Why Apple Isn't Likely to Change Its Strategy

The blogosphere is abuzz with word that Apple Inc. (AAPL) is poised to release its latest iPhone imminently. The consensus conjecture has put a date in the U.S. of June 17 — less than a month from today.

Will the launch equal last year's release of the 3G, where line-ups snaked for kilometres (sorry, miles) outside BestBuys (BBY) days before the vaunted smartphone's release? No, analysts say.

In fact, sales of the device are slowing for Cupertino, Calif.-based Apple, with penetration levels in primary markets "higher than investors may think," writes Scotia Capital equity analyst Gus Papageorgiou in a note to clients on Wednesday. "New devices will likely provide periods of temporary growth," he says, but the iMania of 2008 may be running out of steam.

Yet Apple isn't likely to change up its strategy. Here's why:

Its exclusivity agreements with providers like Rogers Communications Inc. (RCI) and AT&T (T) are lucrative as is. Subsidies would come under pressure if the company chooses to open things up to other carriers, the analyst says.

That principle also applies to the introduction of variant iPhone models. One of Apple's primary advantages is its AppStore. Application developers have flocked toward the device because they know its specifications are universal across all iPhones. The potential lift in sales isn't worth it. Other makers that have fragmented their hardware have experienced app glitches. “Expanding form factors would likely broaden [the iPhone's] appeal but doing so may threaten one of Apple's main strengths,” the analyst says.

Lastly, Apple could attempt to develop a CDMA-network friendly iPhone, which would "dramatically" open up the available market. The device is currently only available to GSM network users, thus why Rogers sells the product here, not Bell Canada or Telus (TU). But again, its simply not worth it right now. "The incremental costs and resources required to design, develop and certify a CDMA device are likely prohibitive," Mr. Papageorgiou says.

Instead, the company will likely focus on expanding distribution into developing markets outside of the U.S. and Canada, while optimizing the current device's performance (the amount of power it chews up is one sticking point with users). “This is more in line with Apple's traditional strategy of focusing on delivering high levels of value to its customers across a narrow product portfolio."

Scotia analysts still have faith though. "We believe the company's profitability will remain intact and its gross margins are very likely to continue to surprise on the upside." They've assigned a one-year stock price target of $155 and rate Apple a Sector Perform.

Comments

[Techtrader10:]

Does anyone have a breakdown of units sold for Apple's computers, iPods, and iPhones? Also, can anyone provide revenue numbers for each catagory? A year ago, analysts were saying that iPhone sales would equal approximately 7 percent of gross revenue, I wonder what that number is inow?

May 28 09:50 AM

[pats:]

Apple reports units sales every quarter and is available at www.apple.com/investor/. Each report contains a breakout under data sheet . The thing you need to remember is Apple is deferring revenue on the Iphone and recognizing over the following 8 qts. So a key figure is the current deferred revenue which is 5.467B.

May 28 11:08 AM

[Synthmeister:]

The one thing Apple might do, is get AT&T to offer cheaper data plans. That could push a new round of iPhone mania.

Second, the iPod touch is finally coming to its own and in doing so is effectively doubling Apple's mobile OS market-share. I won't be surprised if the touch outsells the iPhone this year. Parents and teenagers are realizing it is a much more versatile and cheaper alternative to the PSP and DS when you start to include $30 and $40 games.

May 28 11:54 AM

[Economyst:]

Apple model is the reverse of the PSP, Nintendo DS -"Gillete Principle" where the device/ hardware is cheap but the recurring sales -ie the games are expensive. Apple value propostion is buy the expensive hardware and then the cheap games.
The games/apps are complimentary products to the Iphone and Ipod Touch - they have a negative cross elasticity of demand. Apple touts 1 billion downloads but the vast majority are free.

May 28 12:42 PM

[JWCinNC:]

@Economyst

Not sure what "have a negative cross elasticity of demand" means - but in english this is what it means to a parent of a child who is deciding which to buy. DSi - about $150. PSP - about $155. 16 GB iPod touch - about $200. Three DS or PSP games (new) - about $60 to $80. Twenty games, half free, half $.99 - about $10. Now the two devices are at the exact same cost. Add every song we already bought or ripped, any movie we already bought or ripped, internet, browser, mail, IM, sports, etc. etc. I'm having a hard time letting my son pay $150 for a DS. Particularly when he get bored (children do this) with games 1-20 , he can then buy games 21-40 for less than half his monthly allowance (even if they are all $.99)

May 28 01:12 PM

[Neurotic Nomad:]

My money is on June 26.

betterisnotperfect.wor.../

May 28 01:48 PM