iShort iPhone

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I am sure, despite never having seen an iPhone, that it is a fine piece of kit, Bento. But I do so very strongly dislike Apple as a company. They sell high quality hardware it is true, but so overpriced; you pay a premium to be unable to use 90% of the world’s software without running some other complex program to do so. I hate the cutsie-coo operating system and the self satisfied “pop” when you close a window. I find the advertising unbelievably irritating, with its “Think Different” slogan, which when you think about it is a pean to its lack of market share; if they had managed to sell more Macs than PCs would they be telling us to “Carry on Thinking the Same” to make us buy more Macs? More than that, I pity the ponytailed, smug, pseudo-individualist, and above all gullible Apple fanboys, who all believe they are part of some greater social movement representing god knows what but who are in fact the victims of some corporate succubus which cares not a jot for them except how much more they can milk them. And the fanboy’s anger at the Wintel axis ignores the fact that the only thing which kept the company afloat during the dark times was Microsoft’s charity; that and the need to pretend that Windows was not in fact a monopoly.

No, Apple is the antithesis of what a Spinozist technology company should look like: closed, not open systems; overly pleased with itself and arrogant; and its advertising and brand values appeal to the grossest of the Passions: envy, pride, confusion and fear. In their defence, the flip side of their arrogance is a certain appealing audacity. The company from time to time (but not as often as we think) creates attractive and innovative products. But net net they have to go in the Stupid Cartesian bucket.

Anyway, I submit Apple may well have peaked, and it is all downhill from here. I am worried about the company and the stock, and think it might be time to call er, time on the fanboy stuff at least.

It was with No Small Joy that I read about Apple’s failure with iPhone v1.0. No matter how one spins it, a 33% price cut a couple of months after launch is not a sign of success in any hardware market. Nokia’s “pre-sponse” to the iPhone, the N95, is still selling like hot cakes at the same unsubsidised $700 price point (but it is subsidised, a crucial difference) it was launched at 2-3 months before the iPhone hit the shelves. Now, we are told the millionth iPhone has been sold, and this is ahead of the internal target for the end of September. Hooray, clap hands or rather let’s not, as Apple is notorious for giving mega-low-ball targets they will never miss, so no matter what happens they can say it is a “major triumph”. One million in the 1st 2 months after release is not a great total for the most hyped phone launch in history with a huge advertising budget, and the only reason they made it now is likely the price cut itself. Apple has still to find a European carrier desperate enough to accept the harsh terms it insists on, and has thus excluded itself from the highest value handset market in the world. No, something is smelly here, and all is not well.

As with all things Apple, Fake Steve Jobs has the best coverage of the débacle. 

Not everything is terrible either. Apple will launch a 3G iPhone, of course, and other variants. It will have a European launch, and at some point, Asia. But for the first of any line to flop is not a good sign for the descendants, and 3G is a lot harder to do properly; that version might come later than we think. And if the iPhone is merely an OK product in the end, what then? Stagnation, or at worse a money pit as Apple throws R&D and marketing at a subscale product. The iPod franchise is being attacked by cellphones with embedded MP3 players. iPhone was conceived as the counter to this, but it exists in a very different market from iPod, one which is already populated by lean, experienced kleptomaniac companies with vast scale, open software and massive distribution; 3-6 months after Apple introduces a handset innovation it will be copied and shipped around the world, patents be damned. I do not think it will be enough. Apple will be left with the declining iPod franchise, an unprofitable handset business, and the stub Mac business, which is indeed going very well. However, that business was kickstarted recently by the iPod success, the “Halo Effect” much beloved by AAPL (the stock symbol) bulls. As iPod declines, may an inverse Halo not be possible?

AAPL is not my stock; it is covered in my fund by my dear colleague and boss, who does the computing hardware part of the portfolio (I do the communication hardware and software bit, among others). So I have no real sense of the valuation. We did sell it recently; were I able to I would go further and put on a cheeky trading short, probably offset by a longer term RIMM long. Research in Motion, I decided recently, has cornered the market in mobile email. It should do well whether iPhone is a success or not, as the 3-4 operators in each cellphone market who don’t have the iPhone exclusive will be pretty desperate for something similar to sell.

