There was a time when people either chose an Apple (AAPL) smartphone or, if they thought it was too expensive, they'd settle for an Android smartphone. Being able to afford it was the defining factor.
While at times, spec-wise, Apple was selling about the same devices as the Android competition, people still opted for Apple at a higher price. That is the very definition of Apple having a moat, and its incredible margins thus being sustainable.
I am afraid that increasingly, that isn't the case anymore. There are growing signs that people are starting to opt for either Apple or (some) Android phones as if they were on equal grounds even if they carry about the same price and specs. This is a tremendous change in attitude, and could represent a breakdown of Apple's traditional moat.
Case in point, the Samsung S4
Enter the Samsung S4 (GM:SSNLF). With the Samsung SIII, a phenomenon close to what I described was already showing - it sold 15.4 million units during Q4 2013, compared to the iPhone 5's 27.4 million. But the S4 is now outpacing the SIII considerably. It sold 4 million units on its starting weekend (to the iPhone 5's 5 million) and is now on track to push 10 million phones before its first month is over.
This is significant, because the S4 costs about the same as the iPhone 5. In its new "plain Android" version, it's going to retail for $649. That's the same price as an unlocked 16Gb iPhone 5. So one can no longer say that people are going for the Samsung on price. They aren't.
And if competing products get chosen at the same price for about the same specs at about the same selling rate, then one can no longer say that Apple has an insurmountable moat to its business.
At this point, Apple's stubbornness might be the problem. Perhaps Apple still has an image advantage that's being overcome by some kind of specific spec, like the larger screens on the S4. But the conclusion remains - there are now competitors whose product can be selected over Apple's at the same price. And with so many companies making Android phones, it's likely that the list of competitors able to do so will grow. Another candidate would be HTC (GM:HTCXF) with its latest One, or maybe even Nokia (NOK) with the Lumia 925 which finally gets a more upscale image.
Android still has problems, but they're slowly being solved
It's easy to see that Android still has problems. The much lower utilization of Google Play given the number of Android devices is one of them. However, Google (GOOG) seems to be addressing some of those problems, both with the constant upgrading of Google Play.
Somewhat lost in the bevy of upgrades presented in the latest Google I/O was one which I think will make for a significant improvement in the usage of Google Play. That was the Checkout button. Finally, a unified interface for payments in Android, limiting the need to keep on entering payment information. Sometimes these small changes make for large leaps.
That Android still has a few problems, and yet is becoming competitive with Apple's iOS cannot but be worrisome for Apple. After all, the Android installed base as well as development community stands to keep on improving at a pace which will be hard for Apple to keep up with. Apple started out early, but seemingly has been matched already, it now stands a good chance of falling behind over time.
A further problem, both for Android and Apple
It's been rumored for a while and it's likely that slowly the mobile operators will keep on raising the bar for constant smartphone upgrades. After all, it makes sense to try and limit subsidization for the handsets. When someone upgrades from an iPhone 4S to a 5 by paying $199 (or less) for the new device, the mobile operator has to fork out $450 in subsidization.
There's clearly a lot of money which mobile operators can make by limiting and decreasing this subsidization. And with users now being more open to choosing competing devices, it becomes even easier for this trend to gain pace, as slowly the operators lose the disadvantage of not providing the cheapest-possible iPhone.
While Apple continues to be wildly profitable, a change is evident in the market. The adversaries are getting closer and no longer seem disadvantaged for not being able to run iOS. Apple now needs a revolutionary device to re-establish its position, or at the very least to eliminate the spec advantage that might be enabling some Android devices to compete with it on even ground.
Revolutions are hard to set up on demand. Given the subsidization, a cheaper iPhone might not be the answer either. With the high end ever more open to true competition, the risk for Apple continues to increase even if Apple is, right now, tremendously profitable.
Given Apple's low valuation and tremendous profitability, this is not a call to short the stock. But it sure is a call for caution regarding exposure to it. Apple is no longer a sure-fire winner and it makes no sense to over-expose to its equity given this new reality.