AAPL - Apple Inc.

[txlaw]

The market for smartphones, generally, has not been saturated.  I think we might be able to agree on that.  However, I also contend that the market for "high end" smart phones hasn't been saturated either and, in fact, will not be saturated due to the nature of the consumer electronics industry.  (I explain below.)  Therefore, I do not attribute Apple's focus on older iPhone models simply to high end market saturation.  Instead, it's a direct result of the commoditization of the OS layer.

 

Weren't you the guy arguing about how RIM was going to build a wonderful business selling QNX to all sorts of applications and devices?

 

No, I argued that QNX in conjunction with BBRY's other assets (NOC, data compression tech, MDM software, etc.) is worth quite a bit of money from a resource conversion perspective.  However, I do think that BBRY could definitely monetize QNX through licensing and participating in services/software tied to QNX/BB10.  For example, if you put QNX onto a medical device that transmits sensitive information across the net, you might want to use BBRY's secure network services. 

 

Ultimately, it's about software and services my friend -- that's where the future is at.

[VAL9000]

So I am in the market for a TV and a sound system. I looked at Amazon and I can get both for about $700. These are both commoditized consumer tech markets. So I figure that you could get me a Samsung 4K TV and a Bang & Olfsen system for the same price? I'll pay for shipping to California, of course.

 

BTW, I have a Rolex I bought from this guy on the street in NYC. Could you exchange it for me for a one from Switzerland? I'm sure that will be fine, since they look exactly the same and have the same features, no? It should be cheaper than my Casio which has more features.

 

I was also looking to buy a Nissan z 370. But since cars have been around for so long, the market must have commoditized. A Porsche 911 Carrera has the same features, I'm sure you can get me one for the same price as the Nissan, no?

 

This is a poor analogy.  Rolex, Carrera, and B&O are luxury items.  They're low volume and capture < 1% of the market.  150mm+ people own an iPhone, and they have about 25% market share.  You can't apply the same market rules to luxury items as high volume consumer electronics.  Luxury items do not appear to fall prey to commoditization because they already have - the Model T was born and Rolls Royce was never the same.  I'm sure Rolex felt immense pain when the quartz wristwatch was introduced.

 

Compare these luxury markets to the iPhone.  The iPhone is pedestrian.  I know people who make < $10,000 in a year who own one.  Why would I pay a luxury premium for something that a kid with a part time job can afford?

 

Regardless of this, the overriding point is that software seeks commoditization of hardware.  The more people who can afford the hardware and software combination, the greater the addressable market is.  The greater the addressable market, the more investment made in that market.  i.e. Apps.  The more apps, the more attractive the platform.  If the iPhone moves into the luxury status, it will lose support from the development community.  Nobody wants to develop for the 1%.  If the iPhone wants to maintain relevance with the developer community, it will have to maintain significant marketshare, which means dropping the price in competition with Android devices.

 

[Guest valueInv]

The market for smartphones, generally, has not been saturated.  I think we might be able to agree on that.  However, I also contend that the market for "high end" smart phones hasn't been saturated either and, in fact, will not be saturated due to the nature of the consumer electronics industry.  (I explain below.)  Therefore, I do not attribute Apple's focus on older iPhone models simply to high end market saturation.  Instead, it's a direct result of the commoditization of the OS layer.

 

Weren't you the guy arguing about how RIM was going to build a wonderful business selling QNX to all sorts of applications and devices?

 

No, I argued that QNX in conjunction with BBRY's other assets (NOC, data compression tech, MDM software, etc.) is worth quite a bit of money from a resource conversion perspective.  However, I do think that BBRY could definitely monetize QNX through licensing and participating in services/software tied to QNX/BB10.  For example, if you put QNX onto a medical device that transmits sensitive information across the net, you might want to use BBRY's secure network services. 

 

Ultimately, it's about software and services my friend -- that's where the future is at.

