TEN SQUILLION GODZILLION iPHONES. That’s how many they are making in the 3rd quarter alone. I only mention this to try to make myself look a bit better after having hung my dirty underpants out to dry this week, for I, Baruch, predicted just this! I am not a complete investment dolt! OK I didn’t give numbers, but I said, in a piece which was long term negative on Apple but short term positive (know, and do not confuse, your time frames):
Apple . . . has a window to build some scale. At the same price as an HTC, hell, I’d buy a 3G iPhone. I can finally see it taking off
this is what I imagine will happen: a flattish reception to the 3G iPhone launch in May or June (I hear it looks identical to iPhone v.1, and may not have GPS or a 5 megapixel camera), followed by amazing initial volumes of 3G iPhone.
There was a flattish reception; AAPL sold off a bit after a rally into the launch announcement and everyone seemed more interested in whether Steve Jobs had cooties or not. I hope he doesn’t. “MobileMe” didn’t work (one wag said the Blackberry version of this would be called “RimmMe”). But this 10 million number has blown my mind. “Amazing initial volumes” is an understatement. For context, there will be about 1.1-1.2 billion cellphones sold in 2008, according to like, everybody. So 10 million sounds like small beer. But that’s in one quarter, so really it’s 40 million annualised, which is 3.5% unit share from zilcho (iPhone v.1 was negligible), and then assuming a $550 average selling price — pre-subsidy of course — and a $120 ASP for the rest of the market, and assuming they actually sell them in Q3, well Apple just took a 16% share of the total value of the handset market, give or take. In other words, it just created the equivalent of RIMM’s handset business, Sony Ericsson, the equivalent of LG handsets. In one quarter. Just like that!
There just isn’t room in the market for that type of share loss. There are good reasons to believe growth in the overall handset market is slowing. I don’t know who is going to lose that 16%. I suspect everyone will lose a bit. RIM will see its growth slow (not good news at 35x PE), Nokia high end will suffer. Sony Ericsson and Motorola really, really don’t need this type of aggravation. Somehow I suspect Samsung will be OK. LG? Palm? HTC? Until these guys have something to fight iPhone, the only way to compete will be pricing inferior product to a point where it can compete.
Of course, this is the first quarter of build, where Apple are launching the phone in 80 countries or something and have to stock the shelves. Smarter people than me call this “initial channel fill,” and question whether it is sustainable. It could just be the fanboys buying it (though I plan to get one too). Whether it is or not there is no question, however, that this quarter is going to be a bit of a stinker for everyone involved in the handset market, from vendor to component maker to operator who isn’t Apple or also designed into the iPhone or selling the iPhone.
As for my thesis, step one complete. You will remember the thesis: I was negative on Apple, long term, because they are taking a major gamble on iPhone from a position of weakness, a stalling iPod franchise; after a big initial splash, they will find it difficult to build scale and make the same margins off the iPhone, and in the worst case it could be a major albatross around their necks.
This is still in play. A major shock for Apple’s competitors, and awful quarters in Q3 and maybe Q4 will make clear that fighting the iPhone successfully means a huge effort in terms of R&D and time to market, and Nokia, RIMM, Samsung et al will have to throw whatever they can at the project. They’ll probably come up with something. Opex intensity is set to rise in the space, bad news for everyone, and remember, Apple hamstrung themselves by exclusive agreements with single operators in Europe. But right now the competitors are distracted, overly sanguine, and the instant scale and momentum Apple seems to have created is truly impressive. If they can continue, I may have to revisit my conclusion.
Right now I could think about a trade like long Apple, longer the people who make the bits (except Qualcomm, who have no bits in the iPhone, and whose customers are going to lose share), and short everything else in handsets (note to readership: do not follow stock tips from pseudonymous bloggers). I would think again about this positioning when we are in Q1 next year. I would have said November would be the time frame for the trade to get stale, but we have some sense of the product pipelines for the competitors, and they seem to suck. Again, the only weapon they have here is price.
That might mean revisiting my conclusion, but not in a good way: what if Apple’s entering the smartphone market turns out to be a disaster for everyone? What if it leads to huge price down, greater competition, and an overall lower margin in the market? Not just long term Schmapple, but Schmokia, Schmimm and Schmamschmung too? Say what you like about Baruch, but know that he refuses to persist in error!