AAPL - Apple Inc.

[racemize]

Come on Parsad, that MSFT one was a bit cheap--the P/E was crazy high at its peak!

But I would say MSFT is more of an annuity business than AAPL - at least until recently.  Namely, people bought desktops every 3 or so years and upgrade from Win3.1 --> 95 --> 2000 --> XP, etc.  Can't say the same would go on for as long period for AAPL.  For myself, I did buy iphone 4 and 4S, but would likely switch to another brand next time.

 

sure, but I don't think anyone would even be discussing Apple if it were at a P/E of 60 (or MSFT at that time).  Additionally, MSFT has actually performed very well from its peak, so it just doesn't seem that relevant. 

 

Speaking for myself, the competition will have to be significantly be better than iPhone to get me to switch, so I'm pretty much on a 2 year phone annuity...

[gokou3]

Speaking for myself, the competition will have to be significantly be better than iPhone to get me to switch, so I'm pretty much on a 2 year phone annuity...

 

Yes, I agree this would be the mentality for many iphone users.

 

There are a few billion people who has never had smartphone though.  Would they still consider buying one now?  Again, I still expect Apple to sell incrementally more iphones than 4S... before the trajectory is getting flatter... quickly.

[Guest valueInv]

Speaking for myself, the competition will have to be significantly be better than iPhone to get me to switch, so I'm pretty much on a 2 year phone annuity...

 

Yes, I agree this would be the mentality for many iphone users.

 

There are a few billion people who has never had smartphone though.  Would they still consider buying one now?  Again, I still expect Apple to sell incrementally more iphones than 4S... before the trajectory is getting flatter... quickly.

 

So, you think doubling of sales is incremental?

[Uccmal]

Apple is not expensive; the balance sheet backs the valuation. I just think at some point the valuation of the entire business is absurd. At todays valuation, let alone a market cap of 800 billion in two years, Apple is worth more than all the TBTF banks combined, the combined market cap of the airlines and railroads, or all the auto makers and Boeing.

 

800 billion for a company that essentially innovates the original iPod (a toy) every five years and incrementally adds to their innovation in the interim is absurd. I cannot bring myself to invest in Apple (though I like their products) because there is no way to project their earnings into the future. I don't see a clear moat other than their size. I'm positive an entrepreneur could build another Apple for 600 billion; furthermore, if everyones iDevice stopped working tomorrow, the world would continue to run without much of a hiccup.

 

Apple might continue at it's present trajectory and be worth 800 billion in a couple years. I don't trust the market to have enough sense to value this toy maker at a reasonable level in the next two years, and there is no way I would short it. I would guarantee Berkshire Hathaway with or without Buffett will be worth more than Apple in 2030, 2050, or 2100 so I will just buy BRK instead and let those who want to chase Apple chase it.

 

Very well articulated. 

 

RE: apple bears owning the products.  I can like Coke but be bearish on the stock.  I have never implied that Apple was going to go out of business or stop making decent products.  Their profits are going to normalize, and so is their stock price. 

[gokou3]

Speaking for myself, the competition will have to be significantly be better than iPhone to get me to switch, so I'm pretty much on a 2 year phone annuity...

 

Yes, I agree this would be the mentality for many iphone users.

 

There are a few billion people who has never had smartphone though.  Would they still consider buying one now?  Again, I still expect Apple to sell incrementally more iphones than 4S... before the trajectory is getting flatter... quickly.

 

So, you think doubling of sales is incremental?

 

I was referring to iphone 5 vs 4S worldwide sales.  Is it what you see doubling?  I doubt it is, and even if it is it is irrelevant because that's just a few days of sales.

[Guest valueInv]

Ironic,the Apple bears in this thread seem to buy Apple products themselves and think that other people will stop buying them.

 

BTW, the evidence seems to be pointing towards a GM decline ;)

http://www.intomobile.com/2012/09/17/iphone-5-flop-apple-doomed-oh-wait-its-most-successful-iphone-yet/

 

Remarkable...and they'll dominate for some time!  But remember this?

