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I look at value and contrarian ideas as well as emerging technologies worldwide, both on the long and short side. I also like to discuss the influence of monetary policy on stock markets. I usually do not engage in short-term trading and myopic analysis (quarter by quarter, without looking at... More
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  • Five Take-Aways From Apple's IPhone Event (2013) And A Positive Outlook For 2014 8 comments
    Sep 11, 2013 9:31 AM | about stocks: AAPL

    First things first: If you stuck to credible rumor sources (I listed some of them in earlier Instablogs about AAPL) you got over 90% of the September 10 Apple announcements correct.

    For those still following talking heads or other sell-side analysts disappointed why there was no Apple TV set and no dirt-cheap iPhone please find my outlook below. It should hopefully prove more accurate.

    This outlook is also reassuring to long-term AAPL investors since Apple seems to be (once more) a victim of "buy the rumor, sell the news" on Wall Street following the Sept 10 event:

    1. iPhone 5C: Cheaper Doesn't Mean Cheap, Newer Isn't New

    The iPhone 5C introduction is not a new strategy behind the curtain - it just looks like a new strategy to the average consumer in front of the curtain. It's basically marketing the current iPhone strategy better: Apple simply put its second-newest phone (iPhone 5) in fancier clothing for the first time. As long-time Apple watcher Gruber aptly put it:

    The iPhone 5C has nothing to do with price. It probably does have something to do with manufacturing costs (which are lower for Apple), but not price. Apple's years-long strategy hasn't really changed. They offer three phones:

    1. This year's, with the latest technology.
    2. Last years's, starting $100 lower.
    3. The two-year-old model, with meager storage, free on contract, $200 lower unsubsidized.
    It's just that instead of putting the year-old iPhone 5 in slot #2, they've created the 5C to debut in that slot. The 5C is, effectively, an iPhone 5. Same A6, same camera, same just about everything - except for the most obvious difference, its array of colorful plastic shells.
    (...)

    In marketing, what looks new is new.

    daringfireball.net/2013/09/iphone_5c_5c_event

    Below are Horace Dediu's (Asymco) numbers for the iPhone mix and his reasoning/analysis behind Apple's moves:

    (click to enlarge)

    There are several implications for this shift in positioning:

    1. Apple is recognizing that the market is actually "segmentable". This is the notion that one size does not fit all-a radical idea for the brand. Its mechanism to address it is a "good+better" portfolio. Note that this is not at all like the iPad where the Mini is actually suited to different tasks. The iPad can be thought of as a "small+big" portfolio. The iPhone shows a clear delineation within the same product.
    2. It is signaling that the premium may be more than what the mainstream needs. This is a corollary to the segmentation implication above but stands on its own because it also implies that the iPhone C is "good enough" and the S is more than good enough (or, to spin it another way, it is for "more demanding" customers.) It also implies that the premium "S" version will be a lower volume contributor.

    www.asymco.com/2013/09/11/c-is-for-cogni.../

    It looks like the "C" phone will be the volume winner - but still be positioned in the upper mid-range price range compared to most other smartphones.

    People clamoring for (really) "cheap" iPhones fell into the same trap as sell-side analysts predicting a feature-phone "iPhone nano" a few years ago (which of course never materialized). Same for netbooks or cheap desktops bundled with ISP contracts - Apple never played in these low-end market segments in the past.

    Market share isn't everything, gross margins do matter. There's a good example for this playing out in the phone market right now - a little quiz:

    Globally, out of the 10 best-selling mobile phones of all time 9 where made by whom?

    You probably guessed the correct answer: Nokia (NOK) - the company just called it quits and sold its devices division to MSFT. The only other phone on the top 10 list was made by Motorola Mobility - now owned by GOOG and a shadow of its former self in the phone space (despite the billions invested by GOOG).

    This ironic tweet from today sums up the situation nicely (as AAPL shares are being sold off):

    Wall Street is most disappointed in Apple for not introducing cheap phones that lose money like the rest of the mobile phone industry

    twitter.com/cdhowe/statuses/377811282906578944

    The only thing that puzzled me is why Apple didn't differentiate the iPhone family with feature sets and colors earlier - as it did with the iPod family in the past. 2013 looks a little late to make this separation.

    2. Big In Japan (yes, Japan still exists)

    NTT Docomo is finally an official carrier for iPhone - this is understated by the market focused on China (more about this in 3.). Docomo long was a hold-out for local Japanese brands - also thanks to its i-mode heritage. This is big news and probably the end of the line for most of the remaining "Galapagos" smartphones sold exclusively in Japan.

    With about 60 million subscribers and a powerful 4G network (branded "Xi" with over 15 million subscribers *), NTT Docomo and high-end Japanese consumers are as important if not more important short-term for AAPL as China Mobile is longer-term.

    3. China Mobile Is Most Probably Coming, Wait For 4G Network

    Many sell-side analysts got the AAPL-China Mobile story wrong for months. There are various technical reasons (TD-LTE and before that a different 3G standard) why Apple isn't on China Mobile yet. Details can be found in this good article, also indicating the technical hurdles will be resolved soon:

    China's Ministry of Industry and Information Technology (MIIT) has now certified both the 5S and slightly cheaper 5C with its network access license.

