This note is from BI Research, a new tech-industry intelligence service. The service is currently in beta and free. To learn more and sign up, please click here.The market appears to be focused on two specific concerns about Apple:
- Reports of iPhone order cuts in the Asian supply chain, possibly from production problems.
- Reports of iPad order cuts amid demand weakness.
Of these, the second is actually more serious, at least for the long term. Let’s look at each in turn.
Last week, several reports of iPhone supply chain order cuts appeared, starting with a report in the Taiwan-based publication DigiTimes. The DigiTimes report mentioned both “demand weakness” and “component shortages” as causes.
Given the long wait times and instant sell-outs of the iPhone 4S, the idea that there was “weak demand” for the iPhone 4S seemed ludicrous, and analysts rushed out to debunk this claim.
The theory that there was a production problem due to component shortages, however, seemed more credible. A production problem leading to an iPhone shortage would actually exacerbate the supply-demand imbalance, making it seem like there was even more extreme demand for the phones. So the long lines and reports of iPhone sales problems were not, actually, mutually exclusive.
If Apple is having an iPhone production problem–and this has certainly not been definitively established–the company could report a disappointing number of units sold for the quarter. And because the iPhone now accounts for more than half of Apple’s revenue (see chart below), this could hurt the company’s CQ4 performance overall.
Photo: Business Insider
Importantly, a production problem due to a component shortage would likely be a short-term problem (unlike a demand problem, which is a long-term issue). Within a month or two, Apple should fix the problem, and it will likely recoup most postponed sales.
More broadly, however, Apple’s competitive product advantage in smartphones is clearly shrinking, with even Apple fanatics conceding that recent Android and Windows phones are getting much closer to being as good as or better than iPhones. Apple’s market share relative to Android, moreover, continues to shrink, which eventually will reduce its negotiating leverage with media companies and app developers. These are not positive trends for the company.
The reports of weakness and order cuts in the iPad supply chain, if true, are actually more serious than iPhone production problems, even though they would have less impact on the current quarter.
If demand for the iPad is weaker than Apple expected, it could mean one of two things:
- The near-term iPad market opportunity is not as large as Apple and many analysts believed
- New tablet competitors, including the significantly lower-priced Kindle Fire, are capturing share
Neither of these is positive for the company.
As with the iPhone, Apple’s launch of the iPad created an entirely new product category: a reasonably priced interactive media consumption, web-surfing, and gaming device. For nearly two years, Apple has had this market to itself, as competition from Android (Samsung, et al) and RIM has been weak.
But now, again as in smartphones, competitors appear to be catching up.
Also, in tablets, Apple is facing a very aggressive and credible new competitor, Amazon, which is selling a fully featured tablet at less than half of the price of the iPad ($199 for the Kindle Fire vs. $499 for the low-end iPad 2). Early reviews of the Fire, including our own few minutes of hands-on experience, suggest that the Kindle Fire is not as good as the iPad. But it costs ~60% less than the iPad, and it seems an amazing value for the price.
To avoid losing significant tablet share to the Fire, Apple will either have to start making a smaller, cheaper iPad (the Fire is smaller) or significantly cut the price of its low-end iPad (Goldman Sachs believes this cut is “overdue”). We would guess that one way the company might approach this problem is to do the same thing in tablets that it has done with iPhones: Launch the fully priced iPad 3 next spring and continue selling the iPad 2 at a much-lower price-point, perhaps $299 or even $199.
Either way, Apple’s days as the clear leader in smartphones and the only-game-in-town in tablets appear to be coming to an end. And in Amazon, Apple is facing a competitor that appears to be willing to lose money on hardware to gain share.
THE BOTTOM LINE:
Short-term iPhone production problems would hurt Apple’s quarter, but they would not indicate a decline in Apple’s long-term competitive advantage or margins. More intense competition, however, both in terms of product quality, and, in the case of Amazon in tablets, price, could directly impact sales and margins over the longer term.
And as more credible alternatives appear in both markets, and Apple continues to lose unit share, Apple’s leverage over developers and media companies will continue to diminish. So these are not positive dynamics for the company.
What are we missing? Email thoughts, feedback, and questions to [email protected]
This note is from BI Research, a new tech-industry intelligence service. The service is currently in beta and free. To learn more and sign up, please click here.
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