Apple Bulls, Pray That Apple's Margins Keep Thinning

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Steve Jobs appeared during Apple‘s last quarterly earnings and delivered a few great lines, deflecting attention away from the fact that Apple fell short of analysts’ estimates for iPad sales and that the company’s margins are narrowing.

But that last bit is actually good for Apple: it means that the company is focusing on volume and market share in two red-hot, fast expanding markets that it helped create – smartphones and tablets.

Apple’s bread and butter has traditionally been making (arguably) superior products and charging a premium for them. Apple has always boasted margins more like those of a luxury company than a computer manufacturer. Sometimes that has allowed them to utterly dominate a market, as is the case with the iPod.

But smartphones and tablets are platforms, meaning they’re winner take all markets.

It’s become a meme to say that the smartphones wars may be shaking out like the PC platform wars of the 1980s, with Google playing the role of Microsoft. Apple makes a closed product that is great but doesn’t tap the network effects of a more open platform, while Google with an inferior, but more open product, ends up dominating.

On the earnings call, Jobs rejected this interpretation and the open/closed paradigm, preferring to describe Apple’s approach as “integrated” and Android as “fragmented” and trashed the 7″ Android tablets that are coming out but Apple’s margins show that it is indeed going for volume in the tablet market. Which is what it should do.

The fact that HP could only price its Slate tablet at $800 seems to indicate that Apple may have priced its iPad as low as it could, and may even lower prices further as the device moves beyond early adopters and Christmas shoppers. As does the proliferation of upcoming 7″ tablets — regardless of Jobs’ concerns over user experience, maybe other manufacturers only know how to build an affordable tablet if it’s got a 7″ screen.

This is the right approach for Apple. One of these days tablet manufacturers will get their act together and come out with reasonably priced, reasonably good Android tablets. Android already has a great developer ecosystem. Apple (and Microsoft!) have spent hundreds of millions educating consumers about the benefits of tablets. It would be a sad but familiar story if someone else swooped in and got the cake.

So if we owned Apple shares, we’d cheer at their shrinking margins.

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