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Apple iPhone Slowdown Blunder Leads To Criminal Charges In France.

|Includes: Apple Inc. (AAPL)

Summary

Apple recently admitted to slowing down older iPhones to preserve the battery.

This lead to several civil lawsuits in the US and Israel, but the real problem is a criminal lawsuit in France.

Apple could be fined 5% of turnover and executives may have to serve up to 2 years in prison.

Apple has been getting a lot of bad press for slowing down some older iPhone models when the battery couldn't provide anymore the needed peak current to the processor. This is in large part caused by Apple design decisions and could have been predicted: iPhones have a very high performance processor coupled with a small form factor, so a small battery. This makes for a very desirable device, but in the case of heavy usage the battery may not be able to keep up after only one or two years, contrary to what Apple said previously.

Do you remember when 5 to 10 years back Apple came under fire for the iPhone non-replaceable batteries and they claimed that it was not a problem because the Lithium ion polymer batteries Apple used would last years for the vast majority of users and would never need to be replaced? Now they are essentially saying that those batteries are consumables, that it is normal to slow down your phone's performance when they degrade, but that if that's a problem to you they will reduce the prices to have them replaced.

Does that seems like a 180° turnaround to you? To me too! however the main issue here is that Apple has been "managing" the performance of older iPhones after about one year, or around the time the new models came out. First in the EU warranties have a minimum duration of 2 years, which could open the door for fraud allegations: Apple slowing devices to avoid having to replace batteries under warranty. The largest problem though is that it could have prompted people to upgrade to the latest model. Well apparently a lot of people think it is the case because Apple is currently facing 8 civil lawsuits in the US and 1 in Israel. This however may not be the largest of Apple problems as a criminal lawsuit has been filed in France that could result in jail time for Apple execs.

France anti-programmed obsolescence law allow for a penalty of up to 300.000€ (peanuts for apple) plus up to 5% of turnover (bigger peanuts given that the iPhone 7 was the best selling smartphone in France last winter.) and up to 2 years of prison for the firm executives if found guilty, assuming they travels to France, or at worse anywhere in the EU as I don't expect the US to extradite Tim Cooks in case charges are filled.

Lets be clear, the risk here is not so much that Tim Cook won't be able to sunbathe on the French riviera anymore but the loss of face and consumer confidence in Europe, and especially in France. Many of the consumers in the rich north European countries like France, Germany, Belgium, the Netherlands etc... are very environmentally conscious and tend to replace their phones less often than American or Asian consumers. When I look around me here in Belgium 3 or 4 year old devices are quite common, as is the practice of replacing batteries when possible. Also in some countries (like Belgium) bundling a phone with a plan has been illegal for a long time and is still uncommon, meaning that for a lot of people an high end phone is a 800€ investment, as much as you would pay for a decent computer. It is not a gadget to be discarded after a year when a new shinier gadget comes out.

Europe is the second largest market for Apple by revenue (around $44 billions in revenue following Statista) even though its market share is much lower than in the US (22% vs 42%). Despite the fact that we keep our phones longer, the EU is actually a bigger market than the US. Now I do not expect Apple to lose that many customers over this, but growth could be curtailed due to this setback. Given that Apple shares are currently priced for growth this may lead to price stagnation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.