Apple fails the Cafe Table Test

So we got the new iPhone. Baruch predicted this February (long before anyone on the sell side opined about it) that the launch of iPhone 3 would spell the likely end of the good times for Apple in the smartphone space. They had run out of ideas, he said:

Apple can up-spec: it could add a better camera, a better processor, boost memory capacity, or fluff the OS somehow. At the same time it would cut the price of the old model. This is what they will probably do this summer.

Well, this is exactly what they did a couple weeks ago. And this weekend we see the debut of the new iPhone 3GS, S for “Super”, or “Speedy”, or maybe just  “Something”. You get faster chips, more memory, a compass, and video recording.  This will set you back $200 for 16gig NAND, and $300 for 32 gigs, with the requisite 2 year contract from AT&T. Anything you ever wanted to know about iPhone 3GS you can read here.

Meranwhile the old iPhone gets a price cut, to $99 with 2 year contract in the US, and deeper into free in Europe (where it was already), with a cheaper contract: EUR44 in Germany for example where before I think it was EUR60. Canadians will get still screwed and pay more than anyone else for the same thing; just not quite as much as before.

But here’s the problem, which I hinted at in the link above: the dirty secret of high end handsets is that they are bought as much to impress as they are bought to be functional. Smartphones in 2009 have replaced the stereos of the 1980s as the arena where a certain type of male competition is decided. Early adopter nerd fanboys still imagine that they will become more attractive to the opposite sex with the latest smartphone, and pecking orders in their social circles are partially determined by the changing status of a never-ending flow of constantly higher-specced gadgets. This is why people camp outside Apple stores. They may be dying to finally be able to use cut and paste, hoping their lives will be suddenly fuller, but I submit they are equally keen to be the first in their urban tribe to flash the latest iPhone around in the blessed 2 weeks before anyone else they know can get one.

The problem of the iPhone 3GS is that it fails the cafe table test; can someone tell that you’ve upgraded by looking at it? No. It looks almost exactly the same. Apple is asking you to pay up to $200 extra for minor feature tweaks, when what most people really need to get for that kind of money is a phone that shows to women and men passing by your cafe table, handset ostentatiously displayed, that you are of high status, and possibly worth shagging, or sucking up to.

You laugh? Ask Ed Zander, the man who killed Motorola with the RAZR and its clones. Back in 2005, the RAZR phone was the only one a thinking, style conscious person could possibly buy, at least for a while. It was shocking in its thinness, its style, while retaining the specs of similarly priced, and now suddenly obsolete, thick handsets. They sold 100s of millions of RAZRs, while most mainstream models do well if they rack up 5-20 million units in their lifecycle. Then they made RAZR variants and updates, and cut the price of the RAZR; this didn’t go so well. The unique selling point of the RAZR was its style, the thin thing. The new RAZRs looked more or less like the old RAZRs, had slightly higher specs, but cost $100 to $200 more. There was no point trading up; sales of RAZR remained high, updates like the KRAZR and SCPL never took off. Meantime the competition was catching up; Nokia and Samsung were doing “thin”, but with better specs and pricing. Motorola had to keep cutting price to maintain volumes and scale and cram the channel to keep making its quarters and maintain its stock price, hoping that something would happen to break the vicious circle. But eventually revenues collapsed with ASPs, and sales channels, now stuffed with RAZRs they could no longer sell, swore off Motorola for life. Moto=toasto.

Motorola failed the cafe table test. Now Apple has given up on it as well. I think cost conscious punters are going to buy old iPhone and spurn 3GS. Meantime the opposition are catching up. Android offers at least a similar browsing experience, for cheaper. Samsung’s Omnia HD is a shit smartphone but looks like an iPhone, has touch screen and mega mega pixels on its camera, while the iPhone has only got 3 of them. The Pre has fanboys trembling with anticipation and Palm could sell loads of them if they could actually make any that work. Nokia is still crap at smartphones but is trying, very trying, and has hired a whole bunch of younger Finns to cover the conferences of the earth making noises about social networking. Apps, yes: iPhone has a huge lead. But it’s not even the first innings in that game, and Android has apparently an easier SDK and better developer economics. Eventually every manufacturer is going to carry the key apps that everyone uses, even if Apple may still own the long tail. And more and more of these machines look like iPhones, essentially the same big screen, rounded edges, with a couple of buttons at the bottom. 

