My notional Long RIMM Short AAPL trade from mid-September is still on, and I think it will make me figuratively rich. I was up 20% on this at one point, but only 4% or so now, my RIMMs having been the victim of a Piper Jaffray downgrade today, and are down almost 7% at the time of writing. Still, never say die, and I would now like to double up on my invisible AAPL short and add another offsetting imaginary long, this in Nokia. So I will be 2x short AAPL, and be 1x long RIMM and 1x long Nokia in my little make-believe world.
There’s nothing like a good anti-Apple screed to scandalise people. Bento, you know I hate Apple smugness, and that I think Apple is an anti-Spinozist company. But I like to think my concerns for the stock are reality-based. The way things seem to be turning out, I think the iPhone will prove to be the best thing that has happened to Apple’s handset competitors in a long time. RIMM and Nokia will be the real winners. For Apple, iDoom follows as the iPod franchise withers, and the “halo effect” (people buy Macs because they like their iPods and iPhones) goes into reverse. Also, Apple is much more sensitive to a consumer recession in the US.
Now, this is not an actual trade I can do in my non-imaginary tech fund, as we are “long only” and cannot go short. However I can underweight stocks in my benchmark, and in point of fact we are really mildly underweight AAPL, and mega overweight RIMM and Nokia. There is real money behind this, I am not just making odd noises.
Why do I, Baruch, flout conventional wisdom in such a way? On the advice of my lawyer, please note at this point that nothing in this post constitutes investment advice. He further suggests that anyone who invests money based on the insane jottings of some anonymous blogger deserves to lose their shirt anyway; are you completely stupid?.
You may remember that Apple cut prices on iPhone in the US by 1/3rd only a few weeks after launch; in Europe, the biggest and most dynamic handset market in the world, things look even worse. iPhone is now on sale in Germany via T-Mobile, France via Orange and the UK via O2-Telefonica respectively. But the high price tag with a 2 year contract, which altogether costs over GBP1,000 in hardware and contract, may be putting people off in markets where high spec handsets get sold with huge subsidy. As a result:
- iPhones are not selling in the UK. Carphone Warehouse staff complain that it is not doing as well as they hoped. Corroborating this, Vodafone UK told some of my broker contacts that they haven’t seen any dent in market shares since it went on sale. France may well be tracking with the UK, they tend to have the same handset habits.
- It is a hit in Germany, but not in a good way. Since a German judge agreed with Vodafone that it is morally and legally wrong to tie a phone to a single network, T-Mobile has been forced to sell iPhones SIM-unlocked for EUR999. Clever reseller Debitel is now offering you a EUR49/month 2 year contract on the iPhone you buy in a T-Mobile shop with a EUR600 rebate, similar to the T-Mobile offer. T-Mobile has to pay up to 30% of its revenue from iPhone to Apple, it is one of the business-model breakthroughs that makes the iPhone so interesting. But Debitel pays Apple nothing. This probably makes Apple very cross, and T-Mobile feel like schmucks.
This is all the more galling because, as is becoming clear,
- Apple is a false friend. An aggressive hegemonising swarm of a company, Apple is notoriously mean to its partners and suppliers. As Fake Steve Jobs puts it, “I’m a buddy fucker who screws my friends and allies just for kicks”. Many is the Taiwanese contract manufacturer I have checked out, hoping to benefit from some new Apple product ramp, only to see them killed on price and over-ording one quarter and no-ordering the next. EU operators are beginning to find this out; all are bemused as to how Apple promises to support then on iPhone and then goes and sells the iPod Touch (an iPhone without the phone but with Wifi for web browsing, which bypasses GSM and 3G networks altogether) in their geographies. Now there are even rumours Apple will buy wireless spectrum in the US, and become an operator itself! I have heard more horror stories but am sworn to secrecy. These operators have never, ever given away revenue share to a handset maker, and now they do so, look what happens! Nokia never treated them like this. . .
But that’s OK, because
- Nokia, RIMM, Samsung, LG and Uncle Tom Cobleigh and all will have touchscreen, multimedia browser models from Q1 next year. The handset market is a kleptocracy, where patent workarounds are rife and whatever new feature is adopted by one manufacturer gets trumped only 6 months later by a newer, better model from someone else which goes to 11. I have seen vaguely illicit photos of the new Nokias and they look great, all black and smooth and shiny and touchscreeny, some with retractable keyboards for texting (iPhone’s achilles heel). The Symbian OS which everyone knows and loves will be revamped to accomodate touch. The units will likely be heavily specced with GPS, 1meg 3G data download and probably 5 megapixel cameras with Zeiss lenses, while Apple is still trying to come out with 3G — on which, by the way, they should have to pay 10-15% royalties to Qualcomm, Ericsson and Nokia. In 2008 Nokia alone will have 4-5 touchscreen models to Apple’s likely two or maybe three. These guys have scale and distribution to crush Apple in a high street shootout if they play their cards right.
The big picture here is that operators have been the kings of the wireless foodchains for some time now, blocking moves to mobile data with obtuse pricing because they want to protect their voice and texting margins, and because they’ve been able to grow revenues anyway from penetration and substitution from fixed voice. The iPhone exclusives seemed a foolproof way to gain share and regain some “cool” factor, but now they see they made a pact with Lucifer. They worry that Steve Jobs wants to claim the mobile internet for himself. The open-source business model of Google’s Android platform there to pick over the bones of what is left. They need to do what they can to regain control, or at least manage the transition from voice and text master to dumb data pipe with as much margin and dignity as they can muster.
For their part, the handset makers have always wanted to build the optimal mobile internet and voice appliance, but have always been discouraged by the lack of data-ready networks, and the expectation that operators would price data so high it would be pointless anyway. They may not have known exactly how to make the super-duper killer handset either, and they haven’t had the right user interface. Both operators and handsets have been on the verge of the mobile internet for some time, but fear, or something like it, has been holding them back.
The great thing about the iPhone –make no mistake, it is a historic product — is that it has shown everyone the way and has probably let the genie out of the bottle. The majority of operators who cannot carry the iPhone have a great need to have something to compete with it, something that they can attach data contracts to; right now the key alternative is RIMM. But even operators who do carry iPhone may want something in their shops that can weaken Apple’s negotiating position. Vodafone is even hinting that it will share revenues with operators like Nokia with their Ovi portal (no, not at all like Club Nokia, OK?) if it helps drive traffic.
For RIMM and Nokia, it probably means the broad sunlit uplands of a new product cycle no matter what happens, with more generous support of their traditional partners, the operators, and the prospect of high margin, multiple-expanding, recurring revenue. For Apple, it threatens a slide into irrelevance in the wireless space, before they even get started properly. Unless, of course, they can find an uncharacteristic humility or, perhaps a more plausible scenario, come up with a second generation iPhone that blows everyone away all over again.