AAPL - Apple Inc.

[petec]

Edit: funnily enough what I *would* pay up for is a Windows 10 Phone with continuum and full Office ;)

 

It all comes down to the apps.

[abyli]

Edit: funnily enough what I *would* pay up for is a Windows 10 Phone with continuum and full Office ;)

 

It all comes down to the apps.

 

:-) It is obvious you do not understand Apple.

[Liberty]

Thanks for expanding on your thoughts, Petec. Obviously I disagree, but I appreciate you taking the time :)

 

I think one danger with consumer products is conflating something not being for you personally, and something not being differentiated and attractive to a segment of the market (ideally the premium segment where the profits are). It's not because a Porsche car or a Nike shoe doesn't appeal to me and I wouldn't pay up for it that it isn't something that people pick for reasons other than price (and with computers, there's a huge network effect that doesn't exist with shoes and cars).

 

For exemple, you mention PCs being commoditized. Well, the Mac has stayed differentiated, kept its margins, and has been gaining market share for over 15 years. Despite all other PC makers copying a lot of Apple's design cues and engineering decisions.

[petec]

Edit: funnily enough what I *would* pay up for is a Windows 10 Phone with continuum and full Office ;)

 

It all comes down to the apps.

 

:-) It is obvious you do not understand Apple.

 

Ha ha - maybe not.  That's exactly why I don't invest in it.  But at least I'm trying to make a helpful contribution to the debate.

[petec]

Thanks for expanding on your thoughts, Petec. Obviously I disagree, but I appreciate you taking the time :)

 

I think one danger with consumer products is conflating something not being for you personally, and something not being differentiated and attractive to a segment of the market (ideally the premium segment where the profits are). It's not because a Porsche car or a Nike shoe doesn't appeal to me and I wouldn't pay up for it that it isn't something that people pick for reasons other than price (and with computers, there's a huge network effect that doesn't exist with shoes and cars).

 

For exemple, you mention PCs being commoditized. Well, the Mac has stayed differentiated, kept its margins, and has been gaining market share for over 15 years. Despite all other PC makers copying a lot of Apple's design cues and engineering decisions.

 

I completely agree with this in principle and if I'm wrong, this will be why. 

 

I don't accept the Porsche analogy because Porsches are available to a tiny minority of the population so it's relatively easy to keep them aspirational.

 

The Nike analogy is closer and if Apple can remain the Nike of tech then I'm wrong to worry.

 

I am thinking out loud here but here's why I think it might be different.  High end apparel has a fairly unique set of characteristics in that you make small runs of differentiated items because people want to be associated with your brand but don't want to look the same.  That's why the market lends itself to fragmentation of producers and product lines, and high margins.  If you want the flash of red on a particular shoe, you'll pay a lot for it; and if you don't, you won't pay anything.  I think that's what drives the margins there, and iPhone doesn't work like that.  They're all the same, and I don't find it hard to imagine a world where the mood has shifted and people actively *don't* want to be associated with Apple.

 

Also, Nike isn't dependant on annual product relaunches where people search for what's better about the new product compared to the last one.  Everyone understands that this year's shoe is about as good as last year's shoe, so no-one is disappointed when it isn't better, and people buy it because they like that flash of red.

 

I prefer the Mac analogy.  What Apple have done with Mac is mighty impressive.  But they were up against a competitor that had its hands tied behind its back.  Trapped in the innovator's dilemma, it couldn't make its own hardware for fear of pissing off its hardware partners, so the hardware that carried its products varied from good to awful and often carried a lot of crapware.  Also, it kept putting out dogs like Vista and W8.  I can easily believe that the Android ecosystem is the Windows ecosystem of the smartphone world, if that makes sense.  But I think as of this summer Microsoft is *just starting* to be a better competitor to Mac and I will be interested to see what the next 15 years holds.

 

What are Mac margins compared to iPhone margins?

 

[giofranchi]

Pete,

I understand all you are saying and it is obviously the thesis of the bears.

