AAPL - Apple Inc.

[Liberty]

 

Those are great analogies and it's a very valid point.  I think Apple will be around with premium products for years.  The difference in my mind is that Apple is like 40% of the market in the US (much higher by $ amt).  None of the products above is beyond a high end niche market.  Will Apple still be able to command the premium AND the market share when the other products are close to catching up.

 

That's a very good question. The main difference I'm seeing between what Apple does and cars, shoes, watches, etc, is that with those there's not really a strong network effect that acts as a barrier to new entrants (just one example: nowadays the price just to sit at the mobile computing  table is an app store with thousands and thousands of apps -- it's unlikely there's ever going to be a third successful app store out there), and making top notch computing devices (hardware + software + services) is much much harder than almost anything else. Add a strong fashion/industrial design element, and almost nobody is even qualified to compete.

[LC]

That's a good question and central to the investment. I think they will. I was a PC user in the 90s/early 2000s. I didn't get why people bought Macs.

 

Eventually I got an iPod and iPhone. And now I see te difference: they provide the most intuitive interface between people and electronic devices. Apple products are seamless to navigate and respond well to human direction.

 

My long term thesis is that (1) people will be using more electronic devices in 5-10 years and probably beyond, and (2) Apple creates the most intuitive electronic devices to interact with.

 

For these reasons I think they will retain a high and probably growing level of profitability. If either of those 2 points changes, my investment case changes as well.

[innerscorecard]

WB's line about going across the street to buy a Hershey's bar or whatever brand it was is coming to mind here.

 

IMHO Apple users continue to buy apple products. Android users have no problem flipping over to different manufacturers. HTC one day, Samsung the next, etc. etc.

 

On one side you have a commodity product. It earns commodity like returns, competes purely on price and technical specifications. On the other side you have a differentiated product with decades of brand loyalty which earns outsized returns.

 

Which business would you rather own?

 

It's quite simple. And yet some people say over and over again that because the majority of the industry is commoditized, there is no room at all for a premium product. This is clearly not true as shown by the actual real world, as opposed to some abstract theory about how the consumer electronics market should look like.

[innerscorecard]

Those with real taste can actually tell the difference between quality and branding/marketing.

 

Absolutely. That's why Apple is so successful despite Samsung massively outspending them for years in marketing and sales incentives. That's why Apple could enter new markets where they had no presence, against entrenched incumbents, and win; because people saw the quality of their products and designs. How do you win against RIM, Nokia, Motorola, etc, when you've never made a phone before? How do you beat all the other digital music players when you're so late to the game? Tablets have been around for 15 years, how do you get people to buy yours when others have failed? Certainly not just marketing...

 

I don't understand why you think there's such a thing as "good enough" in consumer products. Did BMW, Porsche and Mercedes get killed by "good enough" Honda Accords? (a modern Accord is no doubt better than a Mercedes from the 80s, if not the 90s). Why didn't Nike get killed by cheap Walmart shoes? Why are high-end watchmakers still around when you can buy a cheap watch that does the job just fine? Why are premium headphone makers still around when you can get a fine pair pretty cheap nowadays? How about that high-end furniture? Viking appliances?

 

That's the thing. Some people just won't notice things like the scroll lag on even the most high-end Android phones. (To pick a non-hardware advantage.) If you literally can't notice something like that - a problem which *could* have been fixed, but simply hasn't, even after all these iterations of Android - then you can't talk in a meaningful way about how the products are or aren't commoditized. The thing is, actual consumers do notice these things. And they matter a lot more than "feeds and speeds," which is what those who advocate the commoditization theory inevitability end up returning to.

[dwy000]

It will be really interesting when the Watch comes out.  That will (in my mind) really test the theory because unlike a smart phone, the watch is truly a premium product because it's a "nice to have" not a "need to have".  And it's priced high but not ridiculous.  So how many people beyond the die hard Apple fans and cutting edge techies will adopt it?