So Motorola-isation is a clear and present danger for Apple here. This second half of 2009 is going to see the first big battle of well-supported heavyweight smartphones, and I am not sure that Apple has done enough in the 3GS to live up to expectations. They may have lost the ability to surprise. Old 3G iPhone is still better than most of the other machines out there, and at $99 it will sell like hot cakes, but soon it won’t be, and if they can’t migrate users to more expensive units, what are they going to to then? Getting off these operator exclusives could be a start.


18 thoughts on “Apple fails the Cafe Table Test”

  1. There is a lot of sense in what you’re writing, but in a second thought, I am reading this post and writing this response using my iphone …
    I think there is nothing like this device, not even close, and it’s not just features but ease of use and smooth working. Therefore I think the new iPhone will remain a great success.

  2. So, were you writing how Sandisk Sansa, Microsoft Zune, Creative, Rio etc Mp3 players will kick out ipods way back in 2003/4 when AAPL started changing formfactor of ipods?

    Here I am just pointing some of your articles for you to know what kind of intelligence you are sharing with readers:
    you got ur a reamed (absolute and relative) in QCOM, THE best performing mega cap tech stock in this vicious bear market by making it your ‘biggest short’. HOW? HOW?

    You got b-slapped in NOK trade. NOK was probably THE worst performing mega cap tech stock. GENIUS:

    You pitched long AAPL right at the top of AAPL stock here (WOWZA!!!!).

    What more sir? were you short AMZN as well? Please write often on stocks…

    Now you are pitching short AAPL/long Android/GOOG thesis. Listen to this – Android is DOA. Even if it takes off in the near term, it wont sustain. Mobile advertising is a JOKE – it wont even help to pay the janitors. FREE business models doesnt work in long term. Were you one of those folks saying nobody buys legal music from iTunes when youtube’s traffic was skyrocketing and filled with free music? But, but arent you now hearing investors want youtube to be shut down/made a paid site? Were you betting on long LNUX/ short MSFT way back in 2000? You wanna know what happens to GOOG stock if Bing market share sustains and market panics on GOOG’s one-trick pony? You wanna know what happens to all these FREE experiments which GOOG is doing right now? wait and watch.

    PS: I know the odds of my post showing up in comments is less than Boltzmann’s constant.

    1. Wow, you are really really paying attention Sherlock! I couldn’t pass up a comment like this in a thousand years, you must be my most loyal reader! This is why I am going to help you out and answer your comment.

      It is true I have made lots of mistakes in trading tech. But I am still here! Many are not. That has to count for something, surely. I think it is because I know how to take a loss.

      Yes, I have lost money in QCOM, and you wouldn’t know that if I hadn’t told you. But FYI replacing L RIMM with L NOK against a S AAPL in Dec 2007 was a fantastic trade! AAPL tanked in the next 3 months almost 50%, RIMM about 30% and Nokia was almost flat. I would have made out like a bandit! If only I had done it real life. Also, please note I was comparing AAPL with GOOG in August 2008. L AAPL S GOOG would have made money over the next month. Then tanked. Then broke even. If I had left it on until now I would only be down 3%. Hopefully I would have been out. The thing that may also confuse you is timeframe; I don’t really say how long I hold these things for. Also, once they make a certain amount of money, I am out. And if they move against me a certain percentage I am out too. Right now I wouldn’t urge you to be long GOOG at all, by the way. It is not the best way to play Android. Maybe not even short AAPL. But if you had to be, an offsetting long HTC might be a good idea.