Of course, I reserve the right to change my mind on this at a moment’s notice, and then to pretend I wanted to do the opposite all along, but that’s how I feel at the moment and for some reason I wanted you all to know.

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7 thoughts on “iShort iPhone”

  1. Some good points and some stupid points in here, I think, Baruch.

    But just to be clear: I have no conception whatsoever what is going to happen to AAPL. It is trading at such silly levels that it could easily fall dramatically even if Apple, the company, continues to do very well. But insofar as you’re projecting hard times for the company as opposed to the stock, I think you’re wrong.

    Is Apple kit overpriced? Not really. Expensive, yes, but you pay for quality. And the iPhone at $399 is decidedly cheap.

    And my OS never pops when I close a window.

    In the only market where the two compete head to head, the US, the N95 has sold pretty much zero, compared to the iPhone’s 1 million. The iPhone is simply a vastly better product than the N95: just ask Bento if he wouldn’t switch in a heartbeat.

    The iPhone is the best phone in the world by far, it’s patented up the wazoo, and it will do very well thank you. v1.0 hasn’t done great mainly because of the 2-year contracts in the US which people don’t want to break. When they can switch to iPhone, they will.

    Besides, how many N95s have been sold?

    And what makes you think iPod is declining? There’s really no empirical indication of that, and the new iPods are actually very nice. 160 GB? Wow.

    But I do think you’re right on RIMM. iPhone, as it stands, is very very bad at email. I’m sure it will get better, but for the time being it’s not even close to competing with Blackberry.

  2. N95s are not really on sale in the US, are they? I do hope they are! We lurve Nokia. They sold about 1.4m N95s in Q2, and I would think another 2-3m in Q3 wouldn’t be hard to do. Texas Instruments just said its high end handset chipsets are selling well, and Nokia is its biggest customer, so that would mean it is doing well!

    Bento is an Apple Fanboy. I have written elsewhere that he would use Apple tampons (iPads), despite his lack of periods, if Apple started making them. But he would keep his N95 for a while for the GPS alone.

    Simply put, iPod has to decline in terms of growth (the only metric that counts in tech) coz it is maffs, innit. Plus the main problem is that in Europe and Asia people increasingly use their MP3 enabled phones for music. It’s bundled in. YOu don’t get 160gb, but it’s “free”.

    I do not know whether the iPhone is the best phone in the world. 2mpxl camera only (N95 has 5), low speed data transfer, closed software and lack of removable battery would mitigate against it, though the screen, interface, overall looks and sheer style would stand in its favour. Is Milla Jovovich more attractive than Giselle Bundchen? Let’s just say it is a hugely attractive phone. Sadly, business models, scale and distribution can be more important in the handset market.

  3. Nokia has a huge advertising campaign, in NYC at least, for the N95, but almost no one buys unlocked phones in the US, so they’re fighting an uphill battle unless & until they get a carrier to sell the thing.

    You’re quite right on the phone: I don’t think I’ve used my iPod once since I got my iPhone. It has a fraction of the capacity, but you can still put a lot of music on it. I do think that the iPhone has the most beautiful and seamless transition from iPod to phone and back, when you make or receive a call, compared to any other MP3 phone. The headphones alone, with their cute little almost-invisible microphone, are pretty much perfect.

  4. If Nokia is advertising the N95 a lot then I am really happy, I shall likely be rich, rich, rich at the end of the year with a megabonus!! I will buy things! I will buy you. Assuming it sells some of them of course.

    Actually I stopped using my iPod after I got a new computer; I haven’t been able to be bothered to reload iTunes, and, can you believe, I can’t be arsed to recharge my iPod even. I may be exceptional in that way, however. Now, had I a Sony-Ericsson Walkman 850i Iwould have to keep it recharged because I need it to work as a phone, and then, well, hell I may as well listen to some music. Just one way in which iPod gets its lunch eaten, as you point out yourself.

