Squishy Margins: Apple Lower Margins Explained

Apple announced a their last earnings conference call  that they expect Gross Margins to be lower at the company for this quarter and into next year.  Here is a list of Margin squeezing forces that may be squeezing Apples margins.  

No one release, product, or strategy is the culprit here.  Do the MATH  a 2% narrowing of Apples gross margin will translate into almost a billion dollars a year in lower earnings (thats why we care)  That is more money than many new products will do in sales.

iPhone Accounting.  

Apple is accruing the income from iPhones over 24 months.  The expense created to enable the development, manufacture and sale of that phone is written off in the quarter it occurred in.  Apples manufacturing partner is currently rumored to be manufacturing 800,000 phones a WEEK.  The expense for this will show up in the next 90 days.  The income will not be completely realized until September of 2010.

Retail Sales Mac/iPhone

Mac sales are growing like crazy, much faster than the industry.  In order to maintain that growth, Apple has partnered with additional retailers, most notably Best Buy to sell their products.  For recent history Apple products have been sold primarily directly by Apple. 

Broad market competition

The larger Apple gets, the more price sensitive their next marginal customer is... Apple will be lowering their prices on iPods, Macs, iPhones in order to get them into more peoples hands because as has been shown is that if you buy one Apple product you  are MUCH more likely to buy another.

Product X

Product exists as does product Y and Z .  These products will have narrow gross margins on release but I think it is a red herring hiding as the product BY IT SELF will not be large enough a force to lower the margins as Apple has indicated.  All of these forces together are conspiring to lower the margins.

More to come

MAC to PCs PC to iPhones... Apples journey to Network externalities

Who is going to be MAC to Apples PC in the portables business?  Yea its hard to get your brain around but it that is why Apple has spent so much time and effort courting the development community. (Near free killer development tools and a cheep way to distribute)

 Apple wants to be the company that when choosing a phone potential customers say... "I know MotoNokiaHTC makes a great phone but All the useful applications are on the iPhone" about.  

Apple wants the power of the "Network Externality"  They have aimed their considerable marketing arsenal at all of us and fired their message in every way possible that we want an iPhone, that having an iphone and the internet in your pocket is indispensable. 

 IF I say IF Apple can succeed in getting 50-100 million iPhones into the market AND IF one (OR several) of the developers working on creating applications for the iPhone actually create something that works really well then ....  Then ... 

Everyone will have compelling reasons to use an iPhone because the Network Externality will make the product the product you use simply because it is the one everyone else uses.  

Remember when you (or your grandfather) didn't buy a mac in 1999?  It was because they sucked Outlook or Word or Excel (or some other program) only ran on a Microsoft PC, you had to share files and BLAM no choice your buying a PC.  

Apple currently has as much as 25% of the US smartphone market share.  Their share of this market and the size of the market are going to grow explosively over the next few years (demographics get over it).  

Think about it... Think ahead to the time you will be able to pick up a version of the  iPhone for $50 bucks at the mall kiosk.  There are other phones and they will gain in functionality but really who would not buy the phone that has 2500 (as of this morning) applications you can download?  Apple is going to be one of the dominant players in the smartphone business and  to complete my metaphor Apple/iPhone is PC because it will hold a dominant position in this product category for a very long time. 

Manic iPhone owners crave. . . Peace?

By virtue of the fact that Apple has recently added the ability to sort applications in the App Store by "Popularity" it is now possible to know the following ironic factoid.

The top two most popular applications that require more than zero dollars for purchase for the ADD addled owners of the, in touch all the time in all places and conditions iPhone, are ... Wait for it

Ambient Noise generators...

Namaste  Ambience #73 overall, and Asleep #93 overall  as Fake Steve would say we honor the place where your quiet and our manic gizmoness become one...

Weather Underground iphone Local weather Hurricanes and more...

Review of free iPhone Web-App Weather Underground.

I have tried several iPhone specific weather applications and this is by far the best setup.

click on this link in your iPhone to open Http://i.Wund.com

You will be presented with a splash screen including some links for severe weather and regions of the US,  Put a US Zip Code in the search screen and hit search.

There is a feature header followed by the weather in your area.