      Anyway, I shouldn’t write so often on stocks. Comments like yours keep reminding me why it is a bad idea. One can easily be misunderstood. In fact I try and comment more on stocks I am not directly involved in. Believe it or not, I don’t ever trade AAPL.

      Arnon. Yes, isn’t iPhone great? I was playing with one just today and thinking much the same as you. But we must be careful extrapolating from the present into the future. And too much success can be a bad thing.

  3. BTW, the reason i wrote about Android alone and not on Blackberry OS or Symbian or MSFT etc is coz they all SUCK moose balls, except Android (and Palm).

  4. Well, my post was a criticism on some of the fundamental thesis/comparisons you use – not on whether u are still in biz or not. What I see in your post is STRONG negative bias on AAPL (yes there was an occasional net long post on AAPL), but its always been net short AAPL. The reason I found it a reason to write a criticism is to point your readers that you have been wrong in your thesis a lot. Yes, eventually AAPL will crumble on its iPhone weight/success – but realistically ask yourself
    a) What is smartphone market share? What is AAPL’s market share in that segment? What was MOT’s market share when it started to crack? What was RAZR’s selling point in the market (hardware) vs iPhone (software)?
    b) Which company in tech space is generating FCF growth like crazy?
    c) Which company will automatically start seeing growth stabilize and even turn up even if macro economy hits the crapper? Remember AAPL’s stellar iphone numbers are hidden in balalnce sheet and cash flow statement.
    d) Which company has THE best margin expansion opportunity among tech mega caps? Remeber, AAPL’s iphone is 50%+ margins and company average is 35%.

    All i can tell you is when Mac business stabilizes, you will see AAPL’s growth numbers accelerate immediately, and significantly. A smarter trade, IMHO, would be long AAPL/PALM short ES/NQ.

    PS: near term (6months), I expect AAPL to tank to 100$ and then a meteoric rise above 250$. We will see.

  5. Sherlock, the only reason Baruch is always strongly short AAPL is because I, Bento, the other, mostly silent, partner in this blog, am a raving Apple Fanboí, and he is trying to pique me into writing a retaliatory post. Luckily there is you to do all the hard work.

    Had Spinoza been alive today, he no doubt would be authoring on a Mac.

  6. The same is largely true of the mac lineup….I’m not familiar enough with specific sales numbers by model to back this up, but it seems like simply swapping the magnesium 13″ into the pro lineup and improving its specs while keeping the appearance the same is simply another page in the same playbook.

    It’s dangerous to opine anti-mac, in part because of ravenous fanboys but also because of their consistent history of actually innovating. After all, the company has gone from zombie to human time and time again in its history.

    As Baruch rightly points out though, other people can make smartphones. They are starting to make them well. Tech pundits are beginning to observe that given the migration of a wide variety of services to the Internet, hardware and operating systems are less relevant.

    Sadly, that’s what Apple makes. I’m not saying S APPL L GOOG or any of that…I’m simply saying I’d rather ignore established players and focus on emerging technologies and on line services if I am forced to invest in technology at all.

  7. Gosh, this changed pretty quickly from “Apple jumps the shark” to “Everybody other’n me is a”

    Well, assuming anybody cares about the original idea, (not bad; worth exploring; I happen to disagree): there’s the little issue of User Experience. The sole touted features of the Pre were (a) multi-tasking, (b) nifty integration and (c) faster. These are all important features on today’s desktops and why not on palmtops, too?

    The sole touted feature of the gPhone was (a) open source. Sank like a 100 lb. stone.

    There may be a market for the “same features, just less well-integrated and slower,” but my guess is the race is to the swift, the flexible and the features for quite a while. Too bad about the RAZR — I loved it; resisted buying the iPhone until my RAZR crapped out — but then, I DID buy the iPhone for the features and Who Cares about the extra $50/month?

