Microsoft is worried i am sure, there is a reason that they spend Nokia millions to develope hardware.

I dont know how fine Windows 8 is, and maybee they need 2-3 more years,
but at the end they will have a competive position. If not they simple risk huge parts of there business.

Many use there PC more or less for entertainment and not for work, and they might be glad with there mobile devices and dont need a normal PC.

If Andoid and Microsoft dominate the market in 4-5 years and apple is third you will see that there abnormal earnings will come back to a " normal " level...and a normal level is much lower than today.

As noted above, AAPL currently has a mere 6.5% of the total global handset market, and captures 71% of the total mobile handset industry's profits.

If you must continue to prognosticate on the health of AAPL's phone business, why don't you start with the above stat, and then break down for us how AAPL will somehow earn less in handset device sales going forward.

Let me put this another way - let's say mobile handset industry device sales CAGR is +5% (no idea what it is, probably higher than that).

If AAPL were simply to maintain 6.5% penetration in this growing market, they will still earn more money should their subsidy model stay in tact.

So what you're saying doesn't really square, but would be interested to hear more - if you could, please use numbers.

I agree that TV needs a big change if that's what you were saying by saying it needs to be standardized. There are just too many commercials on cable right now to keep me engaged for long periods of time like I used to watch TV. Maybe I'm an exception to the norm. Also you currently have to record something in advance to watch what you want. That's not a problem as long as you already know in advance what you want to watch. I'm thinking what if people could look through a channel list like how current cable is, except they could watch any of the content that they paid for at anytime.

I think AAPL is the best company to do this. And that it's more of a software change than a hardware change. They would have to spend a lot of money buying content (which they have money). And they'd have to spend to store all of that content. My cable + internet bill is a little bit over $200 per month. If Apple could even offer that service at say $300 per month I would snap switch services. Current cable is a big joke and someone needs to make it better for the consumer which could equal big profits for the company that did it. Very few comapanies , if any, are even in the right place to attempt something like this.

To help you out, solucky, you should read and digest this post before responding, some great info from asymco:

http://www.asymco.com/2012/05/03/the...o-disruptions/

Google Fiber is an interesting play, and as consumers, we will learn a lot about future offerings in the success/non-success of the rollout.

Also current DVRs in almost every home are a joke. I don't see why people put up with crappy DVRs when they want their phones, tablets, and comps as fast and up to date as possible. Maybe a cloud system would work better for DVRs. Or maybe just better hardware for DVRs is needed. Either way it's right in AAPL's range of capability. Will they make the home TV better?

Currently only for Kansas City? I agree that it could be big. According to the wiki page it seemed really affordable too.

I don't know that Google Fiber will be big - it is though a clear attempt by Google to challenge the incumbents (Comcast/DirecTV etc). And while the incumbents may suck, they have many levers to pull to head off new entrants like Google.

I highly doubt AAPL wants to be in the ISP business. It's unclear they want to be in the content distribution business outside of iTunes/EST, though there are compelling reasons for them to go there as stated many times ITT.

This is interesting point because this is already happening. One of the reasons Apple insisted on keeping Siri 4s only is they recognized there is no difference between the 4 and 4s (in terms of user experience) and they wanted to drive upgrade numbers.

AAPL's assertions that Siri needs 4s' extra CPU power have been thoroughly debunked by all the jailbroken iPhone 4's running Siri smoothly.

So Apple's iPhone sales pain points (?) from a profit share perspective:

1) Longer smartphone upgrade cycles
2) Continued competition from other high-end smartphones (Samsung and HTC for now)
3) Exposure if carriers push back on subsidy models
4) Any other major category I'm missing?

It seems these issues can largely be offset with Apple finding the right distribution strategy to sell iPhones into the total addressable mobile handset market - not just the high-end subsidized model, but finally begin to sell into pre-paid and mid-tier smart phone markets. Don't have the stats, but I imagine if iPhone went "open distribution", their distribution footprint increases by double maybe treble its current size?

There are obviously some real potential fallouts to this strategy (specifically that the carriers subsidizing iPhones will freak out), but the fact iPhones do not have wide distribution today suggests there is still a ton of room for growth if they play it right, no?