 

Deframe and distract. Are you a lawyer by any chance? ;D

[txlaw]

The market for smartphones, generally, has not been saturated.  I think we might be able to agree on that.  However, I also contend that the market for "high end" smart phones hasn't been saturated either and, in fact, will not be saturated due to the nature of the consumer electronics industry.  (I explain below.)  Therefore, I do not attribute Apple's focus on older iPhone models simply to high end market saturation.  Instead, it's a direct result of the commoditization of the OS layer.

 

Weren't you the guy arguing about how RIM was going to build a wonderful business selling QNX to all sorts of applications and devices?

 

No, I argued that QNX in conjunction with BBRY's other assets (NOC, data compression tech, MDM software, etc.) is worth quite a bit of money from a resource conversion perspective.  However, I do think that BBRY could definitely monetize QNX through licensing and participating in services/software tied to QNX/BB10.  For example, if you put QNX onto a medical device that transmits sensitive information across the net, you might want to use BBRY's secure network services. 

 

Ultimately, it's about software and services my friend -- that's where the future is at.

 

Deframe and distract. Are you a lawyer by any chance? ;D

 

Haha, you got anything more than just "you're wrong because you're a lawyer and not a tech guy"?  ;D

 

Let's hear some substance.

[Palantir]

Hey, how about that. Let's talk about valuation

 

ValueInv - what's your estimate of IV?

 

Don't dodge this question.

[Guest valueInv]

The market for smartphones, generally, has not been saturated.  I think we might be able to agree on that.  However, I also contend that the market for "high end" smart phones hasn't been saturated either and, in fact, will not be saturated due to the nature of the consumer electronics industry.  (I explain below.)  Therefore, I do not attribute Apple's focus on older iPhone models simply to high end market saturation.  Instead, it's a direct result of the commoditization of the OS layer.

 

Weren't you the guy arguing about how RIM was going to build a wonderful business selling QNX to all sorts of applications and devices?

 

No, I argued that QNX in conjunction with BBRY's other assets (NOC, data compression tech, MDM software, etc.) is worth quite a bit of money from a resource conversion perspective.  However, I do think that BBRY could definitely monetize QNX through licensing and participating in services/software tied to QNX/BB10.  For example, if you put QNX onto a medical device that transmits sensitive information across the net, you might want to use BBRY's secure network services. 

 

Ultimately, it's about software and services my friend -- that's where the future is at.

 

Deframe and distract. Are you a lawyer by any chance? ;D

 

Haha, you got anything more than just "you're wrong because you're a lawyer and not a tech guy"?  ;D

 

Let's hear some substance.

 

I'll post tonight. Can't do long posts from work.

 

Speaking of substance, you certainly seem to have a lot on my 2007 Apple analysis.  ;)

 

Oh, I forgot, your go to method is distract and reframe.

[Guest valueInv]

Hey, how about that. Let's talk about valuation

 

ValueInv - what's your estimate of IV?

 

Don't dodge this question.

 

I have already responded. Around $600. 

 

I have also told you that the IV concept is not as reliable when it comes to Apple. You simply don't know what products they are going to introduce, how big they are going to be, etc.

 

This is a qualitative type company.

[Guest valueInv]

I talked about step 1. Here is step 2:

 

http://gigaom.com/2013/04/30/apple-looking-for-deeper-ios-integration-into-cars/

 

There's more to come.

[constructive]

Hmm . . . and what is the market share of Rolex in the total watch market?

 

Their unit share is about 1%, revenue share is about 5%, and profit share is probably over 15%.

[Palantir]

Apple adopting Microsoft's design style:

 

http://www.businessinsider.com/sources-the-iphone-is-about-to-get-a-radical-post-steve-jobs-look-and-it-could-be-unsettling-2013-4

 

 

I think this was expected given Ive's reported hate of skeuomorphic design, and MS' Metro is is the sharp opposite of that.

[Guest valueInv]

Hmm . . . and what is the market share of Rolex in the total watch market?

 

Their unit share is about 1%, revenue share is about 5%, and profit share is probably over 15%.