    Looking closely at the MIIT document, it shows two iPhone variants that have't been announced yet: the A1516 variant of the iPhone 5C, and the A1518 version of the iPhone 5S. Perhaps those will support China Mobile's 2.5GHz TD-LTE network, which is expected to go live nationwide later this year. No date has been set, and China Mobile is waiting for the nod from authorities.

    So the certification points to the new iPhone 5S and 5C eventually appearing on China Mobile's TD-LTE network, but it's still too early to tell. Indeed, China as a whole is awaiting its 4G roll-out.

    www.techinasia.com/china-mobile-gets-iph.../

    Analysts simply clamoring for "iPhone needs to be on China Mobile" didn't seem to grasp these network details - it made a lot of sense to wait for the new TD-LTE China Mobile network rather than adapt the previous iPhones to the domestic 3G standard used by China Mobile.

    In addition, out of China Mobile's (often cited) 700-750 million subscribers, many (if not most) are still on 2G feature phones and don't have the purchasing power to buy a modern smartphone (that includes the cheaper 3G Android phones). The aggregate subscriber number is simply over-optimistic in terms of smartphone potential in China for the time being. In addition, the number of 4G subscribers is basically at zero in 2013 and will only start growing in 2014. In summary, AAPL 's new iPhones start selling as the Chinese 4G networks are getting ready for deployment:

    The next time a sell-side analyst talks about "a potential of 750 million subscribers for iPhone in China" kindly show them the chart above - and make them read up on median household income in China as well as current 2G, 3G and 4G mobile phone adoption rates.

    China Mobile first needs to complete its 4G network by the end of 2013, there is no need to worry about a "delayed" deal with Apple before that date. I expect (if a deal is reached, which is highly likely given the TD-LTE support in the new iPhone models) sales to start in late 2013 or 2014.

    In the meantime, Chinese consumers can get an "official" iPhone from the two other main carriers, China Unicom and China Telecom - they are included for the first time at the worldwide first wave (Sept 20) and run on different networks.

    I hope readers now see why the Japanese carrier deal is more important for AAPL short-term and why the market and many analysts got the deal with China Mobile wrong.

    4. Elvis Costello Means No iPods In 2013? Just iPads and Macs?

    It's not Costello's fault :) Just a small hint: Why did the musical guest play at the iPhone event? This is just a wild guess of mine but there may only be minor updates - if any - to the iPod line in 2013 for the first time.

    While it's very likely some Macs (Haswell chips) and the iPad family will be updated soon (separate event in October 2013 ?) per the usual upgrade cycle, the iPods may not be renewed. The iPod family relevance is shrinking from year to year. Some of the iPods were just updated with a new color option at the iPhone event - another small hint.

    I wouldn't worry too much about that as an investor, some iPod products (iPod Classic) look like near EOL status anyway.

    5. AAPL Wild Cards For 2014

    There was no Apple iTV (of course **) so far and the rumored iWatch project (see my earlier Instablogs for details) probably isn't ready for another year. Here are my other predictions for 2014:

    - The iWatch may replace (most of) the current iPod family revenue over time in this decade. I believe this wearable project may see the light in late 2014. It may be linked to a renewed Apple TV set-top box.

    - The M7 chip (or a successor, derivative) inside the new iPhone 5S may show up in the iWatch project, so could Touch ID. In fact, Touch ID's fingerprint sensor looks like it was made for the rumored iWatch and possibly transactions in general. An interesting tweet about that:

    Passbook seems like a good way to extend finger scanner to 3rd parties. Controlled, no 3rd party code. 'Unlock this pass with your finger'. - twitter.com/BenedictEvans/statuses/377764951605395456

    - The iPhone will remain the most important revenue generator at Apple in the near future. AAPL will sell about 50 million iPhones/quarter on average in FY 2014-2015, proving naysayers wrong. It's hard to to estimate the exact EPS impact, but it will be meaningful.

    - There could (finally) be a bigger iPhone in addition to the current 4'' model once the iPhone 4S and 4 are phased out for good in late 2014. "Bigger" is relative, like "cheaper" is, in AAPL terms: A larger iPhone could still be "small" compared to some "phablet" Android phones at 5" and well above. Maybe 4.5" to 4.8" inches with very thin bezels for a future iPhone? The current 4" size could become the smaller iPhone and potentially remain on sale in this scenario.

    - More generally, Apple is not about simply adding more features to a checklist (does anyone really think Apple's engineers aren't capable of adding a really large screen or an NFC chip to an iPhone if they wanted to ?)

    - Speaking of NFC, Apple may have found an interesting alternative discussed at GigaOM: iBeacons (with a much wider range than NFC). This is interesting for potential wearables or similar projects coming from Cupertino. Similarly, Touch ID could show up on Macbooks.

    - Apple is also not about hitting expected (low) price points - we saw that with the iPad mini pricing and we see it again with the iPhone 5C pricing going forward. (Apple is not interested in the lower-end of the market with additional revenue opportunities but razor-thin margins).

