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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 TakinYourPoints on 1/30/2013 11:02:17 AM , Rating: 2
Certainly. The thing is that it has yet to really impact iPhone sales. It may eventually, but current trends aren't pointing to that. The iPhone 4S outsold the extremely popular GS2, GS3, and GN2 combined, and it sold 30 million units in half the time the GS3 did. The iPhone 5 is selling about 40% faster than the 4S did. Enough people continue to find value in their hardware, customer support, and 3rd party ecosystem.

Whether or not we eventually see fewer iPhones sold remains to be seen, but right now it seems that both the iPhone and popular Galaxy phones are coexisting very nicely. Other companies (HTC, LG, Motorola, RIM, Nokia) are bearing most of the pain at the expense of them.

The biggest threat would be if there was a huge shift to cheaper, lower end devices. Of course, this would affect the high end GS3 and Droid DNA style market as well. It seems unlikely though, there are enough people on every mobile OS (even Blackberry :) ) that see the value in higher end devices to keep them going.


RE: Get ready 4 it
By ktemple on 1/30/2013 11:26:36 AM , Rating: 2
Wouldn't the biggest threat really be if someone else delivered a superior value proposition to the iOS ecosystem? Of course, your position is that this isn't likely, but the whole concern in this discussion and these articles has always been that an upset in this specific area is now perceivable where it wasn't in the past.

This all started because the WSJ reported on the component order cuts, but it's sparked an underlying sentiment that was already there. I do agree that it would take a lot more than what Android is currently doing to usurp iOS with respect to its value proposition, but the concern here has been that Apple is being viewed as relatively stagnant and Android is being viewed as rapidly-improving. Obviously if that dynamic persists, something's going to happen to Apple's revenues, and the times will have changed whether Apple's margins recover or not..


RE: Get ready 4 it
By TakinYourPoints on 1/30/2013 11:57:10 AM , Rating: 2
I think your scenario will come if the similar practical utility and user experience you get in a high end device came at a MUCH lower price.

I'm talking Boost Mobile giveaway featurephone prices here.

In that case it wouldn't only be the iPhone in trouble, it would also be devices like the GS3, the Droid DNA, etc etc. I think we're a ways from that happening, not until we've seen a plateauing with mobile hardware for a few years.


RE: Get ready 4 it
By ktemple on 1/30/2013 2:15:48 PM , Rating: 2
You're probably right:

http://www.dailytech.com/TMobile+Offering+iPhones+...

+

http://www.dailytech.com/Google+Officially+Announc...

==

A world where people buy cheaper phones that are at the very least the functional equivalent of the high end, and pay lower monthly rates. Super-hyper profit margins and literally magic ethereal revenue streams disappear (but the only one who had those to lose was Apple).

I did this myself over a year ago by buying a used high-end phone for half the price and getting half-priced non-contract service from the AT&T-tower-based Straight Talk. AT&T is still making a little money off of me though haha, which was never part of my problem so that's fine.

AT&T has been interested in this non-subsidized T-Mobile model for some time and will be watching this closely. The Verizon CEO initially said a few weeks ago that it was a terrible idea and has recently retracted that and stated that he finds the strategy intruiging and will keep an eye on it.


RE: Get ready 4 it
By TakinYourPoints on 1/30/2013 6:18:19 PM , Rating: 2
I agree. We'll see when "good enough" makes expensive devices like the iPhone 5 and GS3 decline in sales. I think there's still a ways to go before people ditch subsidies en masse because the high end continues to be worth it for many.

Off topic, glad you registered, its actually been really good bouncing posts back and forth with you. Cheers.


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