 

http://finance.yahoo.com/echarts?s=IBM+Interactive#symbol=ibm;range=19701106,19930215;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

 

How about this?

 

http://finance.yahoo.com/echarts?s=msft#symbol=msft;range=19950217,20030901;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

 

Lastly?

 

http://finance.yahoo.com/echarts?s=aapl#symbol=aapl;range=19840907,19971230;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

 

"Those Who Forget The Past, Are Doomed To Repeat It"

 

Cheers!

 

This is like trying to predict how the stock market will perform this year by looking at skirt lengths. Here's the funny thing with history:

 

  - History never repeats itself, but rhymes

  - No two versions of history agree with each other

 

Therein lies the problem with the bears - they're simply not willing to do an analysis of the business and instead quote analogous companies. Take your investment in Dell, I can point out 10 tech companies that failed turnarounds and you can point to 10 that did. Do you think that would meaningfully help you predict how Dell will turn out? This is what I call reasoning by analogues and I see people use it when they're not willing to do the analysis work.

 

Lets take this "GMs will decline since competitors have caught up" theory:

 

1, It does not explain Apple's past. GMs for products in the 2nd Steve Jobs era, GMs did not decline in a big way for iPods or Macs despite more feature-filled offerings  from competitors (Zune, etc)

2, It does not explain Apple's present. According to you guys, Samsung and other have equivalent or better devices currently or have already had them for a year. However, Apple's sales show signs of continuing to double. So guess what, Tim Cook has no reason to drop prices and impact GMs

 

So you have a theory that does not explain the past or the present. So what goes a logical person do? Use the theory to predict the future?

 

Uccamal predicted that Apple would stumble this year and would peak at $500-$600B. Well, Apple went on to one of the biggest patent wins in history and blew past the market cap limit within 6 months. Now, you would this that this would make one rethink or write it off as something one doesn't understand but no way. Instead, its like the ECRI recession call - "it'll happen soon". When Liberty presented with with facts about Apple's processor, I quickly admitted I was wrong and changed my position. Its like arguing with intelligent design proponents, the more facts you produce, the more they retrench and rationalize.

 

I don't see any depth of argument, an understanding of what drives Apple's sales or arguments supported by facts. Instead, I see vague, surface arguments (Steve Jobs is dead, Samsung has feature X or I don't like iPhones anymore) or cliches (no company can grow forever, they are bound to screw up, they have too much competition, they are too big).

 

Thats my problem with the bears- No analysis, no facts, no understanding, no conviction

 

 

[Guest valueInv]

Speaking for myself, the competition will have to be significantly be better than iPhone to get me to switch, so I'm pretty much on a 2 year phone annuity...

 

Yes, I agree this would be the mentality for many iphone users.

 

There are a few billion people who has never had smartphone though.  Would they still consider buying one now?  Again, I still expect Apple to sell incrementally more iphones than 4S... before the trajectory is getting flatter... quickly.

 

So, you think doubling of sales is incremental?

 

I was referring to iphone 5 vs 4S worldwide sales.  Is it what you see doubling?  I doubt it is, and even if it is it is irrelevant because that's just a few days of sales.

 

Have you seen the news?

[gokou3]

Speaking for myself, the competition will have to be significantly be better than iPhone to get me to switch, so I'm pretty much on a 2 year phone annuity...

 

Yes, I agree this would be the mentality for many iphone users.

 

There are a few billion people who has never had smartphone though.  Would they still consider buying one now?  Again, I still expect Apple to sell incrementally more iphones than 4S... before the trajectory is getting flatter... quickly.

 

So, you think doubling of sales is incremental?

 

I was referring to iphone 5 vs 4S worldwide sales.  Is it what you see doubling?  I doubt it is, and even if it is it is irrelevant because that's just a few days of sales.

 

Have you seen the news?

 

Enlighten me.  Like I said, I was making a call on the iphone 5 vs 4S sales, and there's no meaningful iphone 5 sales figures yet given it has only been available for pre-ordering for a few days.