  8. Bento?! is that you. i must be dreaming.

    Sherlock, I have a strong negative bias on AAPL. Is true. But don’t listen to Bento. It is a philosophical thing. Spinoza would refuse to use closed, megalomaniacal systems. He would reject the slavish lockstep pseudo-religious adulation of the fanboi. he would use a PC. As an ex-commodities trader, he would also know it tends to be more profitable leaning against the herd at the right moment, so would probably have traded from the short side on the stock, as well.

    Will, Walt, I agree with both of you. Walt, don’t be cross at Sherlock, I believe he is young, and robust pushback can refine a thesis. The swift and the flexible will win the race, though. Plus scale; you need scale.

  9. i want to agree with you, Baruch, but walked past the Apple store in a suburban mall yesterday, there was a line out the door at least 100 people deep just to get into the store, for at least 3 hours (I’d bet all day)…

    it looked like an american idol audition…tought to bet against right now

  10. AAPL is a short here (3-6 month contrarian trade) to 100$. No fanboi crap. I am there to make money – see stocks as whores. Ride them, have fun, get off them and let them pay you for the ride…. Having said that, I see AAPL having the best 2-3 year story among mega caps.

    PS: I have NEVER bought a Mac or iPod or iPhone.

  11. Ha. Josh, did you read the Piper piece on AAPL on the lines outside the Apple stores? They had estimated queues in manhattan would be 65% of the lines at the original iPhone 3G launch. After some highly paid technical analyst analysis the rest of us are not qualified to do (ie counting people standing in a row) they found the “same store” Apple iPhone launch lines were instead only 25% shorter!! That’s a 10% delta. How fortunate Piper has AAPL as a buy or they would have had to upgrade. What joy!

    No self-respecting handset launch is complete without a few lines. Hell, Apple would pay actors to stand in lines at the shops next to where the analysts hang out. Fact is, though, there is little relationship between the 1st week sales and the 3rd month sales after a hero handset launches (remember the original non-3G iPhone? massive initial sales but it was a dud) and the latter is what counts.

    C’mon Josh, when you read stuff like that coming from the bulls it is EXACTLY the time to bet against it.

  12. The old iPhone selling like hotcakes at $99 is actually far more important to Apple than sales of the new one. It starves the competition of revenue because they’ll be compelled to match the price, and reinforces the network effect for the App Store. The new iPhone? A year from now, it will be the old one, selling at $99.

    The Razr analogy is flawed. For old-style cell phones that did nothing but voice and text, perhaps style and thinness were the major selling features; phones were functionally interchangeable and switching to a new brand was costless. But for a full-fledged mobile computing and Internet platform, what matters is apps and ease of use and there are much higher costs to switching (iPhone apps don’t work on the Pre).

    Constant incremental improvements in features and speed are precisely what is needed to raise the bar for would-be competitors while their window of opportunity rapidly closes as network effects kick in, and the iPhone platform becomes the “Windows” of mobile computing: a license to print money.

    1. Yes, that’s what Ed Zander said. “What comes after the RAZR?” he would ask himself, Rumsfeld like, before triumphantly answering, “more RAZRs!”

      Wouldn’t Apple have to like, licence the OS for it to become the “Windows” of mobile computing?

  13. I wonder about the root thesis: that the look and feel is a critical component. I think it is true, but Apple has hedged that particular bet with the Apps store.

    My completely unscientific look at the demographic in question makes me think that 1-upsmanship seems to be taking place on what sort of clever application/face/use you have. And not so much the physical device.

    If anything, the prevalence of bluetooth headsets has made the physical device much less relevant.

    In the long term, Apple has a sustaining model for profit with the various applications, and are much less tied to long term revenue from upgrades.

    One tihng that is a continuing suprise is how poor windows mobile is. The prevalence of outlook should give them a huge natural leg up, and they manage to ruin it completely.

    1. One has been on holiday. And now we are in results season, which is very tiring. Readers must wait. Baruch has a day job.

Comments are closed.