The Silver Lining of Apple's iPhone Announcement

| About: Apple Inc. (AAPL)

I apologize if this article waxes a little long. The basic point is that Apple (NASDAQ:AAPL) knew before the announcement how everyone would feel about the iPhone 4S instead of the much anticipated iPhone 5. However, due to market risk and a shift towards complementary sales, their current strategy is defensible.

Also, take a look at my recent article concerning AAPL’s alpha (vs. SPY) around announcements. It contains data that goes 10 trading days past the announcement, and may prove useful.


  1. Apple knew everyone expected an iPhone 5. However, AAPL knows what it is doing and is actively managing its business risk by not releasing a new product in the market at this time.
  2. The new price points and the addition of Sprint allow AAPL to more fully compete with the barrage of Android devices on the market. By catering to different consumer pocket books, the adoption of iOS will grow rapidly.
  3. iPhone 4S may still woo consumers due to user interface.

Managing Business Risk

I’m going to do a little word association: Greece, currency devaluation, sovereign debt, slowing growth, recession, unemployment, contagion. Getting the picture? We are in extremely turbulent times. Unemployment has been elevated for years (plural).

After a dry spell of hardware updating, Apple (AAPL) decided that now is not the time to bring a brand new fully revamped product to market. So, let us explore what management may have been thinking, considering it was fully aware of the hype around the iPhone release (and iPhone 5 rumors) and also what the impending iPhone 4S release would do to its precious stock options.

My first thought is that management wants to manage margins. Of course there is always the “earnings surprise”, but what has hurt the stock price almost every quarter is declining margins. In an extremely competitive market in conjunction with amazingly volatile macroeconomic trends, AAPL may have opted to wait a while until things settle down before releasing the next “Jesus Phone”. Thus, AAPL is not on the hook for an amazing amount of R&D, retooling costs, and long-term manufacturing contracts. Instead, it is using the same iPhone 4 case, the iPad 2 processor, and who knows how many other parts already in production.

Continue iOS Momentum

iPhone’s margins are suffering, thanks not only to the economy, but also to a slew of Google (NASDAQ:GOOG) Android and Microsoft (NASDAQ:MSFT) Windows 7 phones that are constantly released. These smartphone alternatives come in all different shapes and sizes, with different price points (including free). The iPhone lineup is pretty vanilla compared to the plethora of other smartphones available, yet the iPhone line continues to sell.

AAPL realizes that as the economic trends continue to show weakness, the smartphone market is just a race to the bottom. Granted, we have seen strength in the high-end consumer retail, but that may not apply as much when we are talking about the current subsidized smartphone price levels. Before the smartphone price wars go nuclear (from a consumer perspective, I can’t wait), AAPL is blitzing. The lower price points along with the Sprint roll out will put a lot of new iOS devices in the hands of a different market than the typical new iPhone releases. This market has typically been the fodder for the budget Android devices. However, now that iOS devices can be price competitive, and on an additional network, it will give a massive amount of budget consumers a choice. Of course, the end goal is to snatch consumers and assimilate them into the loving arms of the iCloud.

The iCloud service was sort of graced over by the market, mainly because every AAPL fan’s heart was breaking because there was no iPhone 5. We’ve known about the iCloud for a while, but I think the long-term consequences are a little understated by analysts and the market in general. The game that AAPL can still win at is that of complementary products and services. This includes apps, iTunes and content products, and sales of other AAPL products. All of which will have an integral part in the iCloud service.

The use of the iCloud service in conjunction with the new pricing structure and swift adoption of the Sprint customers will propel the adoption of additional content and app sales (amazingly scalable with minimal outlay), as well as provide a gateway for consumers to think about getting that latest iPad or Macbook (or even an Apple TV). No other smartphone company has the same amount of complimentary goods and services to sell. AAPL is amazingly smart to focus on selling what they already have in the warehouse or server. Finally, once consumers start using the iCloud, it will be difficult to either 1) use a competing service, or 2) use non-Apple products with the iCloud service since in either situation, AAPL does not play nice with competitors.

At this time, I would find it useful to evaluate the iCloud competition, but I will leave that for another day. However, if you have any info or can make an educated comparison, please leave it in the comments below.

iPhone 4S User Experience

Apple never sells its products based on specs. In fact, most of the time, it is behind the curve when it comes to processor, RAM, etc. Where AAPL makes it up is on user experience, software, and support. Therefore, when we see an update like the iPhone 4S, we would hope to see significant user experience upgrades, even when the exterior does not change. We may not see the initial jump of iPhone 4S models that we would typically see with iPhone releases, but we may see a sales “echo” once the product is in the market for a while.


Overall, I see the reaction to the iPhone 4S overdone. AAPL is shifting its strategy, and as usual, they are ahead of the game. As well, let us not forget about the release date of the iPhone 4S, which is October 11th, and earnings coming up on October 18th.

Finally, I leave you with a question. I pulled this quote off of the AAPL website about AAPL’s new voice recognition Siri:

“Or just ask Siri to help you get things done — it figures out the right apps to use”.

Do you think that Siri will help you find the free apps first? Just wondering...

Disclosure: I am long AAPL.

Additional disclosure: Short SPY

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