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Counting Chickens: The Apple iPhone |
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Given the semi-impending launch of the iPhone sometime in June, much market research has been devoted to trying to predict the demand and acceptance the product will see. I have no problem with people trying to make forecasts about iPhone sales, as difficult as that might be. However, I do have a problem when people seem to ignore some basic rules that any introductory-level statistics course outlines about sampling and then make dramatic conclusions from apparently flawed data. Specifically here, I’m referring to Paul Carton (of the ChangeWave Alliance) who predicted on Seeking Alpha that the iPhone will rock the cell phone industry. To make a couple points clear before I go in-depth: I don’t know Paul and I am not familiar with ChangeWave. I’m sure both he and his organization make a fine team of dedicated professionals, and I don’t mean to knock them. Nor do I have any financial interest in AAPL or any of the other companies I talk about here. With that said… ChangeWave “is a research network of 10,000 business, technology and medical professionals who spend their everyday lives working on the front line of technological change.” That item at the end of the article caught my attention because professionals are more likely to be a part of the affluent market that seems more likely to purchase an iPhone at $500 or more. In the article, Carton states that: “Our survey of 3,489 Alliance members reveals exceptionally high levels of excitement surround the iPhone’s upcoming release. Nearly one-in-10 respondents (9%) say they are likely to buy the new iPhone once it becomes available in June. Another 7% say they are likely to buy the iPhone as a gift for someone else. These are big numbers, especially when you consider the worldwide market for cell phones is around 1 billion and Apple’s goal is to get to 1% of that market in year one – which would mean selling about 10 million phones.” The emphasis added is mine, but I think the vast differences between the global market of 1 billion people and the iPhone’s market need to be stated better. Apple’s goal of 1% of market share sounds extremely easy, almost seductive; who would question whether or not Apple can take 1% of the market? Consider, however, that the majority of the “global market share” now comes from outside the industrialized world. By Nokia’s estimates (more on them later) unit demand in Europe and North America is 436 million, or 44.6% of the total global demand. Global demand has shown consecutive years of 20%+ demand growth driven by the Middle East, Africa, and China. The combined demand growth in those countries grew 32.5% in 2005 and 44.2% in 2006. World cell phone demand is being powered by growth from emerging markets - not the typical places where consumers are going to be shelling out for an iPhone. More importantly, the global market for phones is becoming increasingly dominated by the demand from developing countries; the 44.6% share Europe and North America now has is down from 50% in 2004. Predictably, the global demand shift for cell phones has resulted in a decline in average selling prices (ASP). What are the problems that have been plaguing Motorola (MOT)? Lower ASPs. At Motorola, ASPs have undergone double-digit declines in the last two years from about $161/unit to $130/unit. Nokia has been facing the same problems, with about 7% decreases in ASP the last two years. I would argue that the conditions favor declining ASPs not only because of the demand for low-cost products from emerging markets, but also because technology products naturally tend to become cheaper over time. This is most relevantly seen in Motorola’s well-publicized problems with pricing its RAZR model in such a way as to profit. Perhaps a more appropriate example is Research in Motion, another smartphone maker whose product base and customers perhaps more closely approximate what Apple is trying to do with the iPhone. Research in Motion’s ASP was down 7% in 2006 to $355; even adding in the additional $10 the company believes it would have captured were it not for NTP patent ligitation, the pro forma ASP still shows a decline of more than 4% for a product with a more price-insensitive base. Note the trend among cell phone/smartphone prices: down. Even RIMM’s ASP is $350; or 30% lower than Apple is trying to price its entry-level iPhone model. Despite all the data reflected by consumer purchases, for some reason - perhaps due to studying the consumer subset most naturally inclined to buy the product - the iPhone is going to completely change the rules and economics of the cell phone industry to the point where it will single-handedly reverse all established buying patterns. Apple needs to decide what it is aiming for with the iPhone launch: volume, or earnings. The current pricing scheme way above market says that Apple is aiming to keep the iPhone exclusive, and there is nothing wrong with that, as brand dilution has hurt many a company. If Apple is going to make serious headway into market share, though, it is going to need to either take a hit on gross margins or introduce a lesser model. Market price trends dictate the $500+ iPhone days are likely to be limited, and the price sensitivity of the cell phone market suggests that, despite the results one sees from surveying “cutting edge professionals”, Apple’s iPhone will likely be just like other offerings, in that it will have trouble maintaining a high ASP after just a few quarters. Will Apple get that fabled 1% of global market share? I think that target is both misleading and irrelevant. As Motorola has demonstrated, share means nothing without maintaining profitability. Given the high valuation tag attached to AAPL, I’m inclined to sit out the iPhone speculation and other issues surrounding the stock, despite what marketing gurus will say. AAPL may well see $130, but I think it could just as easily see $70 - essentially, I view the stock as a coin flip. Play it safe, sit back, drink a New Coke, and wait to see if Apple can meet the vaunted expectations being priced into it. |