 

Kinda sounds like Apple's model, doesn't it?

[txlaw]

Speaking of substance, you certainly seem to have a lot on my 2007 Apple analysis.  ;)

 

There's nothing to say about your 2007 "analysis."  What you wrote there was not unique at all -- there were tons of people, including me, who felt the same way about the iPhone when Jobs released it. 

 

Most people I knew (in tech) were truly stoked about the iPhone.  And they were really interested in seeing Apple open it up to third party developers.  Luckily, Apple opened up the App Store the next year, despite Steve Jobs' initial reluctance.

 

Oh, I forgot, your go to method is distract and reframe.

 

Haha, that's not really my "method."  You're just annoyed and lashing out -- I get it. 

 

You should calm down and just lay down your opinion when you have one, without taking such an antagonistic tone.  There are tons of people on the board who would engage in constructive debate with you, except for the fact that your posts are so insulting.  I know this for a fact.

[txlaw]

Hmm . . . and what is the market share of Rolex in the total watch market?

 

Their unit share is about 1%, revenue share is about 5%, and profit share is probably over 15%.

 

Kinda sounds like Apple's model, doesn't it?

 

So are you saying that Apple should retain luxury pricing and watch its market share shrink to 1% of the market?  Would Apple be worth hundreds of billions of dollars if they did that?

[texual]

Hero worshipper evangelist is what I think of when I visit this board, or anywhere in the world when it comes to apple. I've refrained from discussing the company and only come here for kicks. It's mind numbing the kind of attitudes people get about companies and products especially ones that are not so unique as they once were.  Competition makes it such that nearly every industry goes through a golden age of unique and specialized and eventually costs fall, competition makes up for weaknesses and eventually causes the original to fight back. Usually that struggle can look like an arms race from the outside except to me it really says the enemy is catching up and gearing up for a brutal battle. Samsung is not yet there but my impression is they are very close to matching apple on the phone front. Both in unit sales and user experience.

 

Now I'm not a fan of Samsung and find the products cheap but they serve a purpose. I think best software and hardware in combo is iPhone. The second for me would be a top of the line Nokia Lumia running the next 8.1 windows phone software provided there is a growing app catalog. Right now I can't commit to that sort of phone even though I love the partnership and even invested on a bet that it would become a success. Old habits die hard and for me, I feel within a year ill be ditching my iPhone for windows phone and plenty of people would ditch iPhone for a top tier android phone. Makes apple seem less special when you see how many amazing devices are coming out

 

Remember the software from google and Microsoft is nothing to sneeze at. I'd be very worried if I knew even one of those guys got closer to building their app catalog and feature set toward parity with iOS. And I'd be more afraid that I missed the train if iOS winds up copying windows phone and their flatter, modern design. That would reek of bad press for years to come. And that's why I believe iOS is going to land themselves in trouble - the only rational evolution for mobile and devices is to adapt a modern flatter ui. Microsoft seems to have a few years behind them and I'd say apple got complacent. Firing old ui guys and forstall makes things worse because your putting the hardware design guy in charge of the operating system level interface? What a really poor move I must say. Ive may be great but you have to be slightly skeptical of what he can accomplish in such a short time.

 

 

[Guest valueInv]

Hmm . . . and what is the market share of Rolex in the total watch market?

 

Their unit share is about 1%, revenue share is about 5%, and profit share is probably over 15%.

 

Kinda sounds like Apple's model, doesn't it?

So are you saying that Apple should retain luxury pricing and watch its market share shrink to 1% of the market?  Would Apple be worth hundreds of billions of dollars if they did that?

 

There are many ways to slice and dice a market into segments by with features and price. This is turn effects margins and marketshare. It is a spectrum between 0-100%. This in turns effects margins and FCF. Cook's job is to find the right combination of all these variables that:

 

1, optimizes FCF

2, fits with Apple's purpose, strategy and brand.

 

Also, as the market changes, so does the combination of the various parameters.