But it all boils down to one single question imo: is the iPhone a commodity product, or is it a product people want at all costs? Until now it has been THE single product people want at all costs, and sincerely I don’t see what has changed.

I also agree what we’ll be able to do with our smartphones doesn’t matter much… if the iPhone were a commodity product. But if the iPhone is a product people want at all costs, the more things we will be able to do with the iPhone the longer new versions of the iPhone will be bought by already existing customers. Am I wrong?

In other words, we are used to paying 9x EPS for a commodity product, aren’t we? Therefore, those who say AAPL is expensive today think about the iPhone not only as a commodity product, but actually as a POOR commodity product…

 

Cheers,

 

Gio

 

[TheAiGuy]

 

I prefer the Mac analogy.  What Apple have done with Mac is mighty impressive.  But they were up against a competitor that had its hands tied behind its back.  Trapped in the innovator's dilemma, it couldn't make its own hardware for fear of pissing off its hardware partners, so the hardware that carried its products varied from good to awful and often carried a lot of crapware.  Also, it kept putting out dogs like Vista and W8.  I can easily believe that the Android ecosystem is the Windows ecosystem of the smartphone world, if that makes sense.  But I think as of this summer Microsoft is *just starting* to be a better competitor to Mac and I will be interested to see what the next 15 years holds.

 

What are Mac margins compared to iPhone margins?

 

They're lower, but Macs are more expensive in general so that makes more sense if you think of consumers as being dollar constrained, not margin constrained. Also, historically computers were very expensive and its very hard to charge a premium on a consumer good that is very expensive, regardless of how useful it is (think cars).

 

Phones, on the other hand, are cheep. Latest gen iPhones start at $650 and are subsidized with debt at around $20 a month. (That used to come with a $200 upfront payment, but that's going away) That's less that the cost of the cellphone data for many (most?) people. Its also less that other forms of diversion, like TV or books or restaurants. Overall, signing a contract for $20 a month (or $40 a month) is a lot easier than shelling out $1500 for a new computer. So, the argument is that consumers should be less price sensitive for lower priced goods.

 

As an empirical matter, iPhone ASP has gone up over the last year as volumes went up, meaning that there was at least some pricing power that Apple had to gain. Its an open question if there is more.

[Liberty]

For something to be premium, it doesn't necessarily have to be very scarce. Pixar movies being very popular and widely available doesn't make them less desirable. They are more desirable because they are considered the best at what they do by a large segment of the population, and if you substitute a Pixar/Disney movie for a cheaper alternative by a competing studio, a lot of people will notice and demand the real thing.

 

If you like what Apple does, you can only get it from Apple. And a lot of people like what Apple does. But the cheapest Android phone runs something very similar to the most expensive one, so it's not differentiated. You can compare multiple Android phones on price because they all give a very similar experience, but only Apple devices run iOS and related Apple software, and most of the user experience happens in software.

 

Apple's appeal hasn't been about exclusivity for a while, at least in most markets (there's still more of that in some EM).

 

If you want one of the best cars out there, you'll pay tens and tens of thousands of dollars more than for an average car. Most people can't afford that. If you want what many consider to be the best smartphone out there - and smartphones are the center of most people's lives now, no doubt providing huge value and enjoyment - you only pay a few hundreds more, maybe $10-20 more per month. That's a very good value proposition. Very easy to justify for many people.

[giofranchi]

The Nike analogy is closer and if Apple can remain the Nike of tech then I'm wrong to worry.

 

I am thinking out loud here but here's why I think it might be different.  High end apparel has a fairly unique set of characteristics in that you make small runs of differentiated items because people want to be associated with your brand but don't want to look the same.  That's why the market lends itself to fragmentation of producers and product lines, and high margins.  If you want the flash of red on a particular shoe, you'll pay a lot for it; and if you don't, you won't pay anything.  I think that's what drives the margins there, and iPhone doesn't work like that. 

