(Almost) Kudos To You, Mr. Cook

| About: Apple Inc. (AAPL)

Did you hear that? After one year of almost uninterrupted silence, during which countless prophecies of an imminent decay and proclamations of a lost leadership with no vision have been spelled by the media, Apple (NASDAQ:AAPL) spoke again. And it was (strangely) a symphony.

We got a preface of it at June's WWDC, where Apple gave the world its manifesto. A particular line stands above all:

There are a thousand no's for every yes.

They do put that in practice. Prior to September 10, the media, analysts and Wall St. itself were asking Apple for the same thing: a cheap iPhone. The answer came, bold and daring, as a resounding no: Apple won't give its technology away for a low price.

And while Wall St. doesn't seem to like no as an answer - having sent the shares down almost 8% since the iPhone 5C price announcement - this is actually extremely good for Apple. They didn't bend to what the people wanted them to do, they went their way. And mind you, this is what Apple has always done. A step in the opposite direction would have been an admission of defeat, a declaration that they need to change course and to follow the lead of the competitors. That certainly is not Apple-like. That's why Tuesday's announcements should be terribly reassuring for all those who fear that without Steve Jobs Apple has lost its way: it hasn't.


I've written in a few occasions that, in spite of what countless analysts and bloggers were saying, Apple would never release a cheap iPhone. From a March 8 article:

A cheaper iPhone would mean compromising on materials, compromising on components, maybe even compromising on the OS. That's not what Apple is at all, and that's why the only "cheap" iPhones Apple is going to sell are the ones that are already there, like the iPhone 4 (which starts at $0 with a 2-year contract in the U.S., and sells around the world at 35%-40% discount to the iPhone 5).

That's exactly what happened Tuesday … with a twist: as usually, Apple updated its flagship iPhone releasing the iPhone 5S, which will be on sale for $199 with a 2-year contract, and cut the price for its 2-year-old model, in this case the iPhone 4S, to 0$ with a 2-year contract. Instead of placing the previous year iPhone 5 in the middle though, it discontinued it to make place for the iPhone 5C which, technically speaking, is nothing more than a colored iPhone 5 made of polycarbonate, with the main difference of being the shiny new model instead of the boring last-year model.

Though to think that Apple introduced the iPhone 5C just to give people looking for a 100$ iPhone something better then "the previous year model" is quite short-sighted.

First of all, plastic makes the 5C much easier to build than the anodized-aluminum iPhone 5. As Dan Frommer from SplatF wrote a few days ago, "We sold every iPhone we could make" is only a "good problem to have" to a certain point. Remember that what Tim Cook is most famous for (and one of the main reasons why Jobs brought him in) is his ability to perfectly organize an extremely complicated supply chain - not the easiest task in a company that "measures the variants in product to product in microns". In fact, it is no coincidence that at the time of this writing you can still get a 5C by September 20. And this is especially important given that the 5S, with its state of the art fingerprint sensor, is expected to be seriously supply-constrained.

Most importantly, though, with the 5C Apple has done something totally new for the iPhone: it segmented the market. There has always been just one new iPhone for the whole addressable market: now there's two, which target two fairly different audiences. I think that Apple took great notice that the iPhone was perceived by some of having an "aged" clientele - something that has been heavily used by competitors in their ads. Color saved Apple once, and it is now clearly hoped for allowing the company to get a better grasp on younger buyers, who will be decidedly attracted by the shiny colors in which the 5C comes. There's no question about it, despite a mere $100 price difference the 5C clearly aims at a younger clientele who doesn't look for thrills like anodized aluminum, fingerprint sensors or gold phones, but values a more essential, colorful and playful device.

On the other side, Apple last Tuesday has played his best cards yet to conquer a market in which it has always notoriously underperformed: the enterprise. In a scenario where, as Ben Thompson at Stratechery cleverly puts it, "the implosion of RIM and fragmentation of Android are increasingly leaving the iPhone as the default choice of more and more enterprises", Touch ID (the iPhone 5S fingerprint scanner solution) may very well appeal to the general public, but was clearly built with the enterprise in mind. Not only that, but albeit given less attention by the media, Tim Cook announced that every new buyer of an iPhone or an iPad is going to get the iLife apps, iPhoto and iVideo, and especially the whole iWork suite - the Apple counterpart of Microsoft Office - for free. This may seem small, but in a world where the PC is less and less relevant, and the iPad has a 50%+ share of the tablet market, giving iWork away for free is a huge blow to the Redmond giant, and should further accelerate the adoption of iOS devices by the enterprise.