Before someone chimes in w/ "lol who will prepay for an iPhone", I'd like to point out something - AAPL spends of course an incredible amount of money on equipment to manufacture their iPhones. The equipment amortizes over 3 years. This is why analysts posit that AAPL will only change the hardware design on an iPhone after the equipment has fully amortized (hence the 4/4S cycle).

So essentially, everytime AAPL sells a 3GS today, it is basically pure profit as the equipment has been fully amortized for some time now (ie, they do not need to be subsidized on sales of older models to still maintain incredible margins). I think that's something to consider as we understand how AAPL might seek to gain a foothold in new mobile handset markets like pre-pay or mid-tier smartphone markets.

Caveat: I'm no mobile handset industry expert, zero pride in what I've written above, perhaps I'm way off, but be great to hear what people think on my above posts.

Yes, Google and Microsoft are definitely more worried about each other than about Apple. First, read this:

http://www.joelonsoftware.com/articl...gyLetterV.html

And you can see that Google's willing to commoditize hardware, software and even internet connectivity (which are all complements to internet software services, where Google dominates) to make it easy for people to use their services. Even though this helps their competitors as well, Google is so dominant at the moment that they want people to convert now, as opposed to later, when they may not be as dominant. This makes it much more difficult for others to compete with Google in the future, because everyone is already using Google.

Microsoft is a credible competitor in software services (Office 365, Bing, Azure, etc) in a way that Apple is not. Microsoft also makes a ton of money selling software, which Google aims to neutralize while it's ahead in services, through open-sourcing Android, among others.

Apple is far more threatened by Goolge than by Microsoft, because the worst case for Apple if Microsoft became dominant (and there was no android) is the replay of the PC market, in which Apple does pretty well, if not as well as Microsoft. Microsoft commodizing hardware won't wipe Apple off the map, because Apple can differentiate with hardware/software combination and Microsoft OEMs have to pay the Microsoft tax. But Google commoditizing hardware and software threatens to take all profits away from this market to software services market. This favors Amazon, Facebook and Google. And certainly Microsoft over Apple. Apple can't even run iCloud on their own - this is not a company that's prepared to fight these guys in software services.


No, I meant, it is and will always be standardized. Content has to work on existing hardware, which means no one's going to produce content that requires new hardware. This is significantly different from application software.


Uhm, Roku, Apple TV, Google TV, Netflix, Hulu, Amazon Instant video, etc.

No, for reasons already explained before.



Consolidation of parts makers, losing the feature race to Android and Windows Phone, and the smartphone market becoming entirely commoditized or absorbed. For strategic reasons, Apple is going to spend a lot of money, internally or otherwise to fill their software and software services gap - this should hurt their margin.


This all cannibalizes their profits at the high end, dilutes their brand and lowers margin. Other companies are already doing all this and not making much money, because Apple is dominant in the most lucrative submarket. One of the edges Apple has is that it doesn't have to support very many different hardware combinations and in fact Apple is probably not very good at it, neither from support or software perspective. Trying to support all these submarkets is likely to be a disaster.


Apple does poorly in those markets because they do this. Their old models are a terrible deal compared to their newest models. What's going on is that Apple keeps the old models overpriced to avoid cannibalizing their top-end model.

This is very cool insight, thanks again, PB.

Could you expand a bit more on this? What is the specific software capex you're referring to? Acquisition? More developers to compete with Google/MSFT? Both? And I guess, for the uneducated... what specific gap are they trying to close in software services today? Do you think that AAPL needs to develop Internet software services on par with Google to stay in the game? If so, why - based solely on the view that Google commoditizing hardware/software leaves all the profits in Internet software services?

Thanks for your POV - think this all makes perfect sense.

I guess, and to your earlier point - if at some point AAPL starts to lose profits in the high-end/subsidized smartphone submarket (which seems likely due to factors you mentioned).... don't they have to move into the pre-paid and mid-tier markets? And if so, are you saying it is impossible for AAPL to do well in those markets for reasons above?

Maybe a better way to ask this question broadly - what's the bull argument for iPhone profitability growth in the long-term? Just if you (or someone else) were playing devil's advocate...

