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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: Get ready 4 it
By ktemple on 1/30/2013 10:17:09 AM , Rating: 2
That's true. But I think it's less about whether or not it's the best phone and more about the fact that Android has finally become a viable option in recent years. Honestly, until ICS, iOS vs Android was like an adult vs a child in everyone's mind except Android fans'. Now it's adult vs adult and it's blowing people's minds, and dropping Apple's stock price.

RE: Get ready 4 it
By TakinYourPoints on 1/30/2013 10:51:54 AM , Rating: 2
ktemple - Competition is way better than it used to be and there are other very viable choices, absolutely. I was cheerleading for Windows Phone long before it was cool. JB is much better than the disaster 2.x. Viable competition is good, but how much it will cut into iPhone sales remains to be seen.

Right now Apple and Samsung seem to be succeeding at the expense of LG, Motorola, HTC, RIM, and Nokia, which implies that there's enough room for at least two big players out there. The low end is obviously up for grabs, and Samsung is doing awesome there too.

As for stock price, I've said this many times but technical reasons aside (everybody owned AAPL and it doubled in less than a year, low PE be damned) the stock got clobbered by reduced margins on new products in the holiday quarter. Every year their net profit increased during the holiday quarter. This year they release multiple new products in the Fall/Winter rather than Spring/Summer, along with the lower margins that come with them (or a complete lack of product when there were no iMacs to buy for a month).

So now you have 13BN net profit in the same respective 2011/2012 quarters despite gross revenue increasing from 45BN to 55BN. Its the first time their net profit flatlined during the holidays (hell, they doubled every other year) and the stock got clobbered.

Funny enough, unlike most of the haters here I actually profited from a short AAPL position about 45% by selling call option spreads against it in August, September, and October.

Sell when people are calling $1000 per share, buy when there's doom and gloom. :)

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