The consensus among analysts prior to the event about the iPhone 5C price was $450, and quite rightly so. With a $450 (unsubsidized) iPhone 5C, Apple would have kept the iPhone 5S as its flagship device at $199 with contract, it would have taken out the mid-level device and it would have put the 5C as the entry level at 0$ with contract. In this way the iPhone line-up would have been majorly simplified, with just two devices, the 5C for the low-end and the 5S for the high-end, no more 3.5-inch displays or 30-pin connectors, ever. Moreover, in the rest of the world, where the majority of smartphone are sold without subsidy, $450 would have been a much more accessible price than $550 and the 5C itself would have sold much more.

So why didn't Apple price the 5C at $450? Simply put, I don't think they could bear that Apple was associated with the word "cheap". Apple is not cheap, it has never been and it (probably) never will be. At $450 the media, the analysts and yes, even Wall St. would have had the cheap iPhone they had been waiting for years. Again, this is something extremely Jobs-like: it maintains the "Apple status" intact and, at the same time, it is a very subtle way of giving Wall St. the proverbial finger. Kudos to Cook for that, that is exactly the Apple that has been said to be gone, forever, by the media for the last year.

On the other side, not giving the world a cheap iPhone may prove a dangerous practice: China has recently become the biggest smartphone market in the world, but Apple's size of that market has just shrunk to a mere 5%. That's precisely Apple's dilemma at the moment: either stay the course in China, or price the iPhones like a cheap, Chinese company with no history like Xiaomi, the company that recently hired Hugo Barra from Google.

The main problem here, though, is not the money that Apple is not making in China by not addressing the budget-smartphone market, but the fact that Android is gaining a bigger lead in terms of market-share. And developers are noticing that, with some already prioritizing Android over iOS. Why is that meaningful? Because one of the main strengths of iOS versus Android has always been having the best apps first. Losing that hedge could prove disastrous for Apple.

Tim Cook loves to show charts during his speech, but the following graph is certainly one that he won't ever show - albeit he should be very aware of it:

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Though while this is something not to underestimate - quite the contrary, it constitutes one of Apple's biggest bear cases - saying that developers will go Android-first simply because of its market share is a flawed supposition. As John Gruber brilliantly puts it in a recent piece:

The fundamental error in this line of thinking is the assumption that all smartphone users are created equal. They're not. iPhone users are significantly different demographically. Android vs. iOS isn't like Playstation vs. Xbox.

iOS can continue to thrive with significantly fewer users than Android if it can continue to attract significantly better users than Android.

If I'm wrong, why hasn't it happened yet? iOS has never been the smartphone market share leader; it was behind Symbian and BlackBerry in its early years, and Android surpassed all of them years ago.

Moreover, pricing the 5C premium may have its pros even in China, where Xiaomi recently launched its new, flagship Mi-3 for less than half the iPhone 5C price. Apple may have just a 5% market-share, but extracts from that small chunk of the market an extremely high amount of profits: Xiaomi, until last quarter, hadn't even made even a dime of profit. In fact, the Chinese market is so brand-conscious that making a cheap Apple product could have disastrous effects on how the company is perceived.

The technical view

The technicals look somewhat positive, something that hadn't happened for quite a long time: the stock has found a strong support in its 200-day SMA and a golden cross is in the making (see charts below, data by Ychart).

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(Click to enlarge)

On the other hand, the stock has been stuck in a range between its 100-day weekly SMA and its 200-day weekly SMA. As you can see from the chart above, after having tested the former repeatedly in the last few weeks, the stock has now retreated and offers a nice entry point.

Closing lines

Tim Cook has done all the right things with the new iPhones. By pricing the 5C premium he didn't bend at the pressure from the outside and continued with what has been the magic formula for Apple in quite a long time: premium products with premium prices. Moreover, by launching not one, but two new devices Apple is for the first time segmenting the smartphone market - albeit still marginally - by targeting younger audiences with the 5C and high-end buyers with the 5S, with an additional focus on the enterprise market thanks to Touch ID and the decision to give iWork away for free to all new buyers of iPhones and iPads.

However, an excessive focus by Tim Cook on what Wall Street thinks of Apple may prove detrimental for the company's culture. News is that he has had many phone calls with activist investor Carl Icahn and that they will have dinner together to evaluate a bigger buyback. Spending time with a person who doesn't care the least about Apple, apart from how much money he can extract from the company for his own personal gain, doesn't seem the best way of employing his time. One thing is sure, though: the stock will difficultly suffer from Icahn's interest. The market reaction to Tuesday announcement seems therefore unwarranted, and may offer a good opportunity to buy the dip: Apple has added one big ally in Japan's biggest carrier NTT Docomo, and a deal with China Mobile, the world biggest carrier, has never been closer than now.

Tim Cook, apart from his mundane dinners with activist investors, is greatly executing. Apple seems a nice long-candidate at these levels.

Disclosure: I am long AAPL. 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.