 

In case you didn't catch it, I am not a AAPL bear.  I am just a non-bull who's commenting because I am interested in the cellphone industry.  And have I seen the news, you ask?  I am sure I have seen more cellphone-related news than most on this board.  You base your calls on the past and present.  I base mine on what I see going forward.  Btw, I didn't become *less optimistic* on Apple's prospect until recently, so it's not like I was calling on the demise of Apple when it put out iphone 3G.

[kevin4u2]

 

I don't see any depth of argument, an understanding of what drives Apple's sales or arguments supported by facts. Instead, I see vague, surface arguments (Steve Jobs is dead, Samsung has feature X or I don't like iPhones anymore) or cliches (no company can grow forever, they are bound to screw up, they have too much competition, they are too big).

 

Thats my problem with the bears- No analysis, no facts, no understanding, no conviction

 

As I mentioned before you appear quite biased toward the company, and that can be a dangerous in investing.  I don't know if any argument would be sufficient for you. 

 

You asked for some facts and analysis, so here are some

 

http://aswathdamodaran.blogspot.ca/2012/08/apples-crown-jewel-valuing-iphone.html

 

Let me quote part of the article.

 

Here is the larger point, though. About 55% of Apple's business value comes from its iPhone franchise and there are three pressure points that will test this value.

 

The first is Apple's capacity to maintain pricing power and earn its current margins; there isn't a competitor within shouting distance of Apple, when it comes to margins. If the after-tax margin drops to 15% from its current 21%, the value of the franchise drops to $219 billion (estimated value of $307 billion).

 

The second is that Apple will be able to prevent the life cycle from speeding up further and that it can continue to innovate at a reasonable cost (with this cost in conjunction with the loss in earnings during the second part of the cycle not exceeding 50% of the after-tax earnings during the period). Reducing the life cycle to one year from two almost halves the value of the franchise.

 

The third is that Apple is able to maintain a net positive switching ratio (more of the competitors' customers switch to Apple than vice versa), allowing it to increase in market share in dollar value terms. Assuming a neutral switching ratio (customers switching in = customers switching out), reduces the value of the franchise to $255 billion.  

 

And...

 

The question that investors face right now is whether Apple can continue its winning streak. The high valuations attached to the company assume that the company can keep doing what it is right now, that the iPhone 5 will not only launch successfully, but be followed by the iPad Mini and the iPhone 6 and so on. The risk that investors have to take into account when investing in Apple is that somewhere along the way, the winning streak may will be broken. Unlike other large market cap companies with long product life cycles or diversified product portfolios, Apple’s value rests on being a Phoenix, constantly reinventing itself every few years.

 

That last point is exactly why Buffett would never invest in Apple despite what you claim.  One would have to know the future in order to accurately value Apple. 

 

Buffett doesn't invest in these types of rapidly changing industries for a reason.  He prefers bubble gum, carpet, and bricks.  Demand for those items will be higher in the future, but what about the iphone?  Nobody knows.  Five years ago the iphone didn't even exist.  Change is the enemy of a value investor. 

 

I have maintained that much of the success of Apple is because of social metaphysics.  Sure they make good products, but many people buy them because they want to be percieved to be "cool" by their friends.  Many people derive their self worth based on what other's think of them.  This is the reason for the overwhelming success of Facebook and the endless nonsense posted on everyone's bragging board.  It's the reason why people wear brand names (and pay high prices), to be socially accepted by the group.  Nobody wants to be rejected by their peers.  So much of social interaction is based on these principles.  These are powerful psychological forces, but predicting and investing in them are very difficult.  However if you can ever get them to work in your favor, as Apple has, the results are huge. 

[ExpectedValue]

Who cares about whether or not Buffett would buy Apple. It's besides the point.

 

To be clear, I have no position in Apple, but it's a company I monitor with interest. I think it's important to stick with the facts, it seems like a lot of people have instinctive emotions driving their feelings towards Apple, when they really should just look at the company's numbers.

 

At its current price, Apple is not expensive, instead, it looks pretty cheap. The company trades at between 9-10x EV/EBIT, which for a company with Apple's growth thus far, is really really good.

