post, Apple stock had soared to new heights. It was $668.30 on the day that I wrote that post and the price had even topped $700 at one point. Today it is just over $503. I'm not sure if I was clear at the time, but I wasn't writing about the stock in terms of an investment opportunity, but as a gauge of long term growth potential. My point was, no matter how high the stock price seemed then, the long term... and six months is not long term... revenue generating capacity of the company was still excellent because of two things. The first would be for future iPhones to fully convert the public to LTE; as it stands now, it is still something that only early adopters have. The second would be the ascendancy of the iPad and iPad mini from tech toys to mainstream household consumer appliances. That's the long term.
In the past week a couple of news items have crossed the internet. The first was the rumours of a cheaper iPhone in the works. One of Apple's ex-CEO's thinks this is the direction that Apple should go to.... he's also the same CEO who fire Steve Jobs in the 80's. This rumor is nothing new, as there seems to be a cheap iPhone rumour every year, and this one seems to be fading as well. The second was a Wall Street Journal piece about declining iPhone parts orders. I can't give specific comment on either because I'm not privy to the Apple's inside business workings, but in my defence, I would like to say that most of what you read about Apple is written under similar circumstances.
I'll deal with the latter first. Apple products, particularly iPhone's, see the strongest demand around launch time. There afterwards, the demand drops off. This is unavoidable because of the carrier subsidy model that North American telecoms use. This means that huge cohorts of people come off contract in synchronicity because they all bought a subsidized iPhone at the same time. So a drop off in parts demand is natural. However, it is possible that the iPhone has reached peak demand and is now in decline because of increased competition from Samsung and others. As I pointed out last year, this is an inevitability. Apple does not mourn for the heydays of the iPod, and it would be foolish to try to maintain peak iPhone sales into perpetuity. Eventually, the iPhone will decline, but to borrow an Apple-ism,,, "there's an Ipad for that."
It is true that Samsung is increasingly competitive against Apple, but the numbers don't seem to be as strong as they are often hyped. Samsung's numbers include all of their phones, high and low end, and are not broken out by model but if you do a bit of inferential thinking, top phone to top phone, the Galaxy SIII is still outsold by the Apple iPhone 5. Which brings us to the idea of a cheaper iPhone. In North America, we have cheaper iPhones already: they're called the 4 and the 4s... and with carrier subsidies they are sold at low to zero upfront cost to the consumer.
What about the developing world? Despite all of the terrible North American press (some of it undeserved), Blackberry has maintained a competitive presence in the developing economies thanks in part to the low cost nature of their Blackberry 7 messaging phones. (BBM also has a huge part to play in this, as the people of the developing countries seem very social compared to us in the western world. We want apps. They still want to chat) First of all, the fabrication and tooling for the 4 and 4s are already in place, so there's no reason why they can't live on at a lower cost use. But should they? China doesn't need a cheap iPhone. Shenzhen already makes multitudes of cheap Apple phone knockoffs, many of them quite decent. In a free-wheeling frontier capitalist economy, China's attitudes about intellectual property and copyrights should be a big hint about how the closed sandbox of iTunes would be received. Yet "developing" does not mean "cheap". As the economy matures in China, consumers will want the real thing. Coming into the market now with a cheap product will make it all but impossible later to reestablish the high ground.
You have to think about this for a minute. Chasing after revenues in a smaller portion of your business at the expense of larger revenues when it has grown later is the very essence of short-term business thinking. Apple does not need the money and is not in any danger of losing a long term foot hold in any market. They have rarely been first-movers, and because they are flush with cash, can afford not to be for some time. The point of all of this is that there are many directions a company can take, but that the pressure from Wall Street is always towards maximizing short term gains, and one of the hardest calls to ignore is the one to grow market share.
Update: This just in. Apple is establishing a credit program in China to support sales of their high end phones. This essentially mimics the North American carrier subsidy model, with credit being given by the manufacturer and not the telecom. I think Blackberry does similar in countries such as Thailand.