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May 14, 2013

Comments

I think this sounds a bit defeatist no? What always wins today and forever is the product. That's why people choose the iphone. Apple wins as long as it makes better products. Or for example take google maps. Show me a better product than google maps. There isn't one. So Google maps wins. By your logic, all that counts is initial market share. But there were smartphones before the iphone. In that case, Apple would have never been able to win with smartphones. So I feel confident that a $325 iphone, if it's a better product, will win.

However, I don’t that owners will be much happier even with a new phone in the Fall. Apple simply has a communication problem. I think it’s a more central issue. I've never commented on this, but I think that one of the many things that Steve Jobs was brilliant at doing was creating the perception in the media and among investors that Apple really is doing amazingly innovative stuff at all times.

Usually he did this by explaining in general terms about how difficult it is to hire the best people (which, of course, he did), talking about where the technology world was, is, and going (i.e. Apple’s vision) and how Apple has been hacking away at some big problems (i.e. the best people's best work). Somehow, he did it all while keeping a blanket over the future products. The audience could dream about the future. We inferred about our own lives. Then shazam a big product reveal and, sure enough, magic.

What's different today is that Tim Cook is much less public. He doesn’t speak as openly about where things were / are / going. Where are we in the history of technology? Where is Apple hacking away with great intent? Tim Cook says on every conference call that Apple in its most innovative period, their employees are doing incredible work, trust the process. Of course, it's all true. But that blanket hiding the products has enlarged to cover the history, present, future. You can’t amaze the audience with magic tricks without a great story!

So they’ve hidden too much. Today observers wonder about whether Apple has vision. So they resort to reading into words on conference calls such as "categories" and "fall". So they read wonderful websites like PA digging into patent filings. So they read somewhat dubious reports about foreign hardware companies that may or may not pertain. Think about it. Historically only a worthy competitor would take the time investigate the transcripts, patent filings and supply chain.

Whereas Google constantly reminds people about just how much stuff they are inventing. And Netflix unveils a road map of the future. And Amazon constantly comes out with new stuff. Apple did that all by talking about hiring the best people, their sense of history and vision of the future, and their hard work, all building up to a moment of magic. But you can’t do magic unless you do the rest too!

So instead the public worries that Apple is a hardware company, that it needs market share (see first paragraph, it doesn't), that it’s lost its speed and innovation. Sorry that turned out to be a bit longer than expected. But to me it’s the heart of the matter.

By the time Apple gets into gear there'll be nothing left because Samsung will already have it all. Apple has already lost all of 2013 to Samsung in both the high-end and middle smartphone market share. Apple is the only company sitting around telling people to have patience. Most of the other companies are busily pumping out smartphones in order to hold market share. Apple's Pegatron partner is just starting to hire workers so we're likely looking at some September iPhone release. That provides all of Apple's rivals a fat four month window to stuff all the inventory channels while Apple sells nearly no iPhones. Apple is just basically begging for everyone to take their market share. This will be mentioned on a daily basis all summer long and Apple's market share will stagnate and decrease and Apple shareholders will just have to suck it up.

They'll never build a market share grabbing nearly no-cost phone to compete against Nokia. But there's definitely room for a $350 phone. Unlocked price points (no $450 US carrier subsidy) are:

$450
$550
$650
$750
$850

Which leaves a nice roof for a $350 phone. I wouldn't be surprised if they say $325, which is round Chinese Yuan$2000 where Yuan$1000 seems to be the target in a country where average wages are $10,000 per year. Also $325 just feels like a great deal when the next phone is $450 so there's a psychological aspect. I don't know how this flushes through with carriers which pay based on very simple assumptions a $450 subsidy but maybe carriers fork that extra $125 over to Apple and Apple discontinues the iphone4 which maybe is not designed to consume as much bandwidth.

Very meatball math. Let's say that the margins are 80% on $650 phone at volume. So $130 cost per iphone5. That's margins of clean 60% on $325 phone at volume. Plus most likely customers for a $325 phone would be new to Apple as it's tough to conceive of people downgrading to less featured phones. So on top of the initial margin there's new customer software/service/potential halo product revenues for the the life of that new customer. So margins still >60%.

In terms of the market for $325 phones, right now Apple sells 140,000 phones or 20% of the 700,000-800,000 global smartphone market. The above stats suggest (to me) that the other 80% is or will be Android of which 30% is current Google Android, 30% is Samsung Android, and 40% is Chinese Android substitutes. So maybe a $325 / Yuan$2000 price point wins some of the 560,000 price sensitive units.

Perhaps more interesting there's 800,000 dumb phones being sold today. People who are buying such phones are probably the greatest and most price sensitive opportunity and if Apple can grab 10% of that market with a $325 phone that's 80,000 phones or a 50% increase in iphone sales.

What's amazing is that this is all pretty easy stuff to come up with - what Apple does on a daily basis it near impossible to imagine and yet very few pay attention to or write about that except for great sites like this one - thanks for your work!!

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