 

Similarly, Apple TV is one of the few Apple products that a) is not ahead of the competition;  b) doesn't get any benefits from a cool design;  c) isn't a status symbol at all since it's hidden under the TV.  And that's a product where they've struggled to get broad adoption.

 

Of course, to Liberty's point, you can't underestimate the network behind the products.

[innerscorecard]

Those with real taste can actually tell the difference between quality and branding/marketing.

 

Absolutely. That's why Apple is so successful despite Samsung massively outspending them for years in marketing and sales incentives. That's why Apple could enter new markets where they had no presence, against entrenched incumbents, and win; because people saw the quality of their products and designs. How do you win against RIM, Nokia, Motorola, etc, when you've never made a phone before? How do you beat all the other digital music players when you're so late to the game? Tablets have been around for 15 years, how do you get people to buy yours when others have failed? Certainly not just marketing...

 

I don't understand why you think there's such a thing as "good enough" in consumer products. Did BMW, Porsche and Mercedes get killed by "good enough" Honda Accords? (a modern Accord is no doubt better than a Mercedes from the 80s, if not the 90s). Why didn't Nike get killed by cheap Walmart shoes? Why are high-end watchmakers still around when you can buy a cheap watch that does the job just fine? Why are premium headphone makers still around when you can get a fine pair pretty cheap nowadays? How about that high-end furniture? Viking appliances?

 

Those are great analogies and it's a very valid point.  I think Apple will be around with premium products for years.  The difference in my mind is that Apple is like 40% of the market in the US (much higher by $ amt).  None of the products above is beyond a high end niche market.  Will Apple still be able to command the premium AND the market share when the other products are close to catching up.

 

My argument is even simpler than Liberty's and LC's.

 

It's that no products are closer to catching up and I don't see anyone catching up at all. It's very hard to make true premium consumer hardware in the phone space, and there really isn't anyone else doing it right now. That's because there are no other companies that control all three of the hardware, software, and services. Apple's most threatening competitors (Microsoft, Google, Samsung, Amazon) have all tried and failed to beat Apple at it's own game.

 

It's like my answer to what someone would say if they say that both insurance and investing is a commodity business, so Berkshire Hathaway is doomed to commoditization.

 

(That's NOT to say that Android is a "failure" or that Android phones aren't good at what they do!)

[innerscorecard]

It will be really interesting when the Watch comes out.  That will (in my mind) really test the theory because unlike a smart phone, the watch is truly a premium product because it's a "nice to have" not a "need to have".  And it's priced high but not ridiculous.  So how many people beyond the die hard Apple fans and cutting edge techies will adopt it?

 

Similarly, Apple TV is one of the few Apple products that a) is not ahead of the competition;  b) doesn't get any benefits from a cool design;  c) isn't a status symbol at all since it's hidden under the TV.  And that's a product where they've struggled to get broad adoption.

 

Of course, to Liberty's point, you can't underestimate the network behind the products.

 

I agree. That's why I really do think the Apple Watch is "historic" for Apple.

 

But also, I do think the Apple Watch will be seen as having a "ridiculous" price after it comes out, and the actual prices for the bands and the higher-end versions come out. It was hilarious seeing some on tech sites complain even about the $349 price! And many more said that they couldn't see how people would pay thousands for expiring technology.

 

I see people on WeChat bragging about their new iPhone Pluses, which they must have paid several times the retail price to get before the China launch. Some people don't give a shit about "wasting" money. Quite the opposite. The fact that you are willing to burn money on getting the iPhone a week before everyone else, or buy a gold Apple Watch (that will be obsoleted by the Apple Watch 2 in one year) shows that you have money to burn. Not everyone is a frugal value-optimizing engineer.

[LC]

Even better is that all the loonies paying thousands just add to the social status of the brand.