 

There definitely is a law of large numbers issue, where its going to get harder and harder for Apple to grow and contribute materially as its size grows. But the market is not really pricing Apple for growth, it is priced like any other value stock (low price relative to cash flows).

 

A lot of you are harping on about the margins being so high. One of the reasons the company's margins are growing is a result of its fixed costs. So if you think margins have to compress, you will need volumes to decline or pricing to compress. On the first point, given that the smartphone market is competitive, it's possible this could happen. On the second point, I'm really not so sure. I'd argue that over the last 10 years or at least since 2003, Apple has really not played the game of being the lowest cost provider for anything. On their computers, tablets, mp3 players, phones, etc -- everything always goes after the premium segment. Apple seems pretty content with chasing profit-share not market-share and that's a really important distinction. I think it's highly unlikely that you'll see competitive pressures forcing Apple prices down.

 

Some of you seem to think growth in smartphones will run out. Maybe that's true, but I think there's still a pretty decent runway where you'll have penetration spreading to a lot of underserved markets. Increasingly, the smartphone market looks like an iOS/Android world, with a small sliver out there for Microsoft/NOK. You've also got embedded call options on things like TVs, etc.

 

What's interesting, what that "Hardware is Dead" article mentions, is the idea that brands are beginning to become important in consumer electronics. I think this is a point that might not be appreciated by a lot of folks on here, but is important to consider. I'm not saying it's going to happen, but if it does happen it can have pretty substantial implications. If consumer electronics shifts to a hardware + software + brand model, you could very well have margins continue to stay elevated.

 

[Uccmal]

Valueinv, I probably never should have attached a number to my thesis. 

 

The problem in your analysis is that you dont understand social psychology. 

You'll learn it one day the hard way.  People love something until they dont.  It happens very quickly and no one ever knows what the catalyst is going to be. 

 

I have no bet on Apple, either way, nor will I.  I have conviction that Apple is not going to get bigger forever, and that will bring the stock price down to earth.  Does one require a financial commitment to prove I have conviction. 

 

Shorting Apple is not on my radar when I can make vast amounts of returns much faster in beaten down banks and insurers. 

[finetrader]

This summer I told my friend, who love Apple's products, that I would short AAPL would the market cap reach 1000G$. Maybe I will have a chance to do so..

[Guest valueInv]

The problem in your analysis is that you dont understand social psychology. 

Hahahahah, you just love to jump to conclusions, don't you?  ;D ;D ;D

 

I have been studying social psychology long before I had even heard of value investing. In fact, I could completely deconstruct your posts based on social psychology alone. Ask yourself if you are ignoring hard facts presented in this and other threads and why?

 

Why do you think I am pushing for a bet of $5000 publicly on a forum on the Internet?  ;) 

[gokou3]

FWIW, a jailbreaker's POV on the iphone 5 / iOS 6:

 

http://thebigboss.org/ios-6-a-dud?utm_source=rss&utm_medium=rss&utm_campaign=ios-6-a-dud

 

Jailbreakers are among the most enthusiastic users of iphones.  It has been said that some new features (e.g. drag-down notifications; physical camera shutter button) are "inspired" by the jailbreaker community.

[Guest valueInv]

I don't know if any argument would be sufficient for you. 

Thanks you, I try to maintain high standards  ;)

 

You asked for some facts and analysis, so here are some

Thanks for posting, now we are getting into a more meaningful discussion.

 

 

 

Let me quote part of the article.

 

Let me add something interesting from the article:

 

I justified my decision to sell not on valuation (since I found the stock to be worth $700+) but on two counts. First, I argued that the company had become a momentum play and that the pricing process had lost its connection to the valuation process. Second, I also felt uncomfortable with the mix of dividend, growth and momentum stockholders, with differing expectations about the company and differing demands of it. Even though Apple’s stock price has gone up about 10% since I sold it, I have no regrets about selling. Since my original case for selling the shares was predicated on a fickle investor base with conflicting views, I believe that the stock price gyrations over the last six months supports that thesis. The stock price dropped as low as $530 and now risen to its high for the year without any dramatic news announcements for the most part driving the price (until the last week). My intrinsic valuation has not changed much in that period and remains over $700, with the updated numbers through the end of last quarter.