Note: I think it's pretty evident that PB's take is that smartphones will be commoditized and margins will shrink dramatically - again, just curious to see if there is a counter argument to this. From my understanding seems like most of the profits in the smartphone business are driven by the data service costs/plans from the carriers. So what PB is also saying, I think, is that mobile data services will also be commodotized...?

Random (perhaps related) point - is Google really trying to commoditize internet connectivity? We can see in the marketplace they are clearly seeking to commoditize both hardware and software values, so I get that strategy.

I only ask based on a single data point really:

http://fiber.google.com/plans/residential/

The Fiber plan pricing is very competitive to Comcast and other ISPs for premium packages (and where a good amount of profits sit in the ISP business), so I wouldn't necessarily call that commoditization. I believe if they roll out the Fiber product in a meaningful way, they will not give it away margin free and try to maintain some healthy profits from that business? I would think that's the current strategy, as Comcasts etc. on their bundled video/ISP packages enjoy very healthy margins (can be north of 40%), and even if they should erode, it should be a healthy business for some time...

Volume. Not everyone has a smartphone yet. Margin compression is inevitable, the question is, will be the market become sufficiently bigger that it won't matter? Companies like Amazon and Google may be willing to supply smartphones (software and hardware) and mobile data services at marginal cost to entice people to use their services. Apple does not have the ability to profit from services the way they do and their services division is at a huge disadvantage, because they are not offered outside the walled garden.


It probably will be in the long run, but that doesn't have to happen for Apple to lose this edge. Availability of the iPhone will stop being the differentiating factor in the long run, even if the mobile data services don't become commoditized.


In NYC, the best plan Verizon offers is 300/65 (down/up) and cost 200 a month. Google's gigabit plan is 1000/1000 (3 times faster for downloads, 16 times faster for uploads) and costs 70 a month. And oh yeah, the free plan.

This is sort of what I was getting at and wondering about. There is so much room to grow w/r/t smartphone penetration on a global basis. I think we can all agree that the incredible margins Apple enjoys today can not be sustained. But their iPhone business could still be extremely healthy 5+ years from now theoretically if they drive enough volume at good enough margins. I guess that was my only, uh, haha fairly obvious point. I still see this as a possible outcome.

And this forces Apple's hand (as the world heads this way) to develop a robust Internet services package to the consumer, or they get locked out of profits.

The only part I'm a bit confused on is Amazon/Google offering their own mobile data services at marginal costs - there is so much profit to be had partnering with the carriers, I can't imagine Amazon/Google side-stepping that part of the value chain in the foreseeable future? You speak to the idea of profiting wildly on Internet services... but this market has not been made yet. Google's mobile ad business is not that large, with annual estimates ranging from $1.2 bil to $6 bil this year - and they of course face similar problems FB does with mobile ads selling at low CPMs relative to their main ad business.

So as a hedge to the unknown of the actual scale/size of mobile Internet service profits, I'd think guaranteeing data service profit share via carriers will be a model for a decent amount longer for any company looking to sell smartphones...

So in your estimation - we'll look back on this incredible earnings runup for Apple (driven by smartphone and tablet sales) as a blip in the longer history of smartphone/tablet penetration? I can see this being true as well.

Haha, as you can see above I edited my post a bit to focus on the premium service package. Yeah, it will be interesting to see if Google Fiber does rollout, how the pricing will look like in multiple markets. Being an ISP on the buildout piece is as I'm sure you know an incredibly expensive business - there must be some ROI on it for them on the provisioning side, I'd think.

Either way, your posts have been pretty awesome dude, thanks again for sharing your thoughts.

If you had actually read the article rather than just the headline you'd know they captured '71%' of the TOTAL operating profit FOR ONE QUARTER where four of their biggest competitors posted losses owing mostly to mismanagement and not slacking sales or product margins. That 'total' profit for the sector was of course reduced by the losses reported by the other companies.

Use your head, over the long term Apple does not stand a chance of making 71% of the money in the cell phone business with 6% of the unit sales.

I did read the whole article - why do you think the 71% quarterly operating profit figure is not a good snapshot of where the industry is today? AAPL was at IIRC ~60% of total industry operating profits the year ago quarter - they're just getting stronger.

