AAPL - Apple Inc.

[Guest valueInv]

 

The terms 'commodity' and 'revenue compression' are just a way of forming a mental model of the smartphone market. I am trying to take a long term view on it and not get excited about this bell or that whistle on a new phone.

 

Commoditization and revenue compression are very different mental models. For example, Shaw Industries experiences revenue compression during housing downturns. That does not mean it is commoditized. The difference has very big implications to the attractiveness of the business.

 

The new bell or whistle introduces a very different dynamic to the tech market when compared to the potato market.

[Viking]

For those who say the discussion on Apple lacks facts there have been numerous links provided regarding: 1.) Apple's current financial and market share results

2.) projected growth of smartphone and tablet categories

 

Yes, growth is slowing but it is not falling off a cliff. This is not a company imploding.

 

My key concern with Apple was how to value the $137 billion in cash (with is growing larger every quarter). I hope the stock falls below $400 as this will give manangement the opportunity to put their cash to work. At some point in March the compant will communicate further details on what it plans to do with its cash.

 

The wild card is future innovation. Today, Mr Market expects no further break through innovation from Apple. I do expect Apple to continue to launch some breakthrough items in the coming years. How can I prove this? I can't. Why do I think this will happen? By looking at the history of the company.

 

Interesting times? Here's hoping for sub $400 stock price so I can get greedy.   

[Guest wellmont]

Individuals choose an new iPhone 4s over a 5 - revenue compression

Individuals choose iPhone Mini over 4s or 5 - revenue compression

 

How do you know this? There is no evidence that this is the case.

 

How many bought an iPad mini over an iPad?

 

http://www.cultofmac.com/205683/ipad-estimates-lowered-due-to-ipad-mini-cannibalization-analyst/

[Guest valueInv]

 

Interesting times? Here's hoping for sub $400 stock price so I can get greedy. 

Amen. I think its highly likely that we will see it.

[VAL9000]

Because 99% of the features and functionality offered by any smartphone can be replaced by any other smartphone.  That makes the offering almost completely fungible.  And that is what makes a commodity a commodity.  There was a time when RIM was light-years ahead.  Then AAPL was light-years ahead.  Then everyone started offering basically the same thing.

 

So to prove that this is not a commodity, can you give a realistic example of a feature that might capture 25% of my iPhone 5 usage that can't be replicated on a Galaxy S3?

 

You have just show that when you are light years ahead, you make a lot of money. Not commoditization. Android and iPhone are fairly different offerings.

 

Yes, when you are light-years ahead you do.  That is an extremely well documented feature of an industry life cycle.  First stage, pioneering.  Second stage, growth.  Third stage, mature growth.  We're very obviously in the mature growth phase of the smartphone industry, which is where competition increases and margins compress.  RIM won the pioneering stage.  Apple won the growth stage.  In the mature phase there are only losers, because competition will be fierce and margins will compress without question.

 

 

I'll make the problem simpler. Android phones are ever more similar (vs Android and iPhone). How come Samsung keeps gaining market share and keeping higher prices which competitors like HTC and on the verge of getting kicked out of the market?

 

Because the economics of handset manufacturing are total garbage.  Samsung makes profits because they have the most significant scale in the industry.  This is basic economics at work again.

 

The issue at hand is, prove to me that the iPhone does something meaningful that Android, BlackBerry, and Windows Phone do not.  Show me what feature set commands a price premium of $150.  If you can defend that, then you can defend the idea that Apple is not being commoditized and that they will not experience any significant margin compression in the next couple of years.

 

For more than 80+% of the searches, Google and Bing produce almost the same result. Why does Google dominate?

 

Both options are free, except for my time.  If Google gives just .001% better results as the only point of differentiation, then the only rational decision is to use Google.

 

BTW, this Mercedes analogue is hilarious.  How many of you would want to be in the auto business?  If you find those economics appealing, the consumer electronics business is right for you.

 

[Guest valueInv]

Individuals choose an new iPhone 4s over a 5 - revenue compression

Individuals choose iPhone Mini over 4s or 5 - revenue compression

 

How do you know this? There is no evidence that this is the case.

 

How many bought an iPad mini over an iPad?

 

http://www.cultofmac.com/205683/ipad-estimates-lowered-due-to-ipad-mini-cannibalization-analyst/

And how many were first time buyers?