[RichardGibbons]

I got an iPhone 6 today after previously using a 4s.  My completely meaningless anecdotes: my son picked it up, looked at it, and said, "Ha!  Apple's totally copying Samsung!"

 

So far, my experience has been poor -- lots of challenges moving stuff from the old iPhone, and it still doesn't want to actually download anything from the App Store on the phone itself (though iTunes seems to work, sometimes.) 

[dwy000]

Richard - what made you choose the iPhone 6?  Did you look around at other phones or just go straight for that because you were already on apple?

[txlaw]

Those with real taste can actually tell the difference between quality and branding/marketing.

 

Absolutely. That's why Apple is so successful despite Samsung massively outspending them for years in marketing and sales incentives. That's why Apple could enter new markets where they had no presence, against entrenched incumbents, and win; because people saw the quality of their products and designs. How do you win against RIM, Nokia, Motorola, etc, when you've never made a phone before? How do you beat all the other digital music players when you're so late to the game? Tablets have been around for 15 years, how do you get people to buy yours when others have failed? Certainly not just marketing...

 

The reason why Apple succeeded with MP3 players, phones, and tablets is because they executed very, very well (they are a great design company) at the exact right time. 

 

The digitization of media and the rise of the Internet provided the waves for Steve Jobs to catch:

 

These waves of technology, you can see them way before they happen, and you just have to choose wisely which ones you're going to surf. If you choose unwisely, then you can waste a lot of energy, but if you choose wisely it actually unfolds fairly slowly.

 

But this has nothing to do with whether the "close in innovation gap" is real and whether deniers are simply blinded because of a reality distortion field of Apple's -- and their own -- making.

 

I don't understand why you think there's such a thing as "good enough" in consumer products. Did BMW, Porsche and Mercedes get killed by "good enough" Honda Accords? (a modern Accord is no doubt better than a Mercedes from the 80s, if not the 90s). Why didn't Nike get killed by cheap Walmart shoes? Why are high-end watchmakers still around when you can buy a cheap watch that does the job just fine? Why are premium headphone makers still around when you can get a fine pair pretty cheap nowadays? How about that high-end furniture? Viking appliances?

 

We've had this discussion several times before. Here is just one example of me explaining my views: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/aapl-apple-inc/msg175296/?topicseen#msg175296 .  You’ve even made the Honda Accord vs. Mercedes and Nike analogies before.

 

So this feels a bit like Groundhog Day.  Perhaps I'm Bill Murray the a-hole, and I just need to agree with you guys and let the Apple love wash over me to move forward.

 

----

 

When I say that "good enough" occurs in consumer products, I do not mean that the "high end" product necessarily becomes undifferentiated from the "low end" products -- i.e., that there is no discernible difference between a high end and low end product -- or that the "high end" product provider gets killed.

 

Let me repeat this once again: In no shape or form am I arguing that the "high end" goes away.

 

(I have to repeat that every time I talk about “commoditization" because people who disagree tend to mischaracterize the nature of the argument.  See multiple posts above.)

 

To me, "commoditization" occurs when a product category evolves to the point where you start to get "good enough" products.  When commoditization occurs, price starts to become a major factor in purchasing decisions, and sales can get pulled away from the "high end" based on pricing.  Indeed, the very notion of a "high end" implies that there is a large percentage of products that are "good enough."  (How can you have a "high end" where the majority of sales are in the high end?  It's nonsensical.)  Plenty of consumer products are examples of commoditization -- toasters, refrigerators, TVs, PCs, etc.  All of those product categories continue to have a "high end."  But the profit pool for these categories has changed dramatically in nature.

 

So the argument is not that Apple goes away or that they don't provide "high end" products.  It's that “commoditization" will affect both the size of the profit pool that can be captured on an annual basis and Apple's run rate for profit pool capture going forward. 