 

The reason why the iPhone is not a commodity product might be different form the reason why a Nike pair of shoes is not a commodity product. But that doesn’t mean the comparison is useless. There are always reasons why people want a product at all costs, and the reasons are never exactly the same for two different products! For Nike it might be that flash of red… For the iPhone it might be Apple’s ecosystem… The result in the end is the same: both products are products people want at all costs.

 

They're all the same, and I don't find it hard to imagine a world where the mood has shifted and people actively *don't* want to be associated with Apple.

 

Then the iPhone will truly have become a commodity product… But why do you assume it will be so?

 

Cheers,

 

Gio

[giofranchi]

If you like what Apple does, you can only get it from Apple. And a lot of people like what Apple does. But the cheapest Android phone runs something very similar to the most expensive one, so it's not differentiated. You can compare multiple Android phones on price because they all give a very similar experience, but only Apple devices run iOS and related Apple software, and most of the user experience happens in software.

 

If you want one of the best cars out there, you'll pay tens and tens of thousands of dollars more than for an average car. Most people can't afford that. If you want what many consider to be the best smartphone out there - and smartphones are the center of most people's lives now, no doubt providing huge value and enjoyment - you only pay a few hundreds more, maybe $10-20 more per month. That's a very good value proposition. Very easy to justify for many people.

 

+1

 

Cheers,

 

Gio

[petec]

But if the iPhone is a product people want at all costs, the more things we will be able to do with the iPhone the longer new versions of the iPhone will be bought by already existing customers. Am I wrong?

In other words, we are used to paying 9x EPS for a commodity product, aren’t we? Therefore, those who say AAPL is expensive today think about the iPhone not only as a commodity product, but actually as a POOR commodity product…

 

Three thoughts (which I'm sure are not new):

 

1. The commoditisation has nothing to do with utility.  That's more or less common across platforms and improvements are driven more by software than hardware.  Commoditisation or premiumisation here is driven more by brand, I think.  That's great if it is sustainable and that is where the debate should focus.

 

2. If the new hardware isn't revolutionary, then replacement demand is driven more by old phones not working well.  My worry is that, if there is any brand damage and/or if there is a price war between other manufacturers, then the marginal Apple customer, when his old phone dies, chooses something else.  Drip, drip.

 

3. You're not paying 9x for a commodity product because if smartphones do turn out to be commoditised then either iPhone margins or volumes will collapse.  If that's the case then you're paying a massive multiple.  At 9x I see this as having a reasonable probability of a reasonable return, and a slightly-too-high probability of a bad return.  If that makes me a bear, so be it!

 

P

 

 

 

[petec]

Phones, on the other hand, are cheep. Latest gen iPhones start at $650 and are subsidized with debt at around $20 a month. (That used to come with a $200 upfront payment, but that's going away) That's less that the cost of the cellphone data for many (most?) people. Its also less that other forms of diversion, like TV or books or restaurants. Overall, signing a contract for $20 a month (or $40 a month) is a lot easier than shelling out $1500 for a new computer. So, the argument is that consumers should be less price sensitive for lower priced goods.

 

Agreed.  Interesting to see how that would play out in a normalised monetary environment, though!

 

[TheAiGuy]

Phones, on the other hand, are cheep. Latest gen iPhones start at $650 and are subsidized with debt at around $20 a month. (That used to come with a $200 upfront payment, but that's going away) That's less that the cost of the cellphone data for many (most?) people. Its also less that other forms of diversion, like TV or books or restaurants. Overall, signing a contract for $20 a month (or $40 a month) is a lot easier than shelling out $1500 for a new computer. So, the argument is that consumers should be less price sensitive for lower priced goods.

 

Agreed.  Interesting to see how that would play out in a normalised monetary environment, though!

 

So you think the access to capital is the thing driving the subsidized phone sales? I would be inclined to view it as competition between phone carriers, who look like they don't have pricing power and are less able to differentiate.

[Liberty]

Petec, smartphones are commoditized on the Android side. On that side, your arguments are right: They mostly compete on price and tech specs, it's a race to the bottom, which squeezes margins and reduces reinvestment opportunities. There's a deluge of models, lots of churn, it's hard for a brand to stand out and inspire loyalty over the long-term.