 

Need I offer a rebuttal on a forum for value investing? Which value investor do I need to quote on stocks being pieces of an enterprise? 

 

The first is Apple's capacity to maintain pricing power and earn its current margins; there isn't a competitor within shouting distance of Apple, when it comes to margins. If the after-tax margin drops to 15% from its current 21%, the value of the franchise drops to $219 billion (estimated value of $307 billion).

Firstly, there is an "if" like in "if Buffet made a series of blunders, the value of Berk will drop". Well, duh.  This is what I mean by depth of analysis. That "if" statement becomes meaningful only when you analyze why and how margins will drop (or are dropping). If you build an analysis on assumptions, you need to be able to handicap those assumptions.

 

For margins to drop, Apple has to have no moat. If Apple has no moat, how come it has had high margins on the iPhone for 5 years? How is iPhone pricing really structured to the end user?

 

Secondly, it assumes that turnover will not increase if margins decrease. The reality is pricing (and hence margin) is a knob that Tim Cook can turn to increase or decrease marketshare. They are clearly priced for profits and not marketshare. 

 

The second is that Apple will be able to prevent the life cycle from speeding up further and that it can continue to innovate at a reasonable cost (with this cost in conjunction with the loss in earnings during the second part of the cycle not exceeding 50% of the after-tax earnings during the period). Reducing the life cycle to one year from two almost halves the value of the franchise.

1, This ignores that fact that the life cycle is set by operator contract durations (2 years).

2, Apple's R&D expenses are 2% of revenues. It spends far less on R&D than most tech companies. The industrial design team at Apple is 15 people - Yup, 15 guys design all the physical aspects of all Apple products.

 

The third is that Apple is able to maintain a net positive switching ratio (more of the competitors' customers switch to Apple than vice versa), allowing it to increase in market share in dollar value terms. Assuming a neutral switching ratio (customers switching in = customers switching out), reduces the value of the franchise to $255 billion.

Another surface "if" statement. How about actually going into what the switching ratio will be? How about looking at satisfaction ratings? How is marketshare progressing in key countries like the US? How about looking at how many iPhones the operators sold in recent quarters?

 

 

And...

 

The question that investors face right now is whether Apple can continue its winning streak.

This is another "Apple needs to produce more hits" argument. First, the use of words like "hits", "winning streak",etc assumes that Apple is getting lucky and that its innovation are the fruits of random events and not skill or company culture or strategy or anything similar. The irony is that the same people who believe that Buffet produces better returns through skill think that Apple produces successful products through luck. I call it the efficient market theory of innovation.

 

How about actually analyzing whether Apple's organization has something different that allowed it to revolutionize PCs, phones and  tablets? How about analyzing if that is repeatable? How about comparing the way Apple operates to the way Samsung does? How are decisions made? What do the managers believe in? What are their biases? What resources can they deploy?

 

The risk that investors have to take into account when investing in Apple is that somewhere along the way, the winning streak may will be broken.

This establishes that there risk in Apple, not that it will fail or why GMs will decrease. As Buffet said, knowledge is the only antidote to risk. If this is the depth of his analysis, I agree, its too risky of a stock for him.

 

Another point, most companies have a lot more risk than people assume. How many people were pricing in a risk of a major oil spill at BP or unrest in China affecting Toyota?

 

Apple’s value rests on being a Phoenix, constantly reinventing itself every few years

If you focus on innovation, it follows that you will re-invent yourself. Most tech companies will have to re-invent themselves constantly. IBM did it, Google is doing it now and even Facebook is forced to do it. How about analyzing which companies have organizations that allow of more successful re-invention?

 

That last point is exactly why Buffett would never invest in Apple despite what you claim.

I never claimed Buffet would invest in Apple. In fact, I claim that Buffet is very unlikely to invest because of a concept he understands much better than the detractors - circle of competence.