 

This argument is about assessing valuation, not execution.  At a $300 billion market cap, for example, I would absolutely be buying AAPL stock hand over fist.  Because it is unquestionably a fantastic company and there is a lot of absolute value there.  I fully expect, though, that Apple fanboys will continue to mischaracterize my argument as being, “Apple has fallen off these days, so they’re doomed.”  C'est la vie.

 

 

[Liberty]

There's a big difference between products that people don't give much of a crap about and products that are more personal. DVD players, microwaves, dishwashers... Sure some people care, there's a high end, but most people couldn't be bothered.

 

But almost everybody cares about cars and they'll never commoditize the way you speak of. And people care even more about smartphones because their whole life is on them and it's a very personal thing that everybody sees.

[txlaw]

There's a big difference between products that people don't give much of a crap about and products that are more personal. DVD players, microwaves, dishwashers... Sure some people care, there's a high end, but most people couldn't be bothered.

 

But almost everybody cares about cars and they'll never commoditize the way you speak of. And people care even more about smartphones because their whole life is on them and it's a very personal thing that everybody sees.

 

It depends on what you mean by not giving a crap about something.

 

Refrigerators and air conditioners are very important consumer products, if not "personal."  They are appliances that most people either have or want.  Yet the margins on these products are low despite the immense value they provide to people because, while most people really need/want them, they are appliances and not as "personal."

 

To me, the smart phone is one of the most important appliances of the Information Age because it gives access to powerful software and Internet connectivity, among other things.  But the software and services that run on top of smart phones is where the real value is at over time.  Therefore, it is my view that the actual hardware -- and even the OS on top -- will become appliance-like over time, with much lower margins than what we see now.  Because people won't care so much about the device or the OS as much as the multitude of software and services we get access to because of that appliance.

 

If you want to extend the TV analogy, for example, we pay really nice margins for TV content, but we don't want to pay high margins for the TV itself.

 

Cars, IMO, are already commoditized.  Even one of the most differentiated "high end" brands of them all, Ferrari, only makes 15% operating margins.

[Palantir]

Liberty keeps saying the same stuff over and over again. Yes, we get it, there is always going to be a high end version of every consumer product, we know...

 

 

The question is always, how big is it going to be? If Android starts doing a great job and convincing people to buy Android, then Apple's marketshare and profitshare will shrink. I do not expect this to happen because I don't think Google really cares all that much about Android, and is happy to let Apple have the high end, but that's another story.

 

Furthermore, you guys have to remember is that the key here is that Apple's products have a very short useful life, and Apple does not support them for very long, this is not like MS supporting XP for over a decade. Once you buy an iPhone, it becomes outdated in 2-3 years, and you can accelerate this by making the next OS more complicated, so your poor old iPhone 4S looks slow, end result is, Apple can keep selling these products.

[innerscorecard]

There's a big difference between products that people don't give much of a crap about and products that are more personal. DVD players, microwaves, dishwashers... Sure some people care, there's a high end, but most people couldn't be bothered.

 

But almost everybody cares about cars and they'll never commoditize the way you speak of. And people care even more about smartphones because their whole life is on them and it's a very personal thing that everybody sees.

 

It depends on what you mean by not giving a crap about something.

 

Refrigerators and air conditioners are very important consumer products, if not "personal."  They are appliances that most people either have or want.  Yet the margins on these products are low despite the immense value they provide to people because, while most people really need/want them, they are appliances and not as "personal."

 

To me, the smart phone is one of the most important appliances of the Information Age because it gives access to powerful software and Internet connectivity, among other things.  But the software and services that run on top of smart phones is where the real value is at over time.  Therefore, it is my view that the actual hardware -- and even the OS on top -- will become appliance-like over time, with much lower margins than what we see now.  Because people won't care so much about the device or the OS as much as the multitude of software and services we get access to because of that appliance.

 

If you want to extend the TV analogy, for example, we pay really nice margins for TV content, but we don't want to pay high margins for the TV itself.