Current, Radar, Forcast, and Warnings buttons will each take you to a one iPhone screen sized outline of just what you want to see.   The data is right off the NOAA web site but better formatted and easier to read. the Warnings information in particular is timely and easy to find.

You can track hurricanes, and 

watch thunderstorms come in. We used the Radar feature to see if we were driving into any thunderstorms one day last month. very handy.   It will give you a running forcast for the next 8 days of weather Time of sunrise and sunset and the current state of the moon

To add the app to your home screen, find the location you want the weather for then press the + at the bottom of the screen.  

Give it a name and your good to go.  Enjoy...

Psystar, Hewdell Packovo, and Apple Antitrust

OK, 

So as we have covered in the past Here and Here.  There may be more to Psystar than a couple of guys in a garage making Mac Knockoffs.  Think about this for a second.  You have the wherewithal (read cash) to start a business selling computers.  The business model you have chosen his shall we say... High RISK.  and right on cue Apple comes along and sues you.  Now comes the interesting part.  You Lawyer up and sue them back...    I will not handicap the chances of the case.   

Now lets suppose that the cost of this lawsuit will cost an amount equal to your projected net earnings of the business for  the next five years (read first and only) of the firm.  Now comes the question that leads you down the primrose path of conspiracy...

WHY WHY WHY,

   Would you invest in a business with no hope of return for 5 years?  NO?  that makes you sane.  so what set of SANE circumstances would make Rudy Pedraza (CEO of Psystar see profile on Crunchbase) plan on losing money for the foreseeable future?    

What if Hewdell Packovo the not real in fact mythical computer company that produced close to half of all PC's in the world were looking for growth in a market segment that they could not currently compete?  And further what if Rudy Pedraza scion of underworld computer manufacturing were approached to start a company with Hewdell Packovo's' money and at no risk to himself in order to test the law and Apple's resolve around these very issues?

He sounds saner now.  

We don't know the the story of Psystar yet Rudy/Psystar could be sane and fighting the good fight with everything he has on principal but the usual outcome when a lawsuit is filed by a 150 billion dollar company is that the company folds.  

Mobile Me

         Like finding out Mom’s famous Home Made beans really came from a can

Mobile Me, is a huge disappointment.  I purchased the family plan on the “Exchange for the rest of us” tag.  Finally .Mac Makes sense to me.  The ability to manage a household calendar with multiple users that updates over the air to my iPhone!  Oh yea that is worth a subscription but Holy Crap!  Even without all the launch issues the omission of multiple user calendar sync the iphone made it a non starter.  You know what I hate about it though… the unfulfilled promise.  It’s so Microsoft to talk about all the features that don’t actually work. (yes I still have a resentment about the Win 98 computer that never woke up…) The Mobile Me overpromise/vaporware is like finding out your favorite ball player used steroids.  I want to return it.  It is sad really I should grow up and expect Apple to act like the Multinational corporation they are.  The thing is though I want it to work so I am continuing to play with it I downloaded Busysync (http://www.busymac.com/) to see if that will help me get close enough to what I need.  It seems pretty slick but remind me again why I need Mobileme if I can sync everything using Busysinc?…  More to come

Kvetching Apple

Michael Arrington gets it right.  He has an office and (a family) he is tech support for.  He uses Macs buys and supports them for other People and when they do not work it reflects poorly on him (read me) wastes his time, and makes him consider market alternatives (currently no good ones but nature abhors a vacuum). 

I don’t think this is going to get better.  Apple is focused on Mobile Me (can I call it something else? I really hate the name.)  and will solve those problems since it needs to work but I think the hardware problem is here to stay.  

Apple successfully differentiates its products with design (e.g. you want to use the product, find it useful and attractive, all the things that make it NOT a Dell) and software.  Build quality is an aspect of design but often times not the one that gets us to a purchase decision.  That said, Apple Desktops (according to a popular consumer magazine…) are better than the industry average for repair rate.  Apple Laptops however are behind other laptop brands in quality although given the purchasing profile of Apple laptop purchasers (eg younger, less business use, more educational use) I wonder if it is because the Apple laptops are beaten more…

The “Apple at the crossroads” article is popular right now but it is accurate.  Growth may have outstripped their model/resources, how will they respond?