 

While they are not going for 1%, they're not shooting for 100% either. I would be the first person to sell the stock if I saw them do that.

 

Let Google, Amazon and others battle it out at the bottom rung. Apple knows better. That is what 20 years after the introduction of the PC, they make more than the other top 5 vendors put together.

 

Also, note that while Apple pulled off one of the greatest wealth creation feats, it has never been the no.1 vendor in terms of smartphone shipments. Ever. IIRC, their marketshare has never topped 20% in smartphones.

 

[RichardGibbons]

Let Google, Amazon and others battle it out at the bottom rung. Apple knows better. That is what 20 years after the introduction of the PC, they make more than the other top 5 vendors put together.

 

The PC was invented in 1977.  So let's compare the profits of Apple to just one of the top vendors (per Apple FY1997 10-K and the Dell 1997 annual report):

 

Apple: -$1,045M

Dell: $518M

 

[Guest valueInv]

Let Google, Amazon and others battle it out at the bottom rung. Apple knows better. That is what 20 years after the introduction of the PC, they make more than the other top 5 vendors put together.

 

The PC was invented in 1977.  So let's compare the profits of Apple to just one of the top vendors (per Apple FY1997 10-K and the Dell 1997 annual report):

 

Apple: -$1,045M

Dell: $518M

 

Try it today.

[txlaw]

There are many ways to slice and dice a market into segments by with features and price. This is turn effects margins and marketshare. It is a spectrum between 0-100%. This in turns effects margins and FCF. Cook's job is to find the right combination of all these variables that:

 

1, optimizes FCF

2, fits with Apple's purpose, strategy and brand.

 

Also, as the market changes, so does the combination of the various parameters.

 

While they are not going for 1%, they're not shooting for 100% either. I would be the first person to sell the stock if I saw them do that.

 

Let Google, Amazon and others battle it out at the bottom rung. Apple knows better. That is what 20 years after the introduction of the PC, they make more than the other top 5 vendors put together.

 

Also, note that while Apple pulled off one of the greatest wealth creation feats, it has never been the no.1 vendor in terms of smartphone shipments. Ever. IIRC, their marketshare has never topped 20% in smartphones.

 

I don't disagree with much of what you said above. 

 

I like Tim Cook and think that he is trying to optimize owner earnings per share within the constraints he is faced with.  And I agree that Apple has to make a trade-off between market share and margins.

 

What we disagree on is the situation Apple faces going forward.  Apple has already been so successful in gaining market share and making huge profits per unit on iPhone -- its biggest money maker -- that I believe something could give in the face of ferocious competition.  As a friend recently told me (paraphrased), there's no reason to believe that Apple can have its cake and eat it too.   

 

With Macs, Apple has chosen to maximize ASPs and profit per unit and forego market share.  Not a bad decision, IMO, given how PCs (and bundled OS) are being commoditized.  Basically, they've made the decision to continue to be a provider of luxury hardware.

 

With iPhones, on the other hand, Apple not only has outstanding ASPs and profits per unit, but they also have a really good market share position.  This has generated tremendous value for Apple shareholders.  But I am skeptical that this market share position is sustainable when you have competitors coming out with similar product at much lower price points.  As a result, I think it's a tightrope that Apple is walking now with respect to absolute profits per share from the iPhone line.  I don't think it's impossible, but it is improbable that Apple will be able to sustain this absolute level of profits from iPhone.

 

With iPads, I believe we are beginning to see what will happen to iPhone, and this could mean peak profits for this line has already passed.  But it sort of depends on what we see in the next six months from the likes of Google, Amazon, Samsung, Microsoft, etc.

 

So, look, that's where I'm coming from on this question of the sustainability of Apple's earnings power. 

 

Note:  I appreciate your tone on the post quoted above.  I promise to ratchet down my language as well, as I know I've been pretty caustic with some of my responses. 