 

Cars, IMO, are already commoditized.  Even one of the most differentiated "high end" brands of them all, Ferrari, only makes 15% operating margins.

 

That (smartphones are undifferentiated dumb glass)  is one vision of smartphones - Google's. It's not an inevitable fate for the market as a whole.

[innerscorecard]

Txlaw, I agree with your definition of commoditization as described above. I think the market does too. That's why Apple's declining margins were such a concern in 2013. But reality has shown both that the high end market is large and sustainable, and that not only do people not really move from Apple to Android (of course some do) but rather the reverse. It's just that so many new to smartphones get there on Android.

[RichardGibbons]

Richard - what made you choose the iPhone 6?  Did you look around at other phones or just go straight for that because you were already on apple?

 

I spent almost no time looking around.  My wife has a Samsung, and I think all things being equal, I would have marginally preferred to get an Android device (largely because a) I think Apple sucks at software, b) historically for me, they don't do really core things well like transferring contacts, c) they seem to make decisions that screw their customers to make money themselves, and because, c) in an effort to make things easy, they tie your hands, which makes stuff hard.)  On the other side of the scale was the apps I've already purchased and familiarity with the iOS UI.  So, it was a close decision between two devices that are largely commodities.

 

The thing that made me go with Apple was laziness.  Everyone else in our office who was upgrading was going with Apple.  So, it seemed like the least resistance path (e.g. I'm not forcing our IT guy to support a different platform, any problems I encounter will be the same problems as everyone in our office, we'll probably do one order for the cases, etc.)

 

Richard

 

 

[Liberty]

There's a big difference between products that people don't give much of a crap about and products that are more personal. DVD players, microwaves, dishwashers... Sure some people care, there's a high end, but most people couldn't be bothered.

 

But almost everybody cares about cars and they'll never commoditize the way you speak of. And people care even more about smartphones because their whole life is on them and it's a very personal thing that everybody sees.

 

It depends on what you mean by not giving a crap about something.

 

Refrigerators and air conditioners are very important consumer products, if not "personal."  They are appliances that most people either have or want.  Yet the margins on these products are low despite the immense value they provide to people because, while most people really need/want them, they are appliances and not as "personal."

 

Of course everybody wants one. But most people don't care what it is as long as it works well and doesn't look terrible. These are commodities. The number of people who care about what brand and model of car they have compared to what brand and model of dishwasher they have are very different despite as many people having cars as have dishwashers.

 

You don't see people buying dishwasher magazines, put dishwasher posters on their walls, follow discussion forums about dishwashers where people argue about which design looks better, which has the best engineering, feel when you use it, etc..

 

To me, the smart phone is one of the most important appliances of the Information Age because it gives access to powerful software and Internet connectivity, among other things.  But the software and services that run on top of smart phones is where the real value is at over time.  Therefore, it is my view that the actual hardware -- and even the OS on top -- will become appliance-like over time, with much lower margins than what we see now.  Because people won't care so much about the device or the OS as much as the multitude of software and services we get access to because of that appliance.

 

It's not because Apple makes its money by monetizing the hardware that it's their main differentiator. If Apple's hardware ran Android, they wouldn't make nearly as much money.

 

But people will keep caring about the hardware too, just like they care about the design and engineering of cars.

 

If you want to extend the TV analogy, for example, we pay really nice margins for TV content, but we don't want to pay high margins for the TV itself.

 

Android phones are becoming like TVs, because regardless of what model you buy, you get pretty much the same thing. But if you want what Apple offers, which is a differentiated experience, you can only buy an iPhone.

 

Cars, IMO, are already commoditized.  Even one of the most differentiated "high end" brands of them all, Ferrari, only makes 15% operating margins.

 

Cars are commoditized? What planet do you live on? Some segments are more commoditized than others, but at the higher-end a very large number of people care very much about the difference between an Audi and a BMW and a Porsche and a Jaguar and a Tesla, etc. Do I have to bring up the Nike example again? If there's something that should be commoditized, it's shoes, right?