[Guest valueInv]

Yes, when you are light-years ahead you do.  That is an extremely well documented feature of an industry life cycle.  First stage, pioneering.  Second stage, growth.  Third stage, mature growth.  We're very obviously in the mature growth phase of the smartphone industry, which is where competition increases and margins compress.  RIM won the pioneering stage.  Apple won the growth stage.  In the mature phase there are only losers, because competition will be fierce and margins will compress without question.

Where are you getting these stages from?

 

Because the economics of handset manufacturing are total garbage.  Samsung makes profits because they have the most significant scale in the industry.  This is basic economics at work again.

That doesn't explain Samsung vs HTC.

 

Both options are free, except for my time.  If Google gives just .001% better results as the only point of differentiation, then the only rational decision is to use Google.

So then the market share should be 49.9% - 50.1%

 

Here's the fundamental issue - you assume that people buy devices primarily based on feature sets. In that case, the first iPhone would have been a failure - no keyboard, no cut and paste, no 3G, no thrid party apps, etc, etc etc.

[Guest wellmont]

Individuals choose an new iPhone 4s over a 5 - revenue compression

Individuals choose iPhone Mini over 4s or 5 - revenue compression

 

How do you know this? There is no evidence that this is the case.

 

How many bought an iPad mini over an iPad?

 

http://www.cultofmac.com/205683/ipad-estimates-lowered-due-to-ipad-mini-cannibalization-analyst/

And how many were first time buyers?

probably lots but estimates were lowered for ipad not raised. due to cannibalization. so people are worried about mid priced iphone doing the same.

[VAL9000]

Here's the fundamental issue - you think people buy devices primarily based on feature sets. In that case, the first iPhone would have been a failure - no keyboard, no cut and paste, no 3G, no thrid party apps, etc, etc etc.

 

Sorry, and for what reason do people really buy things?

 

Your famed memory must be failing you today, as you're forgetting some key features that the first iPhone did include: best ever web browsing experience(!!), biggest screen, best music experience by far, actual app support, great camera.

 

So yeah, I generally default to the idea that people make decisions to "vote with their wallets" on a rational basis.

 

[Guest valueInv]

Here's the fundamental issue - you think people buy devices primarily based on feature sets. In that case, the first iPhone would have been a failure - no keyboard, no cut and paste, no 3G, no thrid party apps, etc, etc etc.

 

Sorry, and for what reason do people really buy things?

 

Your famed memory must be failing you today, as you're forgetting some key features that the first iPhone did include: best ever web browsing experience(!!), biggest screen, best music experience by far, actual app support, great camera.

 

So yeah, I generally default to the idea that people make decisions to "vote with their wallets" on a rational basis.

Rational behavior is your foundation ?  ;D ;D ;D ;D

[compoundinglife]

Exactly how have people reached the conclusion that smartphones are a commodity? In fact, where to see evidence that non-chip tech markets tend towards commoditization? Why is the commoditization mental model even the right one to apply here?

 

Sure, buying an iphone vs buying a competitors phone is not the same as buying corn or natural gas. In the later examples the products are identical and the only differentiator is price.

 

Most current purchasers of apple products buy because of the difference in the product. I think that by competing with lower cost devices you are selling to people who do not care about the differentiation, they only care about price. So you reduce prices to get into the market and then competitors follow up by reducing their prices. As a result people that were willing to pay for the higher end devices you had might opt for the lower cost devices because they may meet their needs. But you are still required to lower prices if you want to sell to the people who don't care about the differentiators. Maybe getting these people into the ecosystem results in longer term revenue streams through apps or content purchases, but I am not sure those people who are purchasing based on price will really spend much money in the ecosystem.

 

Maybe commodization is not the proper term. But basically taking a premium product and competing with more commodity like products.

 

The main point in my response to the Mercedes comparison where I said Mercedes doesn't sell refurbished cars at Walmart is that I think that analogy is a non-starter. You can't compare automobiles and consumer electronics.

Aha, so the commoditization mental model is not the right one to apply here? After all, do we get new models of potatoes every year?

 

When applying mental models does it need to be a binary "this does apply" "this does not apply"? I think selling a differentiated product to people whose decisions are driven by price may warrant including that model to some degree.  If you are looking for someone to say smartphones are not potatoes sure. Smartphones are not potatoes :)

 

Let's say I am attempting to sell something to people whose decisions are price driven. My product exceeds their requirements, it exceeds the functionality of the competitors and it is the same price then they will probably buy it. If the competitor drops their price enough, then they will likely buy the cheaper product that still meets their requirements skipping my value add because of the additional cost. If that happens then the decision to buy the product is ultimately driven by price. It is not a true commodity as we commonly define it. But I don't think its a binary yes/no this model or idea is or is not applicable.