The thing is that despite our kvetching neither Arrington nor I are really considering PC alternatives.

iPhone IS the mobile internet

Engadget who has gone out of their way to mention they had no intentions of writing any proprietary access programs for mobile devices today announced an iPhone specific Application/browser as a result of research that showed that more than 95%! of all mobile traffic to their site is iPhones (iTouch count too).   LINK

Interweb smack down

Given the current crop of mobile computing devices and even some of the ones in near term development.  who will make the product people are more or even AS likely to use on the interWebs as the iPhone? The top Win Mobile phone is the HTC Touch Cruise and by my feeble math the TOTAL use share on Engadgets web site of all Win Mobile phones represent only 1%.  Maybe Microsoft is emulating Apple by being the “The super-small market-share guy”

Network Externalities are the path to dominance in a format war (see evil empire vs. Apple mid 80s to …) and Apple is out to a huge early lead in the mobile computing marketplace, Blackberry notwithstanding.  Businesses and individuals will find the choice to use an iPhone easier as time goes on because it will do more than other phones just because it already does it.  There is no Technical reason Engadget could not build software optimized for another device but they won’t.  They won’t because there will be no reason to and the people buying a mobile computing device that want access to Engadget ( or any of the other gazillion iPhone accelerated web sites) will find that iPhone is the only one that gives them what they want.

Apple will dominate the mobile computing space, the questions are by how much and who will be the alternatives.  The only current promising player seems to be Android but not for a while.  WinMobile is DOA so Microsoft could (not really) give up and start over with a real competing product but that would be years away.  Blackberry is a wildcard clearly a great device but the lack of a real computing/browsing environment mean it cannot win longer term (unless they do he said humbly).

The competition has a little time the market will move slowly to iPhone but there could be 50 million on the street by the end of next year.  Remember Jobs pointed out that 1% of the 1 billion unit per year market by the end of 2008.  10% world wide or 100 million a year will not happen overnight but the forces that could lead to that conclusion are undeniable and very powerful.

test

iPhone Accounting Sucks

First the Disclaimer

 

Since I have no reason to “Know” anything more than anyone else that reads public documents from Apple.  I cannot make predictions about what will happen or what the company is planning in the future.  That said I do have an ongoing dialog with myself about what and why things happen…  So what follows is a list of questions regarding the unknown and what it might all mean for future quarters.

Some General Observations

24 month recognition of iPhone sales sucks.  It seems designed to smooth earnings and give management a warchest of cash.  It made more sense last year while the previous revenue sharing arrangement with AT&T was still in play but now that they are getting a subsidy at time of purchase It makes little sense.  Management can justify recognizing the earnings anyway they like and it is a reasonable argument that the product has a 24 month life.  That said I get updates on my 2 year old Mac once or twice a month and they seem to be capable of recognizing those earnings at delivery.  Over the last 4 quarters Apple has built up over 4 billion in deferred earnings (about 65 cents a share net NOI) This problem will be more pronounced as time goes forward as the business grows, since Apple will only recognize 1/8th of the sales from the current quarter in the current quarter.  From July 1 to the end of this year Apple will sell 4-6 billion dollars worth of iPhones at retail that will translate to only 500 to 750 million in earnings. Even more dramatically the net earnings per share if recognized would represent as much as $1.00 per share vs. 12.5 cents.

Hewdell Packovo, Psystar and Apple

Psystar Lawsuit update…

Recently I outlined a possible conspiracy theory that while unlikely is fun and well… its fun.

Link

Just for fun I think I will try and track the goings on of the lawsuit as it progresses.  As a little background Psystar came into existence in the first couple of weeks of April shipping “Open Computers” with Mac OSX Pre installed.  Initially they could not even promise system updates since the OSX Servers would not have recognized the computers as Macs.  That being solved they expanded their offerings to include servers.  

Apple apparently filed their Lawsuit on July 3 and since then there have been several extensions for hearings (most likely procedural) but they are currently scheduled to meet/have a hearing/beatdown, on July 28th.

