable as the iPhone. And the iPhone itself, while perhaps capable of generating as much absolute yearly revenue as today, is likely to lose relative market share the next few years. We're left with an insanely profitable company that does not have the world's highest market capitalization. I am not going to predict a stock price, though current one-year estimates look high.

One more thing for Cupertino:
for Apple to win, Android doesn't have to lose.

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