 

[Guest valueInv]

When applying mental models does it need to be a binary "this does apply" "this does not apply"? I think selling a differentiated product to people whose decisions are driven by price may warrant including that model to some degree.  If you are looking for someone to say smartphones are not potatoes sure. Smartphones are not potatoes :)

 

Let's say I am attempting to sell something to people whose decisions are price driven. My product exceeds their requirements, it exceeds the functionality of the competitors and it is the same price then they will probably buy it. If the competitor drops their price enough, then they will likely buy the cheaper product that still meets their requirements skipping my value add because of the additional cost. If that happens then the decision to buy the product is ultimately driven by price. It is not a true commodity as we commonly define it. But I don't think its a binary yes/no this model or idea is or is not applicable.

 

Are you saying a mental model partially applies? If this "partial" application throws your valuation off by 50%, is it any useful to apply it?

 

In business school, we did a case study on Dewars. For some business reason they were forced to increases prices. They braced themselves for a drop in sales. They were surprised by an increase in sales.

 

Do I need to explain to a group of value investors the problems of assuming people behave rationally?

[Guest valueInv]

Here's the fundamental issue - you think people buy devices primarily based on feature sets. In that case, the first iPhone would have been a failure - no keyboard, no cut and paste, no 3G, no thrid party apps, etc, etc etc.

 

Sorry, and for what reason do people really buy things?

 

Your famed memory must be failing you today, as you're forgetting some key features that the first iPhone did include: best ever web browsing experience(!!), biggest screen, best music experience by far, actual app support, great camera.

 

So yeah, I generally default to the idea that people make decisions to "vote with their wallets" on a rational basis.

 

But if it was superior in some aspects and inferior in others and was priced much higher, a person behaving rationally wouldn't buy it.

[Palantir]

I'm still waiting for data on "how many switched from iPad to iPad Mini" and "how many people bought iPad Mini that didn't consider iPad at all".

 

Until you have data on this to support the cannibalization thesis, then it is all 400% speculation masquerading as analysis.

[VAL9000]

But if it was superior in some aspects and inferior in others and was priced much higher, a person behaving rationally wouldn't buy it.

 

This is a joke right?

 

[LC]

 

In business school, we did a case study on Dewars. For some business reason they were forced to increases prices. They braced themselves for a drop in sales. They were surprised by an increase in sales.

 

Do I need to explain to a group of value investors the problems of assuming people behave rationally?

An excellent example of how people have difficulty separating price from value.

[nkp007]

 

In business school, we did a case study on Dewars. For some business reason they were forced to increases prices. They braced themselves for a drop in sales. They were surprised by an increase in sales.

 

Do I need to explain to a group of value investors the problems of assuming people behave rationally?

An excellent example of how people have difficulty separating price from value.

 

I like Dewars. If Dewars goes up in price by 50 cents, guess what? I'm still buying Dewars. A lot of people feel that way about their alcoholic drink of choice.

 

If an iPhone goes up by 50 cents, I'm still buying it too (if that makes anyone feel better).

[Guest valueInv]

 

In business school, we did a case study on Dewars. For some business reason they were forced to increases prices. They braced themselves for a drop in sales. They were surprised by an increase in sales.

 

Do I need to explain to a group of value investors the problems of assuming people behave rationally?

An excellent example of how people have difficulty separating price from value.

 

I like Dewars. If Dewars goes up in price by 50 cents, guess what? I'm still buying Dewars. A lot of people feel that way about their alcoholic drink of choice.

 

If an iPhone goes up by 50 cents, I'm still buying it too (if that makes anyone feel better).

 

But then it wouldn't be a commodity.

[Guest valueInv]

But if it was superior in some aspects and inferior in others and was priced much higher, a person behaving rationally wouldn't buy it.

 

This is a joke right?

It flows from your logic.

[nkp007]

 

In business school, we did a case study on Dewars. For some business reason they were forced to increases prices. They braced themselves for a drop in sales. They were surprised by an increase in sales.

 

Do I need to explain to a group of value investors the problems of assuming people behave rationally?

An excellent example of how people have difficulty separating price from value.

 

I like Dewars. If Dewars goes up in price by 50 cents, guess what? I'm still buying Dewars. A lot of people feel that way about their alcoholic drink of choice.

 

If an iPhone goes up by 50 cents, I'm still buying it too (if that makes anyone feel better).