Along the way and this feeds right into the single bullet theory that are my paranoid flailings, they hired Their Lawyers Carr & Farrell LINK Who Have apparently worked/fought with Apple in the past.

Just thinking about the nature of this case don’t you think that Hewdell Packovo even without the conspiracy theories is VERY interested in following the progress/outcome?

Information week thinks so

So What happens…..  

To Apples stock price if they lose…

To Psystar if they win?

Facebook Jumps the Shark

So I get this nice email message from my 75 year old aunt Judy the other day inviting me to Join Facebook so I can keep up with all the family do da…

Thing is the last email I got from Aunt Judy was from WebTV, you see where I am going with this?

Maybe Facebook is so cool, SO all encompassing that there is room for everybody or maybe it jumped the shark.

Apple Everywhere… Margins, Growth and Pervasive Appleness

In the 4th quarter last year Apple earned 904 million dollars on 6.2 billion in income with a Gross Margin of 33.6%. They are predicting 905 million in income on 7.8 billion in income with Gross Margins of less than 32%.  (and 30% for 2009)  Apples Margins may be coming in but they are going to earn more than a 1.00 per share in the 4th quarter this year ( July-Sept 2008 )

Apple has freaked out all the analysts by changing the “Code” they use for what their earnings predictions mean.  Apple is a large multinational company with a large range of products and  sales in 100 countries (yea I made that up) predicting how many for how much and at what cost is a crap shoot at best.  So the “Code” becomes a way for the analysts to come up with a nice safe prediction (safe because it will be close to all of the other predictions.  It is hard to get fired/sued if you have the same prediction as everyone else) that will also be safely leapfrogged by actual results.  

That said Apple has made it clear that they are changing the game in the coming quarters and Gross Margin is expected to suffer as a result.  I have written before Hereand Here about some of the forces at work narrowing margins for Apple.  Apple is not introducing A (meaning one) product that is going to narrow margins.  They have a long range plan to take over the world Grow their business. 

Apple everywhere is a strategic, systematic broadening of Apples scope while simultaneously increasing the barriers to entry for their competitors.

More and lower priced computers, more and higher priced computers more and lower priced phones, mobile computing devices …. Apple is going to meet the market where they are and spend a little less time enticing the market over to them.  How long until the retail price of an iPhone hits $50 bucks? (subsidy still FAT)

RBC today predicted sales of 3 million Macintosh computers in the quarter.  Why not.  The back to school market has shown huge growth (50% Plus over the last couple years) and Apple increased their annual back to school iPod offer to include not a $150 nano but a $300 iPod Touch.  Narrower margins…

Hard to say what comes in the short term but I suspect more computing options for less than $1,000.  Some very competitively priced portables, and more iPhone and iPod options.  The name of the game is Network externalities and Apple knows if you have any one of their products the chances of your taking a chance on another one go up exponentially (yea I made that up too but it goes up a lot) 

App Store Chaos

I have written before about the piles of usless programs piling up quickly in the Apple App Store. There are some great and creative ones too but increasingly they are hidden beneath the iBeer detritus.

There are iTunes issues, (lack of good search/sorting capability), that compound the problem. But the marketplace is chaos by design.

Apple designed the App Store as a unique and ONLY outlet for iPhone/Touch applications. The more Apple restricts programs for sale there the better the argument for a developer restraint of trade lawsuit.

I could be wrong but what the evidence suggests is that Whatever review their is for the programs submitted is just to make sure the program is not malicious and does not break contractual agreements with carriers.

What do you think?

iPhone Bonanza

iPhone Sales continue to impress as rumors of 800,000 iPhones per week production numbers in China are stunningly huge. Todays news that the iPhone will be sold at Best Buy locations is another example of Apples now clear strategy of an iPhone in every pot.

Up until recently Apple has been a niche competitor in a very large pool of consumer electronics. They have decided for structural reasons particularly for the iPhone that they want to sell to the broadest possible market in order to create network externalities that will give them a sustainable advantage in the market for years to come. Steve Jobs alluded to it the other day when he mentioned that he sees the long term advantage the iPhone will have will be the software available for it.

In order to execute on that vision Apple has broadened both its sales channels and markets. Selling through third parties however will nessesitate narrower margins