    - Apple hasn't slowed down on innovation. It always took Cupertino 5-7 or more years to come up with a new product category. There is enough revenue left in tablets and smartphones (see news from Asian carriers) to carry AAPL for another 2-3 years without a new product category.

    Summary: The current sell-off in AAPL is not warranted longer-term in my opinion. The new iPhones will carry the company well into 2014 and should provide over 50% of Apple's total revenue - selling 50 million units on average per quarter. If AAPL again falls below 450/460 or 400 USD (two entry points to scale in) consider going long AAPL as a long-time investor. Prices in the $390-400s range proved to be two good entry opportunities earlier this year.

    If you already own AAPL shares I wouldn't worry either (unless your average price is above $550-600, then patience may be required).

    Apple is one of the few large tech stocks listed on Nasdaq still reasonably valued in my opinion (otherwise, I wouldn't recommend many stocks at the moment, especially not tech stocks. See earlier posts for details).

    _________

    * In contrast to China Mobile, these consumers can fall back to 3G with most "international" phones.

    ** The current Apple TV box however may be updated in late 2013 with more channels or a new model. Longer term, the just-announced Sony PS Vita could provide some hints for the Apple TV regarding gaming and streamed entertainment (or an SDK for third-party apps in general).

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.

    Additional disclosure: Small position in AAPL closed on Sept 10

    Themes: nok, msft, good, mobile phones, iwatch Stocks: AAPL
Back To Tales From The Future's Instablog HomePage »

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Comments (8)
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  • rdtuck02
    , contributor
    Comments (331) | Send Message
     
    Agree the Japan deal is more important in the short term. Japan buyers can actually afford the 5C. Even though WS gave a collective yawn over the iphone event, I think they'll still sell a lot of phones this year. Great instablog, much better than most of the articles on SA I read. You should resubmit it....
    11 Sep 2013, 10:26 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (3675) | Send Message
     
    Author’s reply » Thank you. I have never submitted an article so far.

     

    I'm not a native English speaker and there may be some errors. Hope you and others find the info useful anyway :)
    11 Sep 2013, 10:32 AM Reply Like
  • User7766461
    , contributor
    Comments (114) | Send Message
     
    Great post. I agree with rdtuck02. this would have been the best apple article on SA today if it had been submitted.
    11 Sep 2013, 12:24 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (3675) | Send Message
     
    Author’s reply » Thank you, glad you enjoyed reading it.
    11 Sep 2013, 12:29 PM Reply Like
  • synchrogeddon
    , contributor
    Comments (145) | Send Message
     
    Good points. I would add one more that in my opinion is underestimated hugely: http://bit.ly/1e2O4pP

     

    This is prototype of gamepad for iPhones that is going to be released in late 2013. Screenshot is from WWDC 2013 presentation for developers with topics about creating games for new controller. I think it can drive a lot of new sales because iPhone will enter handheld console market and with new controls there will be many new game types never seen before (on smartphones) optimized for new control scheme (touch screen is very limited for games).
    11 Sep 2013, 01:21 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (3675) | Send Message
     
    Author’s reply » Thank you for your comment.

     

    A gamepad could also work very well with an updated Apple TV - once and if a renewed Apple TV box gets an SDK. (The new PS Vita TV from Sony at a price point around $100 could be an interesting model for casual games in the living room).

     

    In addition, people could of course stream the games over Airplay to the Apple TV. An iDevice gamepad with buttons in addition to touch controls could replicate a Wii/Wii U controller.

     

    In general, I'm a bit skeptical on "AAPL in the living room" because it's already so crowded with competitors and boxes (NFLX, AMZN, Roku, SNE, MSFT...) - also since Apple still hasn't provided an SDK for the Apple TV.
    11 Sep 2013, 11:50 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (3675) | Send Message
     
    Author’s reply » Another article about Beacons vs NFC:

     

    http://bit.ly/17rQrxi

     

    Video:

     

    http://bit.ly/15lM3Ae

     

    Keep this development in mind for rumored Apple wearables or mobile phones in 2014 and beyond.

     

    There may be a master plan why Apple didn't add NFC so far...
    12 Sep 2013, 12:05 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (3675) | Send Message
     
    Author’s reply » Additional details and use cases for the M7 chip I mentioned in the article:

     

    "Sources say that Apple is testing a tool for its Maps app that, with the M7 chip, could analyze when your car is parked. When you park your car, the iPhone will register the car’s location. Now when you return to the parking lot, your iPhone will be able to help you assist with finding your car since it knows the vehicle’s location.

     

    Besides the car-finding feature, Apple is also working on other mapping features. Apple is said to be planning notable updates to its Maps app in iOS 8, and the company is currently working on implementing both public transit directions and indoor mapping features (which Google already has on iOS)."

     

    http://bit.ly/1e6w7GP

     

    PS: Generally, please keep in mind my article only focused on iPhoneand related devices, which currently account for a little above 50% of Apple's total revenue.
    12 Sep 2013, 12:12 PM Reply Like
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