 

If you want to invest in what Buffet invests in, buy Berk.

 

One would have to know the future in order to accurately value Apple.

Like one would have to know the future of the stock market to accurately value Berk?

 

Change is the enemy of a value investor. 

Well, as a value investor, I surely hope that the stock prices of my investments change from my purchase price. ;)

 

Sure they make good products, but many people buy them because they want to be percieved to be "cool" by their friends. 

I don't see a logical connection between the former and the latter. The former is a fact, the latter an assumption. Care to substantiate the assumption. Why does the possibility not exist that people buy products because they are good or that they're more familiar or that they identify with the brand or a 100 other reasons.

 

Many people derive their self worth based on what other's think of them.  This is the reason for the overwhelming success of Facebook and the endless nonsense posted on everyone's bragging board.

Same as above.

 

It's the reason why people wear brand names (and pay high prices), to be socially accepted by the group.  Nobody wants to be rejected by their peers.  So much of social interaction is based on these principles.  These are powerful psychological forces, but predicting and investing in them are very difficult.

I don't try to predict them and its a myth that Apple's success is based on it. Apple is not creating "fads". If they were, the iPhone's external design would be changing very fast. Instead, Apple found something that works and is sticking to it. The design process is not about trends, its about solving people's problems. Go through the list of features in the iPhone 5 and IOS 6 and ask yourself why they decided to include those features? Why is NFC left out when it is all the rage? Why are there "boring" features like FB integration or VIP lists in email? Why are they working on improving the audio of a phone call or the quality of their earphones instead of a kickstand? Why does the phone not have 20 hour battery life or a 5 inch screen? Why don't they go for flashy features like a stylus?

 

Once you start answering those questions and you'll see how the organization thinks and functions. Once you do that, work your way up to market, operations, brand and competitive position and finally, work your way up to the financials. Then you'll begin to understand Apple.

 

[Ross812]

 

For margins to drop, Apple has to have no moat. If Apple has no moat, how come it has had high margins on the iPhone for 5 years? How is iPhone pricing really structured to the end user?

 

 

Apple maintains high margins as a luxury item; not due to some sort of competitive advantage. I define a moat as how much money it would take to substantially affect a company's market share. Google spent 14 Billion on Android or 2-3% (Apples market cap) and now controls over 50% of the smart phone market. Please share where you see Apple's moat. I now see Apple trying to defend their products in court because other products are catching up. If Apple was so far out in front would they bother with law suits?

[rmitz]

 

For margins to drop, Apple has to have no moat. If Apple has no moat, how come it has had high margins on the iPhone for 5 years? How is iPhone pricing really structured to the end user?

 

 

Apple maintains high margins as a luxury item; not due to some sort of competitive advantage. I define a moat as how much money it would take to substantially affect a company's market share. Google spent 14 Billion on Android or 2-3% (Apples market cap) and now controls over 50% of the smart phone market. Please share where you see Apple's moat. I now see Apple trying to defend their products in court because other products are catching up. If Apple was so far out in front would they bother with law suits?

 

Yeah, they probably would.  Certainly Jobs set the tone there on this--I imagine a number of internal people really feel strongly about the topic.

[stahleyp]

Have you guys read the Jobs biography? I'm about a quarter of the way through and it is insane how much control and decision making he had with Apple, at least in the early days.

[FrankArabia]

sorry for the basic question but where do you get the statistic that google spent $14 billion on Android?

[DCG]

 

For margins to drop, Apple has to have no moat. If Apple has no moat, how come it has had high margins on the iPhone for 5 years? How is iPhone pricing really structured to the end user?

 

 

Apple maintains high margins as a luxury item; not due to some sort of competitive advantage. I define a moat as how much money it would take to substantially affect a company's market share. Google spent 14 Billion on Android or 2-3% (Apples market cap) and now controls over 50% of the smart phone market. Please share where you see Apple's moat. I now see Apple trying to defend their products in court because other products are catching up. If Apple was so far out in front would they bother with law suits?

 

-How can a company be a 'luxury item' without having a competitive advantage?