 

But at the high end of the market, they are not commoditized, you can't get iOS on anything else than Apple's products, and iOS is a huge part of the experience. As I said, it might not appeal to you, but it appeals to many people, especially when coupled with premium hardware. The customer satisfaction numbers that Tim Cook keeps talking about are a really important part of the story.

 

The crux of the matter is whether Apple can keep making a product/user experience that is more desirable than the competition. What the past 8 years have shown (in phones, and 15+ years in PCs) is that they can, and in fact the lead seems to have widened in the past year or two as competitors have stumbled and become even more directionless. Making premium consumer products simply isn't in the DNA of Google and Samsung. They're very good at other things, but they haven't cracked that, and it's a very difficult thing to do.

[intothebreach]

We are mixing up two things here: quality and perception. For any given company to be able to command premium pricing, it needs to offer premium products. Which only comes from some form of barrier to entry or effective differentiation in the eyes of the potential buyers.

 

While there are some barriers to entry (capital requirements and scale, among others), the number of competitors in the space demonstrate that the barriers to entry are not that formidable. So it comes down to differentiation where, once again, we have two options. A product can be better (in the broadest sense, see below) or it can be perceived as better. For instance, what "hardware" specs are really better in a Prada shirt or Louis Vuitton handbag versus more affordable ones? It this case, it's pricing and exclusivity that create the differentiation.

 

Apple it can be argued plays a bit on both aspects: aside from diamond-studded phones, it commands the premium pricing in the spaces it plays in but the crux of the argument comes down to quality. However, I would argue that it's not quality of the hardware or even the software, but of the overall experience, including the ecosystem, the service and, increasingly, the peace of mind that comes with their respect for their customers privacy and personal information. In a world where hacking and malware-apps are increasingly frequent, the walled garden offers tangible benefits.

 

As long as Apple can offer what is perceived by most sophisticated customers (in the sense of not being a newbie that buys whatever the carrier sales person is incentivized in pushing that day) to offer the best overall quality, it will continue to command a premium pricing versus alternatives. Newbies buy whatever, a sizeable proportion of Android users switch to Apple products, and Apple users predominantly upgrade to Apple products. The copycat strategy is by definition a laggard strategy, so it will take an innovator to have a credible threat, but that innovator will need to be good on many aspects, so while the barriers to entry may be low, the barriers to winning appear to me to become more challenging with time.

 

As Horace Dediu of Asymco puts it, maybe it's time to stop evaluating Apple as a seller of one-off products (à la Best Buy) and start looking at it at a formidable, entrenched player with an ever growing subscriber base.

 

What most people also seem to miss is that Apple is extremely disciplined in producing products that are able to sustain its profit margins. I suspect it even informs their product development roadmap.

 

Petec's comparison with traditional PC makers is interesting, but that is exactly the strategy that Samsung has followed: it has outsourced its operating system. The key difference is instead of paying for it, its users are through Google ads.

[petec]

 

If you like what Apple does, you can only get it from Apple. And a lot of people like what Apple does. But the cheapest Android phone runs something very similar to the most expensive one, so it's not differentiated. You can compare multiple Android phones on price because they all give a very similar experience, but only Apple devices run iOS and related Apple software, and most of the user experience happens in software.

 

If you want what many consider to be the best smartphone out there - and smartphones are the center of most people's lives now, no doubt providing huge value and enjoyment - you only pay a few hundreds more, maybe $10-20 more per month. That's a very good value proposition. Very easy to justify for many people.

 

This is irritatingly persuasive ;)  I don't see huge growth coming out of this argument, but that's not in the price.

 

What does stand out to me is the quality of Apple's software+hardware business model.  Windows and Android suggest to me it is impossible to be premium with third party hardware.  I'm really intrigued to see where Microsoft will be in 10 years' time with their own hardware.  But that's another issue.