Of course not if you define long term as 5+ years - but the stat is astounding and a good reference point for who is actually making money in the mobile handset industry today.

http://www.asymco.com/2012/05/03/the...o-disruptions/

meekrab - so I posted this before, and as it seems you're interested in this profit stat, the above is imo a smart breakdown of why there are basically only 2 mobile handset hardware manufacturers (Apple and Samsung) that are making any money in the phone business:

So the ultimate point here is that the 71% stat I've cited is not some quarterly aberration, but is in fact a solid snapshot of where mobile handset industry profits are going. And it's not just because Apple is gobbling up other device makers share, it's largely because Apple and to a lesser extent Samsung are generating new profits in the high-end smartphone category (w/100% profit capture in that segment). And the other manufacturers are failing to execute a low-end device strategy that yields any profits at all.

Now, to your point, it's obviously very unlikely in 5 years that Apple will retain 71% of profit share of the market - but there are fundamental, disruptive forces in play that explain why Apple is dominating the handset market today - it is not some random series of events, and to dismiss the losses of LG/RIM/Nokia etc as merely "company mismanagement" is imo shallow analysis and ignores powerful market changes driven by significant shifts in consumer demand. Right now, the handset market is Apple's, and will continue to be in the near-term.

Al, why do you keep changing your sn?

All my ideas are speculative and for a longer distance than 12 month.

I invest over a longer timeframe usually my mainspeculation is that Apple had untill 2012 a huge gap to the competition for the high end devices and the high prices are usually not directly paid from the consumers....At least i dont know many that pay directly 800 $ for an Iphone ( german price ).

Apple still have a gap with there Ipads bud for the Iphone the gap is closed..If the consumers more and more choose Android and maybee in the future Microsoft ( I strongly believe that ), the consumers simple will not longer pay the "premium price".

You cant look to the stats for all handheld devices, many are still happy with a phone..and dont think to switch to a high end pocket PC.

The smartphonemarket itself is still relative small in relation to the hand-held devices and noone really knows how large the consumerbase will be over the time...and how many will choose a high end device.

Lets look to possible customers 3-4 billion people in the developed world
half of them might be interested in smartphones, 1 out of 5 maybee to an high end product thats 400 million...but that 400 million are still sold.

So we more or less talk mostly about replacement.

For the tablets Apple and the first months the Iphone 5 might be fine but for a 1-4 year timeframe i see at least here in germany that Apple loose marketshare and dominance to android and microsoft will have an effect to the industry too.

But its all speculation, and i have invested a few $ on this longterm.

Forgot it in my last post, i see potentzial for apple if the next generation support the 4 G Network ( china mobile ) and support flash.

But over a longer timeframe i have more than doubts.

jfc, flash is as good as dead.

Curious how you guys felt about this bet. I admire the conviction of Ahnuld in this spot as it's not a name that the majority wants to bet against.

I feel like getting AAPL for $600 in March of 2013 would be a good deal. Right?

Also why is there a second AAPL thread when we have this good enough one right here?

The recent iOS Maps fiasco is an illustration of a possible trend I was talking about earlier - that the smartphone market is increasingly becoming part of the broader online services market. Obviously Apple's management is smart enough to get this, which is why they pushed Siri before it was ready and are working to remove Google's presence from iOS devices. They have no choice but to build up their online service offerings, because increasingly, that's where differentiation will occur.

The problem is that I just don't see how Apple can win this war. Microsoft is a lot better than Apple at delivering online services, from infrastructure to software development to data-gathering, have been throwing billions of dollars at the problem and are a distant 2nd or worse in every single one of Google's core markets. Apple has approximately zero presence in search, zero presence in email - almost no one chooses to use Apple software or services on a neutral platform without having to interact with an Apple device. Why does a smartphone maker need a search engine? Well, what is Google Maps? It's a location search engine that displays results on a map. At this point, it's close to impossible to do maps as well as Google without having a comparable search engine, let alone mapping and location data. To compete with Google on maps, Apple has to duplicate much of the effort Google already puts into collecting data and refining its search results, only without the same ability to monetize it.