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William Haynes
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Academic, physician, technology orientated amateur investor.
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  • Apple and the iPhone nano (and what will it look like)
    Rumors are swirling that Apple will make an iphone nano. While there has been a lot of speculation on the shape, thinness and looks of this future product, I'm more interested in the cost and business justification for an iphone nano. Apple needs a product that is appreciably different from the existing (or new) iphone 4/5, yet helps them commercially. Maybe the best way to think about this is to ask the question: 'What does Apple want from an iphone nano?"

    Answers:
    1. Most important - more iOS users (we are in the race that will decide the prevailing computer OS(s) for the next 10 years).
    2. Therefore, they need a cheaper price.
    3. But they also need to keep apps compatible (which means keeping certain display tech, sensors and processing speeds).
    4. Maintain customer experience at superlative levels (Steve Jobs has always striven for outstanding customer satisfaction)
    5. It has to be significantly lower in spec than iphone 4/5 if Apple wants to keep also selling the more expensive phone.
     
    Please note that none of these things implies a smaller iphone! As far as I can see it the ONLY reason to have the phone be smaller would be if that smallness saved money. In fact I believe that if Apple could make a profit selling an iphone for $200 off contract that was BIGGER than the iphone 4 then they would do that. Cost is the primary driver (partly because lower cost drives greater sales, which increases iOS market share, and leads to more developers).
     
    To me this suggests that an iphone nano compared to iphone 4/5 will have:
    1. Same resolution display (compatibility) but smaller size (price): say 3 inches. At this size the cost is substantially cheaper than 3.5 inches but still usable.
    2. A4 processor (cheap but fast enough for most apps)
    3. 8G flash memory (or even 4G)
    4. Both front facing and rear cameras but lower quality than iphone 5 (they want to encourage Facetime)
    5. Keep GPS, wifi, bluetooth, magnetometer, gyroscope (maybe they'll drop the gyroscope though I doubt it)
    6. They ABSOLUTELY will use iOS, offer itunes and the appstore.
     
    Current price to build iphone 4 is about $180 (using iSuppli data) and Apple sells to carriers for $600. Of this cost: memory is $40, touchscreen is $40, boards and power management $26, communication chips $25, camera $14, A4 $8, sensors $8, battery $6, and others.
     
    Let's assume they cut memory, touchscreen, camera, battery by 50% (smaller, and using Moore's law) and boards, sensors, A4 by 25% (just Moore's law). That would give them savings of 20+20+7+3+6.5+2 = $59 cheaper. That would equal a cost to build of about $120. Apple's overall margins (macs, iphones, ipads, ipods etc) are about 40% (though MUCH higher for iphones). But if we assume that they will be willing to accept lower margins on iphones in order to expand iphone and iOS share then they may accept 40% instead of 60% margins. If that is the case, then they could sell a $120 iphone mini to carriers or off contract for $200 and maintain 40% margins. BUT they better make damn sure the more expensive iphone 5 is much different and cutting edge (4" display, 64G memory, dual core processor, 8 MP camera, other ideas?) if they want to keep selling it for $600.


    Disclosure: I am long AAPL.
    Feb 15 3:29 PM | Link | Comment!
  • Hollywood is slowly destroying themselves if they fail to see the need for affordable online content.

    There has been a lot of rumor and criticism from Hollywood on the dangers of affordable online content. This includes quite striking criticism of Disney and Fox for striking a deal with Apple to rent TV shows for $0.99 on AppleTV. And a perception that Apple is the enemy. For an example see: 

    www.hollywoodreporter.com/hr/content_dis...

    The content companies seem to think that $0.99 rental fees for TV shows is going to undervalue their content and jeopardize their cable TV income. I think this is mistaken and they are going down the road of the music industry despite (or because) the recent history of music industry sales (i.e. they are so desperate to avoid giving Apple an advantage that they are jeopardizing their future business health). AppleTV (and similar experiments with online purchase or rental) offer an opportunity for the industry. But only if they take their heads out of the sand, and actually offer prices that people want to pay. NBC, CBS, Viacom, Time Warner, Scripps, and others will suffer in the long term.

    1. If an ABC viewer rents just 1 episode of a TV show a month from AppleTv (or similar), ABC gets more money from that viewer than they get from most cable companies (actually now they get $0 from the cable company but ABC are trying to change that). Having Apple rent a show for $0.99 should strengthen ABC's hand in negotiations with cable companies not weaken it. In fact average cable rates per customer per month per channel range from $0.01 to $0.99 for almost every channel (avergae ($0.20) with the exception of ESPN and Fox Sports ($2-5 for those). Most are about $0.25 per month.

    See: http://mediamemo.allthingsd.com/20100308/hate-paying-for-cable-heres-the-reason-why/

    2. As has been pointed out the issue is not cannibalizing DVD or cable sales (i.e getting $24 instead of $50). The issue is that the DVD or cable sales WILL be replaced by piracy. So the studios will have $50 turn into $0. Only last week a friend showed me how easily he downloads episodes of True Blood from utorrent. He does not pay for premium channels and refuses to. If the studios refuse to provide a competitive online price then I may join him so I can ditch cable.

    3. I accept that there are some extra costs in going through Apple (30% cut) but this is probably lower than the cable companies cut. I also accept that a la carte will net less than bundled channels. But if the average (good) channel gets $0.50 per month per subscriber from cable companies then it should be possible to rent individual shows for $0.49. If a viewer watches just 4 shows per month on a channel, that channel will get 3 times what they get from cable. Trying to preserve robust cable income AND DVD sales AND sell online material at $2.99 a TV show is not going to work in the era of file sharing and fast internet.

    4. Parenthetically, I HATE sports. Why do I have to pay the extortionate fees for sports channels in the bundled model? Once this model is cracked, I think the amount that professional teams will get from broadcast rights will fall dramatically. I'm happy to spend my money on high quality drama. The main reason I want to ditch cable is having to pay extra for stuff I NEVER watch. 


     



    Disclosure: Long AAPL

    Disclosure: Long AAPL
    Tags: AAPL, DIS, GE, VIA, CBS, TWX, NWSA, SNI
    Sep 02 1:47 PM | Link | Comment!
  • Will the iPad add 0.2% at an annualized rate to US personal consumption in Q2?
    This analysis makes some pretty bold assumptions but go with me:

    Apple sold 1 million ipads in the first month of sales. Assume that sales rate continues for the next 2 months (graduation gifts, 3G version, still hard to obtain), that makes 3 million in calendar Q2. Assume average revenue per ipad is $700 ($500 base price plus extra memory, 3G upgrade, accessories, itunes music/video/apps, ATT data plan). Total US sales likely exceed $2B in Q2. GDP per quarter is $3.6 trillion. Therefore, ipad sales could represent an additional 0.05% increment in personal consumption  (0.2% at the annualized headline rate). Of course, the impact of this increment in PCE on GDP will be offset by the import cost of ipads. The cost of production overseas probably 50% of the retail price, which would reduce the impact on GDP. Also, money spent on ipad sales may be taken from money consumers would have spent on other things (though anecdotally that does not seem to be happening). And, on the other hand, overseas sales of the ipad in Q2 will improve Apple's corporate income. 

    So (if my math is right!) the introduction of the ipad on April 3 has the potential to incrementally increase US GDP in Q2 by 0.2% at an annualized rate. 


    Disclosure: Long AAPL
    Tags: AAPL
    May 19 12:56 PM | Link | Comment!
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