[petec]

Phones, on the other hand, are cheep. Latest gen iPhones start at $650 and are subsidized with debt at around $20 a month. (That used to come with a $200 upfront payment, but that's going away) That's less that the cost of the cellphone data for many (most?) people. Its also less that other forms of diversion, like TV or books or restaurants. Overall, signing a contract for $20 a month (or $40 a month) is a lot easier than shelling out $1500 for a new computer. So, the argument is that consumers should be less price sensitive for lower priced goods.

 

Agreed.  Interesting to see how that would play out in a normalised monetary environment, though!

 

So you think the access to capital is the thing driving the subsidized phone sales? I would be inclined to view it as competition between phone carriers, who look like they don't have pricing power and are less able to differentiate.

 

It was a slightly facetious comment but yes, I think low rates have helped a lot of consumer product sales.  Anything funded by debt (as you put it) is a lot cheaper at the zero bound.  Those phone carriers might not be competing nearly so hard if money was harder to come by.  Or rather, they wouldn't be doing it by subsidising their customers' capex.

[Liberty]

This is irritatingly persuasive ;)  I don't see huge growth coming out of this argument, but that's not in the price.

 

What does stand out to me is the quality of Apple's software+hardware business model.  Windows and Android suggest to me it is impossible to be premium with third party hardware.  I'm really intrigued to see where Microsoft will be in 10 years' time with their own hardware.  But that's another issue.

 

How many people will join the middle class in China and India and Indonesia (etc) over the next 5-10 years? How many places are just starting to roll out 4G, making any phone much more useful? How many people will start leasing iPhones and upgrading every year rather than every 2-3 years? They're also growing quite fast in the enterprise, a lucrative market that they haven't historically tapped. Apple still has a relatively small market share in many places, even though it has a massive profit share, and the trend in Android switchers is promising. Heck, a very large portion of the installed base still hasn't upgraded to the 6 or 6S, and statistically, they probably won't switch to Android or stop using a smartphone, so they're coming...

 

I'm not saying we'll see massive growth everywhere, but I think there's still a good runway left. Mobile is ridiculously massive, and too many people are using old heuristics from the PC era to judge its size. And per-share value can do well if they keep buying back lots of stock at those low multiples.

 

I also think the Watch will eventually be big (not iPhone big, but significant). A few versions down the line when it has its own LTE radio, GPS, more health sensors, and maybe a few new killer apps (it takes a while for every platform to figure out what those are), many people will want those capabilities available at a glance. Pulling your phone out of your pocket 30 times a day will seem just as annoying as typing in a PIN rather than using a fingerprint sensor. And the Watch is uniquely positioned to become your primary way to interact with the digital-physical world (HomeKit smart devices and appliances, proximity ID to unlock doors, buy things, Apple TV, geo-based info around the city/stores/transit, etc).

 

Same with Apple TV. Over time, with a content deal (no doubt coming), it could be a pretty ubiquitous way for people to get content, play games, run a few apps in the living room, listen to music, show photos, etc... User experience and integration with other Apple device could make it premium. And if they upgrade the SoC every year or two, within a few years it'll catch up with game consoles for graphics (they're mostly on a 6-7 year cycle)...

[giofranchi]

3. You're not paying 9x for a commodity product because if smartphones do turn out to be commoditised then either iPhone margins or volumes will collapse.  If that's the case then you're paying a massive multiple.  At 9x I see this as having a reasonable probability of a reasonable return, and a slightly-too-high probability of a bad return.  If that makes me a bear, so be it!

 

Ok. You are right. So, here we should talk about two things:

1) Is the iPhone going to maintain its premium status? Will it still be a product people want at all costs?

2) Is there still room for volume growth?

 

Answers:

1) I think the whole Apple’s wherewithal is constantly focused on getting to a YES! All their efforts in both software and hardware and new products that constitute the Apple’s ecosystem are focused on keeping their users experience one step ahead of all the rest. Will they continue to be successful? No one can be sure… But, if you ask me, they seem to be very well positioned and to be doing all the right moves.

