Apple analysts and enthusiasts expect the company to announce a new, smaller iPad to compete with such devices as the Kindle Fire and Google Nexus – two tables vying for the $199 tablet market.
Rumors suggest that Apple’s next generation iPad could be smaller, less than 8” diagonally, and feature light in order to get the iPad under the critical $200 price point.
A Changing Strategy at Apple?
Apple’s recent movements in the tech space suggest the company is facing stronger competition. Last year, the company moved to keep its older iPhone 3GS product available for sale. The idea is that Apple can hit two types of consumers – those who want the best and newest iPhone at the $199 price point, and those who want an iPhone at a lower cost. The 3GS is currently free from AT&T with a 2-year contract;
The strategy seems to be working. Even my mother, a Microsoft loyalist, recently purchased her first smart phone – an iPhone 3GS – as part of a new 2-year contract. Apple believes that at a lower price point allows it to reach into a new market, while increasing its market share and improving its App Store revenues. The company takes a massive 30% cut from every app sold in the App Store.
But this new strategy may be problematic. For the first time in the company’s history, Apple has to compete on price. Never, ever has Apple been the low-cost leader in a particular space. Instead, it relied on a monopoly on its own operating systems, selling laptops, mp3 players, and smart phones at a price well above similar Microsoft and SanDisk devices.
Why Investors Should be Concerned
Apple’s foray into lower-cost products may mean that the company now has to compete on price. Nike is a perfect example of a company that does not – it’s shoes and clothing are consistently sold at much higher prices than competitors because of its brand.
Speaking of branding, cheapening a brand is something very few companies want to do. Take, for example, Ralph Lauren, a clothing company built on a premium brand. The company also owns the well-known “Chaps” brand, which targets a consumer with less disposable income than Ralph Lauren. Of course, Ralph Lauren could put its name on less expensive garments, but instead it chooses to operate under a different brand for a lower cost audience so as not to dilute its signature namesake.
Apple is very much a premium brand. In fact, the iPhone has become a status symbol in China, where millions of people own the iPhone 4s despite the fact that Siri cannot even comprehend spoken Chinese.
Amazon and Google may be delivering a kick to Apple’s bottom line. In the past few years, Apple’s margins have grown tremendously as it keeps more and more profits from the same dollar of sales.
Apple’s sales have also increased, as you can see from this chart grabbed from Google Finance:
Since 2007, margins for Apple have nearly doubled.
Watch Margin Compression like a Hawk
Investors hate with a passion any brand that experiences margin compression, especially if the firm is a so-called “growth” stock. As Apple launches a low-margin tablet product (one which may cannibalize sales of the pricier, fully featured iPad), and looks toward other low margin devices (the company is rumored to be entering the cable set-top box market), Apple’s margins may be under pressure for several quarters. If the brand is devalued, margins may permanently deteriorate.
If I were an Apple stock shareholder, I would be concerned about Apple’s position on the defensive. For years, Apple has maintained premium pricing and a near “luxury” position in consumer electronics. Should Apple spread itself too thin to target lower margin sources of growth, expect future multiple compression. A high profit margin is indicative of earnings quality and resiliency; declining profit margins imply the company is working too hard to grow its bottom line.
What do you think? Can Apple sustain itself as a signature brand in the consumer electronics space?
Now that Android is firmly entrenched, I suspect Apple is in for a rough ride. iOS has no real technological advantages, Apple can’t match the product cadence of the collected Android handset developers, and in the long run closed platforms tend to end up being niche players.
Exactly my thinking regarding closed-end products. I do think Apple has a slight edge in the fact that its users LOVE to spend money. They outspend Google users on apps by like 4-to-1 but I do think that will change as Apple loyalists are pulled away by lower cost Android devices.
What are you talking about? iOS is far easier to develop for (less device fragmentation and forking of OS) and far more profitable (Android users are cheapos and geeks who want free stuff, neither of which buy many apps).
The fact that you mention “technological advantage” shows you just don’t get it.
LOL JT, “slight” edge because iPhone uses will actually pay for data plans and apps! That’s like saying mankind has a slight edge on other mammals because it has a larger brain.
You people need to understand Apple is successful *because of* it’s ecosystem, not despite of.
Then again, Linux did trounce Windows on the desktop, LOL.
While I don’t know that much about the technological aspects, I suspected that it was only a matter of time until another company “closed the gap” on Apple.
I think it should be investing law that “all tech companies eventually go bust, and do so faster than other companies.”
Funny, I’ve been long Apple and IBM 19 years, and they make more money every year. How does that fit into your “law”?
Maybe they are lowering the cost of production by a large amount, allowing their margin to stay the same or increase? But I agree, Apple has been killing it, but you should always watch a stock that seems invincible.
The margin on the new iPad will have to be razor thin to compete with similarly priced Google and Amazon products. The only way I think they’ll be able to drive margin higher is with two different SKUs – one with a minimal amount of SSD storage, and one with slightly more (at a much higher price.)
Either way, Apple’s definitely changing its game to compete on price. Rare to see a top brand do that.
It will definitely be interesting to see what happens! I love Apple products. In fact, I’m typing this on my MacBook while listening to music on my iPhone. But I’m pretty sure they won’t be on top of the world forever.
No company lasts forever, but I am impressed with Apple’s turnaround and longevity as #1 in the phone space. Even still, I think Samsung and company will eventually take over the show.
I’m not sure that it’s a sign of weakness, but rather a way for them to make more money. It’s simply a market they haven’t tapped yet, and they’re probably looking to do so.
I think there’s a lot of value in tapping a new market, but if you’re selling $200 products in lieu of $500 products just to defend your position against a competitor, things might not be as rosy as they seem to be.
Is Apple playing catchup with their technology? Absolutely. Is it a bad thing for them? Most likely not.
Apple might just be going the way of Microsoft: an established company making good money, but losing the edge of being the technology leader. In the beginning, Apple needed innovation to get customers. Now it has those customers locked in with their app ecosystem, iTunes and iCloud. That makes it expensive or at least inconvenient for someone to abandon Apple for Android or anything else.
Apple’s financials will continue to look great, because they’re forced to account for iPhone revenue over 24 months. That means for the next two years they will continue to show great financials from the iPhone. And I doubt if they will ever sell anything at thin margins – that’s simply not the Apple way.
Nothing to be ashamed of – nobody can grow at 25% per year forever. They know how to make money and iTunes and the iCloud will continue to ensure people are hooked and forced to buy their products, even if they’re overpriced and not leading edge any more.
Personally, I avoid them because of their overt and continuous attempts to lock me into their ecosystem. But there’s no doubt millions of others don’t care. So even though Apple plays catchup, they’ll continue to be a significant part of the landscape and make money. Just like Microsoft does.
“For the first time in the company’s history, Apple has to compete on price. Never, ever has Apple been the low-cost leader in a particular space. ”
Nonsense. The iPad is very competitively-priced due to Apple’s mass-quantity buying and pricing power. Unless you count AMZN’s money-losing Fire. Which I don’t.