Apple's (NASDAQ:AAPL) quarterly earnings call provided valuable insights into the possible future direction of a company that is still hurting from its delayed move to larger screen iPhones and the continued wrestling match with carriers over the consumers' pocketbook. Time is still on the company's side to adjust its business model; however, it seems obvious, given the worldwide commoditization of smartphones, that Apple must make a significant adjustment on its business model by building only one high end model for the subsidized user and a much lower cost version for unsubsidized users. In other words, the iPhone 5C ended up being a tweener, not good enough to be a significant player in either universe.
Apple's expanded carrier strategy enabled the company to overcome weakness in the US and a late start in ramping the iPhone 5S. Many asked what could have been had it not been short on product in September and October. This is another case of the company placing all its marbles on the newest iPhone to satisfy its yearly pent up demand. It's a very profitable strategy that tips on the knife's edge of the company's extreme logistics. The easier to manufacture iPhone 5C was offered as a buffer to any shortfall, but it looks like customers and carriers won't buy a plan for a second rate product.
It is difficult for a heavily branded company like Apple to introduce the new star to the team while at the same time saying: "hey don't forget the second stringer on the bench." There are plenty of consumers in the developing world who would love to jump on the iOS ecosphere but don't want to play the carrier subsidized game. Apple's falling market share has to concern it for no other reason than it wants to pull in a steady stream of new, young users - just like it does with school kids on iPads.
Apple's rivals are not surprisingly shipping high volume in order to make a profit on miniscule margins. It is a repeat of the PC markets exactly where over 40% of the sales go to no-name purveyors. Tablets are headed in the same direction. It is literally a black hole that Apple couldn't chase and maintain a strong brand. However, Apple has yet to move down off of its $549 price point while the rest of the entry market has moved dramatically.
This stall in Apple's iPhone sales is very reminiscent to what happened at Compaq in the early 1990s. At the time it engineered its own PCs down to developing its own chipsets to work with Intel's (NASDAQ:INTC) processors. Competitors like Dell, however, beat it to market with much lower costs. When Compaq matched Dell, the company turned around and sales soared. Apple faces this low end threat by not addressing it even though lower component costs are available. Stubbornly sticking to $549 on the entry level phone is a dead end that Tim Cook must address.
Given the build out of the carrier network with DoCoMo (NYSE:DCM) and China Mobile (NYSE:CHL), one would expect bigger upside in the coming year for Apple. Assuming it launches a larger iPhone 6 that refreshes Apple's current customers this fall, then the dramatic shift to $300 is the key to whether the company grows more in line with the market. It is entirely possible that the iPhone 5C becomes the $300 phone if for nothing else but to fill the gap until a true successor is developed.
One of the key facts in the earnings call was the dramatic slide in iPod sales. The iPod is dying quickly and Apple needs a phone that carries tunes, plays video and takes photos for teenagers. It doesn't need 4G LTE and it can be enclosed in plastic. Will the US carriers want to play - that is the interesting question.
It seems clear that Apple holds the upper hand over carriers with its latest and greatest phones and there is no way it will lose this. Carriers may grumble, but these phones drive the data plan side of their revenue while cheap, cut rate phones drive the margin side of equipment sales. The minute a consumer says "I don't want a contract" or "I was looking for a cheaper phone" is the point the carrier directs them to another brand or the house model and Apple loses by only having the tweener at $549.
In the longer-term strategy, Apple has to consider when the crossover comes in regards to the uplift in a lifetime of iTunes and applications purchases outweighing the smaller margins of a low cost $300 smartphone. Tied in with a refresh of its Apple TV, the connected home can drive sales much higher than what we saw in Q4. Wall Street senses that the company, though very profitable, is leaving a lot on the table, unlike Amazon (NASDAQ:AMZN), which is racing at lower margins to eliminate its brick and mortar competitors.
Disclosure: I am long AAPL, QQQ. 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.