 

As for the margins, of course the economics of the car industry are different from the consumer electronics and software industry. I don't think it's too relevant what margins they get.

[Liberty]

Liberty keeps saying the same stuff over and over again. Yes, we get it, there is always going to be a high end version of every consumer product, we know...

 

Some people have a hard time understanding that despite the facts actually showing that it's the case in many industries (though not all). I wish I didn't have to repeat myself, but when others do repeat themselves, sometimes I have a hard time not jumping in...

 

The question is always, how big is it going to be? If Android starts doing a great job and convincing people to buy Android, then Apple's marketshare and profitshare will shrink.

 

The facts seem to show that the market is gigantic, and most of China is still on 2G and China Mobile is still ramping up. iPhone 6 isn't for sale in China yet and already we have record sales.. What will be interesting is how Samsung sales do, because big screen were a differentiator for them. Now they lost that.

 

Cars are expensive compared to most people's average income, so the premium segment will always be relatively small. Smartphones are the most affordable luxury out there if you account for how useful and addictive they are. If I ever see Android being better than Apple, I'll sell my Apple stock. But right now I see Apple just pulling ahead when it comes to differentiation of the ecosystem and quality of the products in what actually matters to customers. It's not preordained that Apple has to win, though.

 

I do not expect this to happen because I don't think Google really cares all that much about Android, and is happy to let Apple have the high end, but that's another story.

 

Google isn't a consumer product company. It's not in their DNA. It's an uphill battle for them.

 

Furthermore, you guys have to remember is that the key here is that Apple's products have a very short useful life, and Apple does not support them for very long, this is not like MS supporting XP for over a decade. Once you buy an iPhone, it becomes outdated in 2-3 years, and you can accelerate this by making the next OS more complicated, so your poor old iPhone 4S looks slow, end result is, Apple can keep selling these products.

 

It's a nice side benefit of the mobile technology moving so fast right now. The current iPhone is something like 86x faster CPU-wise than the original one. Of course the modern OSes will feel slow on a device that is a few years old. It's actually a "damned if you do, damned if you don't" thing for Apple; if you support old devices, people complain things get slow. If you don't give a crap about older devices like Android OEMs, then people will complain about not getting updates and being forced to buy new hardware...

 

At some point the hardware improvement cycle will slow down and we'll have to closely monitor what effect this has on sales. But mobile devices are carried around and get beat up a lot more than a stationary computer, so I doubt the upgrade cycle will ever be as long as for computers. Plus, they are kind of a fashion accessory, so having an 'outdated' device will bug people a lot more than having an old beige box under their desk...

[portfolio14]

Don't lose sight on the big picture.

 

A real risk Apple is facing is Chinese regulators/government. It was once an unknown unknown to me before Bronte Capital's John Hempton pointed it out more than a year ago.

 

The Chinese government is always paranoid, rightly so, about surveillance backdoors in foreign technologies. That's one reason why they are keen to develop their own "red-flag" linux and why they are phasing out Windows. At the same time, they are equally interested in doing the surveillance themselves. There were reports weeks ago that unusual "phone home" activities were observed on the more recent batch of Xiaomi mobiles sold in Hong Kong.

 

I speculate Apple's recent announcement that they will change how they encrypt data at their datacentres is a move to win Chinese's trust. The timing is too suspicious.

 

(disclosure: Long AAPL)

[constructive]

What will be interesting is how Samsung sales do, because big screen were a differentiator for them. Now they lost that.

 

I agree. I had started the Samsung thread but with the introduction of the 6 and 6+ I do not see that as a very attractive investment any more, at least until we get a couple more quarters of information on Samsung's shifting competitive position.