[Guest valueInv]

valueInv, can you post your apple commentary on the other thread you started and please leave this thread alone?  The noise to signal ratio has gone through the roof since you started posting in this and the google thread.  Being this is the official thread, I think you should use the other one you started or maybe start your own "ask valueInv" thread.  If people are interested in hearing what you have to say they can go there.  You just keep antagonizing people on this thread and the Google thread, and it's really bringing the quality of the board down.  If not, at the very please stop insulting other board members.  Thank you.

I beg to differ. Please feel free to ignore my posts. You will see an angry reaction from me when people pretend to be experts on things they are not or post out of ignorance and insist it is correct.

[Viking]

txlaw, I share your concern regarding Apple's ability to maintain total profit on the iphone line with the current line up of phones; I do think as they broaden their product offering (lower priced phone; 5 inch screen phone) and increase distribution (China Mobile and DoCoMo distribution deals) they should be able to grow total phone profits.

 

I watched the recent Samsung launch with some concern. Samsung had built a lot of momentum and consensus opinion was they had caught Apple in terms of being a truly leading, innovative company. However, watching the launch and reading the reviews I believe Samsung missed a great opportunity to show they are in Apple's league (I am talking about being first with the next big thing). It looks to me that Samsung is work class at fast adapting the best innovation (a very profitable business).

 

The ball is clearly back in Apple's court. 

[Guest valueInv]

 

 

Hmm . . . and what is the market share of Rolex in the total watch market?  Market share of Porsche?  Market share of Bang & Olufsen?

 

Why don't you marinate on that for a while and then come back to me with some answers -- or some more snide comments instead, if you wish.  ;D

 

Aha, now were getting somewhere. Now you know why they don't have high marketshare, that businesses have other successful strategies than simply pursuing marketshare. I don't want Apple to have the highest marketshare if it means going down a slippery slope. If BMW tries to enter the low end market and compete with Corolla, they will fail miserably because the company is not built for that. The same way, Apple, if they continue to act sensibly will not do that. They have high marketshare in the beginning when there are no competitors. The competitors copy, fight price battles, lose money and eventually most die. Apple chugs along with discipline. Take a look at the PC industry, how many companies survive today? Remember Gateway, eMachines?

 

Tim Cook has said repeatedly that he will not introduce a cheap iPhone - read that as "we may enter the mid range market but not the the low end". Marketshare is a goal but it is not at the top of the list.

 

This is what I mean by understanding Apple - they are not run to maximize marketshare. I think this should be pretty obvious.

 

 

And what's the market share of OSX, pray tell? 

 

What about iOS? 

 

As a shareholder, I am very happy with the wealth they have created for me without optimizing for marketshare. And I have said this before - all Apple needs to do is make sure that their share does not fall below a certain threshold due to platform effects.

 

Could market share have anything to do with how ASPs are changing?  Hmmm . . .

We have tread this ground before.

 

 

And here's a rec for you as well:

 

http://www.amazon.com/The-Innovators-Solution-Sustaining-Successful/dp/1578518520/ref=la_B000APPD3Y_1_6?ie=UTF8&qid=1339574940&sr=1-6

 

Christensen is like Graham for the Silicon Valley. You read about it, we live it in the trenches everyday. In fact, go back on this thread and it was me who said that his model is the appropriate one. But since you mention it and seem to have read it, here are some questions for you:

 

1, What is the difference between commoditization and disruption?

2, What condition is necessary for disruption to occur?

3, What are the two kinds of disruption? Does Apple have anything to do with the second kind?

 

BTW, did you know that it aws Jobs' favorite technology book and that he distributed it to all his executives? Trust me, Apple management is well aware of disruption and they have handled it very well in the past.

 

http://www.cultofmac.com/125220/these-were-steve-jobs-favorite-books-and-bands/

[Guest valueInv]

Speaking of substance, you certainly seem to have a lot on my 2007 Apple analysis.  ;)

 

There's nothing to say about your 2007 "analysis."  What you wrote there was not unique at all -- there were tons of people, including me, who felt the same way about the iPhone when Jobs released it. 