 

But then it wouldn't be a commodity.

 

Ok. And then?

 

Nevermind, got it. You're saying Apple isn't a commodity. I guess that's the crux of this discussion LOL

[LC]

 

In business school, we did a case study on Dewars. For some business reason they were forced to increases prices. They braced themselves for a drop in sales. They were surprised by an increase in sales.

 

Do I need to explain to a group of value investors the problems of assuming people behave rationally?

An excellent example of how people have difficulty separating price from value.

 

I like Dewars. If Dewars goes up in price by 50 cents, guess what? I'm still buying Dewars. A lot of people feel that way about their alcoholic drink of choice.

 

If an iPhone goes up by 50 cents, I'm still buying it too (if that makes anyone feel better).

Yes but you aren't purchasing more Dewars, or iPhones.

 

valueInv's example is describing the irrationality of consumers in general, not the specific flavour of irrational behaviour which Apple consumers may or may not suffer from.

 

PS: For the record, I think Apple's products are beyond commodities. They offer the best user experience, bar none.

 

Smartphones are devices used to access our private lives: pictures of ourselves/family/friends, our personal selection of music, our private phone conversations, etc. This isn't coal being used to fuel a plant.

[Guest wellmont]

that's funny. I am waiting for data that proves there is No cannibalization. until I get it I assume cannibalization because that's how humans behave and it is in alignment with the theory of supply and demand. I've heard many anecdotal accounts of people actually getting more function and utility from the smaller cheaper ipad.

 

alas we will both be waiting a long time as apple management is not in the habit of releasing data that could be of value to owners.

[LC]

that's funny. I am waiting for data that proves there is no cannibalization. until I get it I assume cannibalization because that's how humans behave. alas we will both be waiting a long time as apple management is not in the habit of releasing data that could be of value to owners.

How do you respond to the argument that the same cannibalization we're seeing now took place as the iphone took sales from ipods? And that competitors won't go the way of the Microsoft Zune (or whatever their competing "iPod" product was")?

[VAL9000]

Yes, when you are light-years ahead you do.  That is an extremely well documented feature of an industry life cycle.  First stage, pioneering.  Second stage, growth.  Third stage, mature growth.  We're very obviously in the mature growth phase of the smartphone industry, which is where competition increases and margins compress.  RIM won the pioneering stage.  Apple won the growth stage.  In the mature phase there are only losers, because competition will be fierce and margins will compress without question.

Where are you getting these stages from?

https://www.google.com/search?q=industry+life+cycle

 

Because the economics of handset manufacturing are total garbage.  Samsung makes profits because they have the most significant scale in the industry.  This is basic economics at work again.

That doesn't explain Samsung vs HTC.

Yes it does.  Samsung = huge scale = 200mm+ devices shipped per year.  HTC = small scale = 50mm or so devices shipped per year.  It is so much harder to make money in this business when you are small.  Hence why I refuse to invest in RIM unless they become a software company.

 

Both options are free, except for my time.  If Google gives just .001% better results as the only point of differentiation, then the only rational decision is to use Google.

So then the market share should be 49.9% - 50.1%

 

Actually, it should be 100% Google, 0% Bing given the framework that I gave you (".001% better results as the only point of differentiation").  Of course it's not that simple; there are thousands of differentiators between Google and Bing.  Overall, Google is better, which is why it has the higher market share.

 

Historically, iPhone has been a much better with a decent price, which is why it has traditionally held the higher market share.  Now the products are mostly fungible, so price becomes a significant consideration.  Thus buyers will make decisions based on price more than on features.  Thus prices will come down.  Thus margins will compress.

 

Another way to look at this is...  Basically the hardware in a G S3 and an iPhone 5 are the same.  There are minor differences but for the most part it's not swinging any votes.  Which means you're paying $150 for software and everything else touchy-feely.  Is that a defensible premium?  Can you truly maintain a $150 price lead on iOS vs. Android, Apple support, and an Apple brand halo?

 

[Guest wellmont]

that's funny. I am waiting for data that proves there is no cannibalization. until I get it I assume cannibalization because that's how humans behave. alas we will both be waiting a long time as apple management is not in the habit of releasing data that could be of value to owners.

How do you respond to the argument that the same cannibalization we're seeing now took place as the iphone took sales from ipods? And that competitors won't go the way of the Microsoft Zune (or whatever their competing "iPod" product was")?

 

i respond by saying the iphone was higher margin higher value product so cannibalization "worked" for them. in this case it's the reverse.