[Liberty]

The two things that interest me most right now, apart from iPhone 6 sales, are:

 

1) Apple Watch: They said the S1 wasn't just a SOC, it's an entire computer on a module, all encapsulated in resin and completely separate from the rest. What if a couple years later you bring your watch to Apple for service and for a few hundred bucks you get a new (better) battery and a S3 chip that is much faster and has new sensors, cell capability, etc (maybe they can even replace the health sensors in the back with new ones if that round part is modular too)? The whole thing could've been designed with this in mind; they're really not telling us much about the watch so far because they don't want to be copied before it launches, but I think there's a good chance this'll be the case.

 

The solid gold sapphire covered Edition watch will certainly cost many thousands of dollars, but that'll make sense to high end watch buyers if they can just keep upgrading it and keep it a long time rather than see it become obsolete like an old iPod after a few years. And with all the bands and designs that will come out over the year, it can actually be desirable to have a first edition Apple Watch, or a 2016 model because you prefer that design (by Marc Newsom?) over the previous year, or whatever. This happens in the mid to high end watch market, and Apple obviously wants to go in that industry, not in the "smartwatch" industry (they've never used that word for the Apple Watch).

 

2) Still looking forward to Apple TV turning into a much more powerful living room computer. So far they've mostly just seen Apple TV as a hobby and as a neat little thing that strenghtens the ecosystem and gives you some functionality, but Apple's real mission is to build general computing platforms. I expect the new Apple TV to have a much faster SOC (A7? A8? the shift to 64 bits probably means that within a few years it could have more than 4 gigs of RAM), gaming controlers, an app store, better integration with cable companies/content companies, maybe the ability to be controled from your Watch (a remote you always have with you), etc.

 

The new Metal API which is so much faster than OpenGL is basically asking for big screen gaming capabilities. What if they did a custom SOC with 4 cores and a beefier GPU? That would be more than enough for all but the most hardcore gamers.

[Palantir]

Don't lose sight on the big picture.

 

A real risk Apple is facing is Chinese regulators/government. It was once an unknown unknown to me before Bronte Capital's John Hempton pointed it out more than a year.

 

The Chinese government is always paranoid, rightly so, about surveillance backdoors in foreign technologies. That's one reason why they are keen to develop their own "red-flag" linux and why they are phasing out Windows. At the same time, they are equally interested in doing the surveillance themselves. There were reports weeks ago that unusual "phone home" activities were observed on the more recent batch of Xiami mobiles sold in Hong Kong.

 

I speculate Apple's recent announcement that they will change how they encrypt data at their datacentres is a move to win Chinese's trust. The timing is too suspicious.

 

(disclosure: Long AAPL)

 

I agree to some extent, I think any Western firm having intimate access to Chinese users makes the CCCP very very uncomfortable, and it's easy to understand why. That being said, Apple will only be a small part of the market so I hope it will be able to escape too much scrutiny.

[innerscorecard]

Breaking anecdote: I've already seen an iPhone 6 on the Shanghai subway!

 

To understand why this is in any way significant, you have to understand what the Shanghai subway during rush hours is like. There is no room to breathe. It's extremely unpleasant. If you could pay any money at all to avoid this unpleasantness, you would. But most people can't.

 

Yet there was a young woman with an iPhone with she assuredly paid a huge premium for to get before the China launch. Maybe double or more the purchase price. Gold, of course, matching the gold iPhone 5s she was holding at the same time.

 

That's the power of the Apple brand in China. People will save money in almost every way, but when something is a status item, watch out. That's also why when you go to upper-middle-class Chinese homes, all the furniture and home electronics (air conditioner, kitchen stuff) will be super-cheap domestic brands, but they might have nice cars and phones. Those are items that people see outside of the home. They don't care about having nice blenders. Those are commoditized.

 

 

[Liberty]

Innerscorecard, thanks for the Shanghai perspective. I'm curious, what would you say are the top phone brands that are considered status symbols there? What is the brand hierarchy for most people, if there's a clear pecking order there? Thanks in advance.