Seeking Alpha
Long only, tech, chipmakers, software
Profile| Send Message|
( followers)  

In a recent article for Seeking Alpha, Ashraf Eassa points out that the displays of the Apple (NASDAQ:AAPL) iPad Air and iPad Mini with Retina Display tested out bellow the Amazon (NASDAQ:AMZN) Kindle Fire HDX and Google (NASDAQ:GOOG) Nexus in certain metrics. As a result he concluded that "Apple screwed up something" and that "it's going to be difficult for Apple to really compete. . ." As usual, he gets the technical details right, but misses the bigger financial picture.

Repeating Mistakes

Eassa is simply repeating the mistake he made all of last year in assuming that technical superiority (in a given category such as displays or processors) inevitably leads to market success, or in the case of Apple, market failure. As I pointed out in "Intel's Mobile Money Losers", Eassa's erroneous prediction that Intel would take over the table space was based on the assumed technical superiority of their Bay Trail tablet processors. In focusing on technical metrics, which he appears most comfortable with, he missed the larger question of whether Intel could offer processors that were cost competitive with ARM derived processors being designed by Apple, Qualcomm, Samsung and others in the ARM ecosystem.

Lacking Perspective

Although Eassa has a technical background, I get the impression that he hasn't actually spent any time in industry, working on real products, since even his technical assessments lack perspective. Eassa's conclusions were based on a pair of articles by Dr. Raymond Soneira, one comparing "flagship" tablets, iPad Air, Amazon Kindle Fire HDX 8.9, and Google Nexus 10. The other article comparing mini tablets, Kindle Fire HDX 7, iPad Mini wRD, Google Nexus 7. Technically, they're very good articles, although probably more than most people want to know about display metrics.

Overall, in the flagship group Soneira gives the Kindle HDX 8.9 an A, the iPad Air an A-, and the Nexus 10 a B. In the mini tablet group Soneira gives the Kindle HDX 7 an A-, the iPad Mini wRD a B, and the Nexus 7 an A-. These grades are somewhat subjective, but after reading through Soneira's work, I basically agree with him. Does it follow from this that Apple isn't a good investment? I'm not hurrying to sell my Apple stock. Here's why:

  1. Display performance is only one of many technical performance metrics that are typically used to evaluate smart phones and tablets. I find it odd that after spending the better part of last year harping about the technical performance advantages Intel processors, Eassa chooses to ignore the goodness of Apple's A7. In AnandTech's reviews of the iPad Air and Mini wRD, the A7 outperformed its competition (both ARM and Intel) in most tests.

  2. Despite Apple's repeated proclamations that it just wants to build the "best product", it's almost always possible to find a competing product that is superior in a particular performance category such as processor speed, screen size, memory capacity, you name it. This has never had much bearing on how successful the Apple product would be. For instance, the A4 processor in the original iPad was by no means the fastest ARM processor available at the time.

Balance or Best?

I really wish Apple would stop using the word "best" in their advertising, since best is really in the eye of the beholder. Apple's approach to deciding what's "best" is pretty fuzzy and wholistic anyway. It's really about balance, balancing performance across a broad array of features and components in order to yield a product that is beautifully integrated and a pleasure to use. A critical factor in the balancing act is cost, of course, but also supply constraints and delivery times. Apple sells many more iPads and iPhones than Amazon or Google (how many more is tough to say, since neither Amazon or Google releases sales figures as Apple does). Apple may have settled for a lower performance screen for the iPad Mini wRD simple to be assured of having enough screens to meet demand.

Margins or Market Share?

Eassa may have a point, however, that Apple might have chosen to offer less than the "best" screens in order to preserve margins. Apple's preoccupation with protecting margins has been a sore point with me for the past year. If the point of protecting margins was to endear Apple to investors, this clearly didn't work very well, if at all. Judging by the valuation of Google and Amazon, what investors value is dynamic growth, especially in revenue and market share.

Eassa's conclusion that "Amazon.com and Google are absolutely deadly to Apple's business model" reflects a widely held view (which I don't share) that Apple must inevitably succumb to its lower cost competitors. I don't see anything inevitable about it. Apple could have reversed the iOS market share trend in 2013 at any time simply by deciding to decrease margins in favor of being more cost competitive.

Many Apple supporters discount the importance of market share, preferring to focus on usage share and user base. But the pool of iOS users is a dynamic thing, with users defecting to other platforms even as new users enter the pool. Eventually, if Apple's mobile device market share (its per cent share of new device sales) continues to decline, the rate of defections will exceed the rate of new users and the pool will begin to shrink. This can lead to a rapid collapse of the ecosystem as software and hardware developers abandon it in favor of growing platforms. This is what's at stake if Apple's market share continues to slide.

For the time being, however, Apple investors can relax a little about iOS market share. The A7 proved that innovation is by no means dead at Apple, and the A7's 64 bit exclusivity helped propel sales of the iPhone 5s and iPad Mini wRD, providing a magic bullet combination of high margin and high market share. I believe Apple had an outstanding quarter, and I'll have more specifics in my Apple earnings preview.

Source: No, Apple Hasn't Screwed Up