The Bigger Picture Apple Investors Are Missing

| About: Apple Inc. (AAPL)

With all the talk about Apple (NASDAQ:AAPL)'s cash hoard and cheap valuation, investors continue to miss the bigger picture. Apple has a tremendous problem in Asia and isn't doing anything about it. The problem Apple has is not with customers wanting the iPhone, but with the mobile carriers themselves - the gatekeepers between Apple and the consumer. According to Bloomberg, Apple could be missing out on as many as 2.8 billion customers!

Samsung Is Eating Apple's Lunch

Since 2011, Apple has signed fewer than a dozen new deals with new carriers. Currently Apple has deals with about 240 carriers globally versus 800 carriers for Samsung (OTC:SSNLF). This disparity represents billions of potential mobile phones users in China, Russia, India, and Japan. In Japan the nation's largest mobile phone carrier NTT DoCoMo Inc. (NYSE:DCM) doesn't carry Apple products and neither does China Mobile Ltd. (NYSE:CHL), which has over 700 million mobile phone subscribers. These carriers are balking at providing the subsidies necessary to carry Apple products. This has allowed Samsung and Android to capture an even greater share of the worldwide smartphone market.

Apple's prior business model required carriers to guarantee a minimum number of sales and a price north of $600. In the beginning Apple was able to extract those types of terms from companies like AT&T Inc. (NYSE:T) and Softbank (OTCPK:SFTBF), but that isn't working with other carriers. The other carriers are unwilling to bend to Apple's terms because they have grown and survived without the iPhone. As new carriers have failed to commit to Apple products, Apple has faced a saturated market in North America and Europe. This explains the more than 36 percent decline in its stock price since its all-time high in September. Apple's gross margin dropped from 47.4 percent last year to 37.5 percent in the latest quarter. Margins will continue to drop going forward as the smartphone market has become so competitive.

But an even bigger problem for Apple's growth in Asia is that the iPhone's price is too high in India and China. More than 80 percent of the market is prepaid and monthly cell phone bills can be only $10 or $11. The economics of an $800 phone for this demographic doesn't make much sense.

There has been talk of Apple developing a cheaper iPhone to appeal to this market, but it hasn't happened yet. Even in terms of the older iPhone 4S, it still is only cheaper than the iPhone 5 in Asia by a little more than $100. It makes sense for Apple to discount the 4S, why it hasn't done so yet makes no sense.

By continuing these missteps in Asia, it has created opportunities for other smartphone manufacturers. Samsung has taken the lead in this department by offering a variety of devices in different styles, screen sizes, and price points. With a company like Samsung offering customization to individual carriers and their subscribers, the carriers ask themselves why do we need Apple and its terms? They have been doing just fine without the iPhone on their networks and are not going to let Apple dictate terms. For Apple, not being in the prime negotiating position is a spot the company is not familiar with and quite frankly, doesn't know how to deal with.

Technical Issues

The last and final piece to this puzzle is that many of the carrier's networks cannot technically carry the iPhone. Case in point is the world's largest mobile phone carrier China Mobile. Currently, the iPhone is not compatible with China Mobile's network. According to China Mobile, Apple hasn't made the technical adjustments necessary. There have been talks of a deal between China Mobile and Apple, but that has yet to materialize. China Mobile CEO Li Yue has said, "besides the technical issues, the business model and benefit sharing still need further discussion." To me this is a sign that the two companies are still far apart on completing a deal.

Bottom Line

Apple needs to adapt to a changing market. This is something that the company didn't have to do in the past as Apple was driving the market. That market has now become saturated and the driving market is in Asia where Apple lacks a significant presence. Until Apple can counter Android phones that are tailor made to the Asian market, look for continued weakness in margins and the stock to remain depressed. Even though the stock has bounced recently, Apple is still almost $250 off the all-time high.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.