 

-Go compare Google's profits from Android with Apple's profits with iPhone.

 

-So just because a company is far out in front means they should be completely fine with other companies stealing from them?

[Guest valueInv]

sorry for the basic question but where do you get the statistic that google spent $14 billion on Android?

 

Motorola + other acquisitions. Somewhere in the ballpark

[Ross812]

sorry for the basic question but where do you get the statistic that google spent $14 billion on Android?

 

Motorola + other acquisitions. Somewhere in the ballpark

 

I read 14 billion in a Seeking Alpha article. Looking at the numbers myself I come up with:

 

-50 million for android OS in 2005

-30 million on the android desktop environment in 2010

-They made 11 other purchases related to android for undisclosed amounts - lets say 25 million each

-12.5 billion for Motorola

-800 million in R&D per year since 2005 ~5.6 billion

 

I added in the R&D costs and they are probably an over estimate for the early years.

 

18.5 Billion +/- 15% is my best guess

 

 

[FrankArabia]

thanks. was curious to see if you incorporated Motorola in your assessment.

[gokou3]

The second is that Apple will be able to prevent the life cycle from speeding up further and that it can continue to innovate at a reasonable cost (with this cost in conjunction with the loss in earnings during the second part of the cycle not exceeding 50% of the after-tax earnings during the period). Reducing the life cycle to one year from two almost halves the value of the franchise.

1, This ignores that fact that the life cycle is set by operator contract durations (2 years).

2, Apple's R&D expenses are 2% of revenues. It spends far less on R&D than most tech companies. The industrial design team at Apple is 15 people - Yup, 15 guys design all the physical aspects of all Apple products.

 

I don't agree with some of the points in your long post, but I think the above two stick out in particular:

 

1. If you are going to imply that operators have such great power to set renewal cycles and such, you won't like it to hear that now operators are telling their sales staff to persuade customers away from purchasing the iphone.  Why?  Because they don't make as much money on an iphone as other phones.  Operators want their margin too, and the competitions among the few operators in US (and Canada) are really not that fierce.  Why sell a phone where you make almost no money (based on various sources; talking about the phone hardware only, not monthly plan fees which are somewhat equal among smartphones) when you can sell another one which earns (say) an $100 extra?  In Canada, iphones are bought on 3-year (!) contracts, yet operators offer 2-year contracts on certain android phones - and sometimes those latter plans are cheaper too.  One thing that goes through many customers heads would be "oh should i be tied to a contract (and be stuck to the same phone) for 3 years?  The iphone X may be kick-ass now but by the third year it would be so outdated".  I wouldn't be surprised if US operators start offering 18-month contracts on android phones.

 

Here's the story (and of course AT&T denied it): http://www.gottabemobile.com/2012/08/01/att-telling-employees-not-to-sell-the-iphone/

 

2.  How is a low R&D expense % a good thing?  If they increase their R&D budget, perhaps they could have gotten out the iphone 5 last year and maintained the technology lead.  Yes, I am talking about "a list of specs" and skipping the "user experience / ecosystem" again, but both matter.

 

Btw, I read about the iphone 5 sales-doubling news.  This is really another example of "reality distortion field".  Not accusing the number is wrong, but it's manipulated to sound impressive -- I must admit Apple marketing is a genius at that.  There are a few contributing factors for the initial sales jump (over 4S): 1) Better and more distribution points this year.  New provider Sprint, and ability to online pre-order through carriers (in Canada; not sure about US). 2) First day availability in more countries, notably Hong Kong which is a proxy to the China market.  You can say, double is double.  True, but I maintain that this initial doubling of sales does not give an indication of its sales going forward.  In fact, it may be an indication of *some* sales drawn forward.

 

 

 

[gokou3]

-How can a company be a 'luxury item' without having a competitive advantage?

 

There's no direct correlation between luxury and competitive advantage.  It's just different marketing strategy / segmentation.  For example, Toyota has Toyota, Lexus, and Scion.  If luxury = competitive advantage, then Toyota would only sell Lexus.  Luxury sellers can have as fierce competition as the cheapo sellers.