    Actually you can chart the fortunes of iPhone through the NAND flash memory spot price (dramexchange.com or something JFGI). The drop in the spot is testament to the lack of re-ordering by Apple of iPhone components (just another tech fund manager trick), of which flash memory is a major part. I hear that initial order indications of about 6m iPhone units to the end of the year got downshifted to about 4.5m (after peaking at 9m at the top of the hype). Wags suggest the awkward product called the iTouch is an attempt to use up all the NAND they over-ordered! Me I am not so sure, I do not think it is that bad.

    But I am sure Steve Jobs will be pleased you like the earbuds.

  5. Some people buy apple not because it’s different but because Mac OS is much more efficient and less annoying.
    In the end it is all about efficiency, well and clever marketing.
    p.s. If you compare Mac hardware to PC price wise the difference is not that significant.

  6. AAPL stock rallied 47% to its high after this prediction, so it was a poorly timed outright short.

    Hedged positions lost money too. Since the date of this post (Sep 11th 2007) AAPL is down about 34%, compared to a fall of 48.3% for RIMM, a loss of 14.3% for a market neutral position. The S&P 500 fell 42.5%, so AAPL outperformed the market by 8.5% minus the difference in dividends.

    So: AAPL had a huge rally in the months after your post, has significantly outperformed RIMM stock, and has modestly outperformed even the S&P 500. The latter is a particularly impressive and surprising achievement for a high beta growth stock in a huge bear market, since go-go stocks normally get creamed in such environments.

    I would take issue with many of your analytical comments. The first Iphone was a bit flawed – but then so was the first Ipod. I didn’t like the first Ipod I bought, but within 1-2 years they were much better designed and more reliable. The same will happen (is already happening) with the Iphone.

    I have used PCs for years, since I’m a trader and most software didn’t run on Macs. I’m the classic old-school PC user – performance is key, looks image & fashion are irrelevant when trying to trade futures or stocks. Last year I started using Macs for about half my business – the main reasons are less crashes, seamlessness, and far more intuitive usability. For example I have automated backups to an external hard drive every hour, without having to lift a finger. Took my 5 mins on the phone to Applecare to set that up. With PCs backups – a critical function – were a nightmare. A closed system has a key advantage – no driver issues. I was driven to distraction by driver updates, conflicts etc with PCs. Having something with 50 different firms involved in the manufacturing of hardware and software is not a plus point. Anti-virus and security is a non-issue for me now. Seamless synching with the Iphone is far superior to the Windows PDAs I used to struggle with, and the Iphone software design is far better. You also ignore its open-source applications – I have about 20 on mine, including options pricing calculators, broker front-ends and Bloomberg, which I can’t get on other 3g mobile phones.

    I am nothing resembling a typical Apple fanboy, I just shifted because it offered far superior products, and (key point) seamless product integration. As mobile and multimedia devices become more important, ultra-compatibility and seamlessness will become critical. Given Apple’s proven ability to come out with leading-edge design and killer apps in every field they enter, you may well get a kind of “lock-in” effect where if you want to use the Iphone, it makes most sense to own a Mac not PC. Having bought a Mac, it makes more sense to use other Apple products than knock-off, usually inferior competitors.

    Don’t forget the ace in the hole, the PC/laptop business. Apple’s edge in MP3 and mobile phones could result in a virtuous circle of user migration to Macs, and after a certain point it may hit critical mass. Then software compatibility (already resolvable by purchasing one copy of Windows and a cheap hot-swap software program) will be a non-issue.

    I have no current position in AAPL, due to the current poor outlook/visibility for earnings. However, once the recession moderates and begins to end, I think there is potentially huge upside for the stock. It could easily be the Microsoft/Intel/Dell combined of the 2010s.

  7. Timeframe, Rsole, timeframe. May I suggest you look thru the rest of the site, searching (i don’t know if this blog has search) for key word AAPL or iPhone or whatever. Or google it. I “changed” my “position” many times since I wrote this.

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