 

Most people I knew (in tech) were truly stoked about the iPhone.  And they were really interested in seeing Apple open it up to third party developers.  Luckily, Apple opened up the App Store the next year, despite Steve Jobs' initial reluctance.

Most people in tech laughed at Apple including the "geniuses" from RIM and Ballmer. Take a look at examples from my signature.

 

As for you, you still don't understand what Apple is trying to do, I seriously doubt you did 6 years ago.

 

And I'll give you one more prediction - when Apple releases its new product categories this year, the world will yawn, fanbois will line up to buy it, others will call them crazy and their competitors will scramble to copy it. It happens every time.

[Guest valueInv]

txlaw, I share your concern regarding Apple's ability to maintain total profit on the iphone line with the current line up of phones; I do think as they broaden their product offering (lower priced phone; 5 inch screen phone) and increase distribution (China Mobile and DoCoMo distribution deals) they should be able to grow total phone profits.

 

I watched the recent Samsung launch with some concern. Samsung had built a lot of momentum and consensus opinion was they had caught Apple in terms of being a truly leading, innovative company. However, watching the launch and reading the reviews I believe Samsung missed a great opportunity to show they are in Apple's league (I am talking about being first with the next big thing). It looks to me that Samsung is work class at fast adapting the best innovation (a very profitable business).

 

The ball is clearly back in Apple's court.

 

Both DoCoMo and China Mobile have been losing marketshare in their respective markets. iPhone has been gaining in Japan.

http://www.bloomberg.com/news/2013-05-01/docomo-may-pick-galaxy-s4-and-sony-models-for-handset-promotions.html

 

 

They also grew share in India. This quarter they dropped prices in Brazil (likely due to tax reduction for bringing in manufacturing):

http://www.macrumors.com/2013/04/01/apple-slashes-prices-on-iphone-44s-by-15-25-in-brazil/

 

And there are many countries like Indonesia where they have even started on distribution and marketing.

 

 

[Guest valueInv]

valueInv, can you post your apple commentary on the other thread you started and please leave this thread alone?  The noise to signal ratio has gone through the roof since you started posting in this and the google thread.  Being this is the official thread, I think you should use the other one you started or maybe start your own "ask valueInv" thread.  If people are interested in hearing what you have to say they can go there.  You just keep antagonizing people on this thread and the Google thread, and it's really bringing the quality of the board down.  If not, at the very please stop insulting other board members.  Thank you.

I beg to differ. Please feel free to ignore my posts. You will see an angry reaction from me when people pretend to be experts on things they are not or post out of ignorance and insist it is correct.

 

What exactly are you begging to differ on?  That you insult people or that you have significantly increased the noise ratio?  It's impossible to ignore you because you reply to every post here, and on the RIMM and GOOG threads, and start a flame war almost every single time.

Its easy, watch me ignore...

[RichardGibbons]

Let Google, Amazon and others battle it out at the bottom rung. Apple knows better. That is what 20 years after the introduction of the PC, they make more than the other top 5 vendors put together.

 

The PC was invented in 1977.  So let's compare the profits of Apple to just one of the top vendors (per Apple FY1997 10-K and the Dell 1997 annual report):

 

Apple: -$1,045M

Dell: $518M

 

Try it today.

 

Sorry, I misunderstood.  I thought when you said twenty years, you meant roughly 20 years, rather than almost twice that.  My mistake.

 

Oh, so when you said that their PC strategy was working, you really meant that their strategy was to sink to 5% market share in PCs, lose money hand over fist so that they were laying off piles of people, and (as I recall) were trading at a valuation less than cash, or close anyway.  And this was all part of a long-term strategy to become the #2 provider of smart phones.

 

I guess that makes sense. 

 

That said, if Microsoft manages to turn Xbox into the primary hub for all home electronics, I reserve the right to say that was the strategy all along when they implemented Basic on the Altair, OK?  (If they don't, then I also reserve the right to have no recollection of this conversation.)