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Steve's Jobs; successor Tim Cook has faced fire for his company's slipping margin.  (Source: Reuters)
Apple no longer commands the "cool" clout it once did

Apple, Inc. (AAPL) under Steve Jobs established itself as perhaps the most coveted OEM in the smartphone industry.  The late Apple CEO and cofounder, and his trusted legion of executives squeezed suppliers tighter than perhaps any company before boosting Apple's margins to gaudy heights.  And on the carrier side, carriers like Sprint Nextel Corp. (S) were willing to spend billions ($15.5B USD, to be precise), mortgaging their future to get access to the iPhone.

But Apple's ability to squeeze partners on both sides of its product chain may be coming to a close.  After a quarter of record profits, but a disappointing slip in margins, investors have sent Apple stock on a humbling plunge from a height of $705 USD/share to around $450 USD/share in recent weeks.  And Apple's partners are taking note.

A year ago, Apple enjoyed a 44.7 percent margin, but in the last quarter that figure had slid to 38.6 percent.  Apple managed a record profit, but only by growing sales volume.

The biggest threat to Apple's empire may come from carriers moving away from a model of subsidies.  Due to the iPhone popularity, carriers are willing to pay Apple a subsidy of around $400 USD per iPhone, plus a small cut of on-going monthly service revenue.  Other premium phones from Apple's rivals typically command around $250 to $300 USD.

But the last American carrier to get the iPhone -- T-Mobile USA -- will be phasing out subsidies just as it begins to carry the iPhone.  T-Mobile USA's deal with Apple has not been made public, but is rumored to be more favorable for the carrier than similar deals with AT&T, Inc. (T) and Sprint -- and less favorable for Apple.

T-Mobile wide
T-Mobile won't be subsidizing the iPhone. [Image Source: Flickr]

An entry-level 16 GB iPhone 5 costs $649.99 USD without subsidies.  Flagship Android phones and Windows Phones cost hundreds less unsubsidized.  Some fear customers will bail on the iPhone once carriers start passing the costs on to the consumers by cutting subsidies.

Both AT&T and Verizon Wireless, America's largest carriers have warmed to the idea of unsubsidized handsets after initially scoffing at the idea.

Comments AT&T CEO Randall Stephenson, "That's something we've looked at on several occasions. I kind of like that idea.  It's something we're going to be watching."

And Lowell McAdam, CEO of Verizon Wireless -- a joint subsidiary Verizon Communications Inc. (VZ) and Vodafone Group Plc. (LON:VOD) -- seemingly went back on previous comments, remarking, "[The strategy is] very intriguing."

Interesting, indeed.  Carriers may be experiencing a bit of envy that T-Mobile is not suffering the same exploitive terms they agreed to, to get the iPhone.  Down the road they will likely look to renegotiate more favorable terms.

Harvard Business School Professor David Yoffie, who specializes in corporate competition, warns that while Apple's is coming down to Earth, it's still a power player.  He tells Reuters, "Even though they're not gaining share, they're such a large piece of the market and such a driver of customer volume into their stores that people can't walk away yet.  Over the longer term, clearly there will be more and more pressure on Apple if they don't find new ways to innovate."

In other words Apple may be feeling the heat, but it's still got more cash than any other phone OEM, has superior contracts, and the biggest single-handset sales in the industry -- for now.

Source: Reuters

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RE: Obscene
By dgingerich on 1/30/2013 9:19:07 AM , Rating: 0
1. we're talking margin here, not markup. Yes, housing gets a big markup above the materials and land cost, but that doesn't generally include labor, which is the second most expensive part. Their actual margin (the money left over after paying for materials and labor) is right around 15 to 25%, depending on the area of the country you're talking about. Even jewelry, which has some of the highest markup (the amount it is marked up from the purchase or manufacturing price, but does not include labor) in the retail world at around 300-500% in the stores, boils down to less than 40% for the final margin. Hoever, that is all companies in the market, and not just one that keeps blocking out the competition.

Apple is making over 38% margin, meaning that over 38% of the money they have coming in is pure profit, and they're actively blocking other companies in the market using patent trolling and government reinforcement. Other companies in the market, when they can get in, aren't making even close to this margin level. It's not a free market, and it's the worlds' governments' fault. If it were actually a free market, Apple wouldn't be making nearly this much profit, and people would have wider, more innovative, more economical, choices in smart phones and tablets.

2. I'm not against companies making a profit. I'm generally conservative, especially when it comes to business. I'm a free market kind of guy. What I'm criticizing here isn't the business, it's the stupid consumers that let it happen this way, and the government mechanisms that facilitated it.

3, yes, I suppose I am a "radical small government" type, in that I would like to see the government stop interfering with the markets and go back to 70's and 80's patent and copyright laws, when a patent or copyright actually meant innovation and they weren't interfering with the common people's lives so much. The patent and "intellectual property" laws of the past 15 years have facilitated Apple's tactics in soaking their customers and badly stifling innovation.

When concepts that have been in use for centuries, like slide-to-unlock and a rectangle with rounded corners, (hello, there are only a limited number of ways to unlock something with a touch screen, and a rectangle is the only way to economically produce a LCD screen) are locked down by one company, with the government facilitating it, it locks down the entire market. Do you even realize that if someone decided to patent covering candy in chocolate, they could succeed, and shut down the entire candy bar market, which has been doing this for over 100 years?

We have had our free market economy eroded away over the last 15 years by tactically laid out laws. Our lawmakers, in many countries, not just the US, have put in laws to impose more and more control, to grab at more and more power. The latest "patent law overhaul" actually made the US system a "first to patent" instead of a "first to invent" system. This promotes corporate control over innovation and market sales. We haven't had a completely free market in a century, and that's probably a good thing, but recent developments are just tyranny.

My final point is this: we are already under far more oppressive government control than ever in US history, and most people are just too stupid to understand it, and because of their stupidity, they keep promoting and strengthening it.

"When an individual makes a copy of a song for himself, I suppose we can say he stole a song." -- Sony BMG attorney Jennifer Pariser

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