Apple losing its grip but future still looking bright
Source: Agencies |
January 30, 2013, Wednesday
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Print Edition
Print Edition
APPLE Inc's shareholders have been hit by one of the bloodiest weeks in the history of the stock, but wider fallout from such weakness might be more important to the long-term value of their investments.
While Apple's iPhones, iPads and Macs remain gold standards, signs the company is losing some of its edge in the smartphone market suggest its clout with business partners could wane.
Recent comments from executives at phone carriers and component suppliers show they see room for at least some shift in the balance of power.
In particular, a move by No. 4 US mobile service provider T-Mobile USA to stop subsidizing smartphones around the time it starts selling the iPhone in three months time may put pressure on Apple, especially if other carriers follow the example.
US phone companies mostly subsidize handsets in return for two-year contracts. If customers start paying the full price for an iPhone they might look for cheaper alternatives.
Asked whether carriers are now in a better position to negotiate lower prices with smartphone makers such as Apple, Fran Shammo, chief financial officer of Verizon Communications, said that having four strong platforms - Apple, Android, Windows and BlackBerry - was leading to more competitive pricing.
"The more operating systems we have to compete in this area the better the competition," he said.
Lower gross margins
Verizon Communications Inc is the majority owner of Verizon Wireless, the biggest US mobile provider.
Apple sold a record 48 million iPhones in the December quarter, but its share of the overall market is expected to peak this year at 22 percent and become dependent on repeat business unless it accepts lower margins by making low-cost iPhones, according to ABI Research.
Meanwhile, arch-rival Samsung Electronics Co Ltd has overtaken Apple as the world's top smartphone seller.
If Apple's customers and suppliers, let alone rivals, smell blood and take a much harder line in negotiations, it could erode Apple's gross margins, which slipped to 38.6 percent in the last quarter from 44.7 percent a year ago.
Apple declined to comment on its business with partners, although when CEO Tim Cook was asked last July about subsidies potentially being reduced, he said the total subsidy carriers pay was fairly small compared with revenues over a two-year contract. He also said carriers told him the iPhone had many advantages, including lower churn rates and the ability to sell shared data plans for other Apple products such as the iPad.
Certainly, Apple's astounding run over the past decade and rising iPhone sales have given it unrivaled power to negotiate with carriers and suppliers.
Down to earth
Last week's results fell short of Wall Street's estimates, sending Apple's share price down more than 14 percent. That underscored signs Apple is coming back down to earth, transforming from undisputed Wall Street darling to a more normal company.
A less powerful Apple could be welcomed by telecommunications carriers and component suppliers that have grown accustomed to the tough terms Apple was able to exact thanks to its massive scale and leadership in the market.
Wireless carriers that once agreed to unfavorable contracts and subsidies cannot live without Apple, but could have more leeway in the future if Samsung and other device makers continue to grab market share.
For now, Apple is still a mega player, even if it ships fewer phones than Samsung. For many consumers, its cult-like status remains unchallenged.
Even with slower growth, Apple is still widely seen as a highly successful company with a bright future and plenty of potential to produce another revolutionary product. "What rabbit will Apple pull out of its hat to once again transform the industry?" asks Joseph Doyle, who co-manages wealth management firm Morris Capital Advisors' large cap strategy. "And if they can't do it, does that make it an awful investment? No, that will make it more like everything else."
While Apple's iPhones, iPads and Macs remain gold standards, signs the company is losing some of its edge in the smartphone market suggest its clout with business partners could wane.
Recent comments from executives at phone carriers and component suppliers show they see room for at least some shift in the balance of power.
In particular, a move by No. 4 US mobile service provider T-Mobile USA to stop subsidizing smartphones around the time it starts selling the iPhone in three months time may put pressure on Apple, especially if other carriers follow the example.
US phone companies mostly subsidize handsets in return for two-year contracts. If customers start paying the full price for an iPhone they might look for cheaper alternatives.
Asked whether carriers are now in a better position to negotiate lower prices with smartphone makers such as Apple, Fran Shammo, chief financial officer of Verizon Communications, said that having four strong platforms - Apple, Android, Windows and BlackBerry - was leading to more competitive pricing.
"The more operating systems we have to compete in this area the better the competition," he said.
Lower gross margins
Verizon Communications Inc is the majority owner of Verizon Wireless, the biggest US mobile provider.
Apple sold a record 48 million iPhones in the December quarter, but its share of the overall market is expected to peak this year at 22 percent and become dependent on repeat business unless it accepts lower margins by making low-cost iPhones, according to ABI Research.
Meanwhile, arch-rival Samsung Electronics Co Ltd has overtaken Apple as the world's top smartphone seller.
If Apple's customers and suppliers, let alone rivals, smell blood and take a much harder line in negotiations, it could erode Apple's gross margins, which slipped to 38.6 percent in the last quarter from 44.7 percent a year ago.
Apple declined to comment on its business with partners, although when CEO Tim Cook was asked last July about subsidies potentially being reduced, he said the total subsidy carriers pay was fairly small compared with revenues over a two-year contract. He also said carriers told him the iPhone had many advantages, including lower churn rates and the ability to sell shared data plans for other Apple products such as the iPad.
Certainly, Apple's astounding run over the past decade and rising iPhone sales have given it unrivaled power to negotiate with carriers and suppliers.
Down to earth
Last week's results fell short of Wall Street's estimates, sending Apple's share price down more than 14 percent. That underscored signs Apple is coming back down to earth, transforming from undisputed Wall Street darling to a more normal company.
A less powerful Apple could be welcomed by telecommunications carriers and component suppliers that have grown accustomed to the tough terms Apple was able to exact thanks to its massive scale and leadership in the market.
Wireless carriers that once agreed to unfavorable contracts and subsidies cannot live without Apple, but could have more leeway in the future if Samsung and other device makers continue to grab market share.
For now, Apple is still a mega player, even if it ships fewer phones than Samsung. For many consumers, its cult-like status remains unchallenged.
Even with slower growth, Apple is still widely seen as a highly successful company with a bright future and plenty of potential to produce another revolutionary product. "What rabbit will Apple pull out of its hat to once again transform the industry?" asks Joseph Doyle, who co-manages wealth management firm Morris Capital Advisors' large cap strategy. "And if they can't do it, does that make it an awful investment? No, that will make it more like everything else."
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