2) With China, India, Latin America, etc. getting richer and richer I still see lots of room for volume growth. It will be lumpy, of course… China and other EM might falter on their way to prosperity… But they will get there. That’s why to me volume growth seems much more predictable on a 10-15 year timeframe than in the next 2-3 years. What do you think I am missing here?

 

Cheers,

 

Gio

 

[petec]

And per-share value can do well if they keep buying back lots of stock at those low multiples.

 

 

Now here I do disagree.  I'd FAR rather have the cash as a dividend.  But that's because I don't have the same confidence that the company's intrinsic value is sustainable.

 

 

[giofranchi]

The crux of the matter is whether Apple can keep making a product/user experience that is more desirable than the competition. What the past 8 years have shown (in phones, and 15+ years in PCs) is that they can, and in fact the lead seems to have widened in the past year or two as competitors have stumbled and become even more directionless. Making premium consumer products simply isn't in the DNA of Google and Samsung. They're very good at other things, but they haven't cracked that, and it's a very difficult thing to do.

 

I agree. As I have said, no one can be sure. But it seems Apple's moat is widening, not shrinking.

 

Cheers,

 

Gio

[petec]

Thanks all for the discussion.  I'm about 50% persuaded that my commoditisation concerns apply to Android only and will, if I find the time, do more work here.

 

Unlikely to sell my MSFT to fund it though ;)

[Liberty]

And per-share value can do well if they keep buying back lots of stock at those low multiples.

 

 

Now here I do disagree.  I'd FAR rather have the cash as a dividend.  But that's because I don't have the same confidence that the company's intrinsic value is sustainable.

 

You could sell a percentage of your shares equal to the buybacks every year. You'd probably get a better tax treatment. I know it's not exactly the same, but in theory it works. But they also have a decent dividend that has gone up pretty quickly.

 

I don't know if you've read this thread (probably not worth going back to the start..), but a few months ago I wrote some thoughts about what I see as the barriers to entry for competitors to Apple. You can take that how you want, but I believe it's at the center of deciding whether Apple's position is sustainable or not.

[Liberty]

Apple's chip-design capabilities are getting ridiculous. Here's a paragraph from John Gruber's review of the iPad Pro:

 

The iPad Pro is without question faster than the new one-port MacBook or the latest MacBook Airs. I’ve looked at several of my favorite benchmarks — Geekbench 3, Mozilla’s Kraken, and Google’s Octane 2 — and the iPad Pro is a race car. It’s only a hair slower than my year-old 13-inch MacBook Pro in single-core measurements. Graphics-wise, testing with GFXBench, it blows my MacBook Pro away. A one-year-old maxed-out MacBook Pro, rivaled by an iPad in performance benchmarks. Just think about that. According to Geekbench’s online results, the iPad Pro is faster in single-core testing than Microsoft’s new Surface Pro 4 with a Core-i5 processor. The Core-i7 version of the Surface Pro 4 isn’t shipping until December — that model will almost certainly test faster than the iPad Pro. But that’s a $1599 machine with an Intel x86 CPU. The iPad Pro starts at $799 and runs an ARM CPU — Apple’s A9X. There is no more trade-off. You don’t have to choose between the performance of x86 and the battery life of ARM. [...]

 

The entire x86 computer architecture is living on borrowed time. It’s a dead platform walking. The future belongs to ARM, and Apple’s A-series SoC’s are leading the way.

 

The A9X didn’t come out of nowhere. Watching Apple’s A-series chips gain on x86 over the past five years, we’ve all been speculating about whether Apple might someday start using ARM chips in MacBooks. As of now, it’s only a question of whether they want to.

 

http://daringfireball.net/2015/11/the_ipad_pro

[fareastwarriors]

Apple, Banks in Talks on Mobile Person-to-Person Payment Service Like Venmo

 

Service would be rival to PayPal’s Venmo platform, could launch in 2016

 

 

http://www.wsj.com/articles/apple-in-talks-with-u-s-banks-to-develop-mobile-person-to-person-payment-service-1447274074