On Apple’s tightrope walk between market share and margins
Quick post here on Apple for the daily summary. The results for the most recent quarter are in and they were under market expectations across the board: on the top line, on margins, on profit, and on handset sales. In my view, this most recent report for Apple was abysmal.
Apple is in a market share/margin quandary that was inevitable, Steve Jobs or not. As I wrote two weeks ago:
On Apple specifically, my call has been that Apple will eventually face a point where it will be forced to go for share or maintain margins. When it decided to maintain margins in the PC business two decades ago, it was disastrous. But, now Apple has a market leader status in mobile, so maintaining margins rather than share won’t be fatal. It will, however, negatively impact growth.
Mobile users with cheapie phones will switch to Android. Apple is not going to chase share in that market. But in the tablet market it could do. While Amazon is creating problems for Google by customizing Android and forking it into a non-Google dominated platform, Amazon powered hardware still requires Android software and apps and that gives Android economies of scale and network effects which will erode Apple’s dominance (see my comments from last year). Google’s entering the tablet market itself increases this more directly. The reason that Apple is suing the pants off of Samsung is because they want to stop the Android menace, not just because Apple thinks Samsung has infringed. I see Apple going down-market in tablets and we’ll have to see how well they execute and whether it cannibalises sales.
P.S. – this has nothing to do with the passing of Steve Jobs. Apple was always going to face a margin/share quandary.
What we see in the Q3 numbers reflects this quandary. It will get worse in my view. Samsung is taking share and Android has become a threat to Apple’s revenue growth. This is precisely the reason Apple is suing Samsung for patent infringement. Apple is afraid. For me, the bottom line is that Apple’s earnings growth has slowed and will continue to slow. When growth turns to contraction as it eventually will, the sell off will begin in earnest.
P.S. – Apple still makes a ton of money and is distributing cash. Apple is a great company but it is vulnerable given its high institutional holding and its lofty price.
Below are a number of good articles that highlight the quarter Apple had.
In Silicon Valley, Patents Go on Trial – WSJ.com
Apple’s rivals swoop as iPhone China sales flag | Reuters
Apple in China: less froth but still pretty darn impressive | beyondbrics
Samsung Galaxy S III Shipments Hit 10 Million in Two Months – John Paczkowski – Mobile – AllThingsD
Apple disappoints analysts despite posting a 21% rise in profits | Technology | guardian.co.uk
Apple claims $2.5 billion damages in Samsung patent case | Reuters
Apple misses estimates as iPhone sales fall – MarketWatch
Apple Misses Expectations – WSJ.com
Apple revenue misses Wall Street forecasts, shares plunge | Reuters
That’s it. Here are the other links.
ECB’s Nowotny pushes ESM banking licence – FT.com
Weimar solution beckons as manufacturing crashes in US Fifth District? – Telegraph Blogs
A Mental Experiment for establishing the relative mood for solving the Crisis in Europe, in Britain & in the USA « Yanis Varoufakis
Slowenien droht Kroatien wegen Alt-Spareinlagen – Wirtschaftsraum CEE – derStandard.at › Wirtschaft
Exclusive: Greece will need more debt restructuring – EU officials | Reuters
Who Warned About the Euro First? – The Euro Crisis – WSJ
Europe is sleepwalking towards imminent disaster, warn top economists – Telegraph
Spain feels debt heat, Greece way off bailout terms | Reuters
Josh Rosner: Eurozone Crisis – No More Safe Havens « naked capitalism
Cataluña también cede y pide el rescate | Cataluña | EL PAÍS
Debt crisis: Spain and Italy ban short-selling – Telegraph
NYT’s Jackie Calmes’ “Grossly Inaccurate” Hit Piece on Neil Barofsky « naked capitalism
N.Y. Fed silent on Barclays’ admission of rigging Libor – The Washington Post
Negative Yield on 20-Year TIPs | Crossing Wall Street
Shock 0.7% fall in UK GDP deepens double-dip recession | Business | guardian.co.uk
First they came for WikiLeaks, then the New York Times — Tech News and Analysis
Philip Pilkington: Market Monetarism Or An Attempt to Speed Up the Decline in Real Wages | Steve Keen’s Debtwatch
Relative Strength of Cyclicals Hits 3-Year Low | Crossing Wall Street
The Consumerist » Report: Banks Make It Really Difficult To Take Your Business Elsewhere
The Consumerist » Plenty Of People Wanted To Move Checking Accounts This Year But Banks Made It Too Tough
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