On September 10th, Apple unveiled two new iPhones, the iPhone 5C and the iPhone 5S. Another year, another new iPhone, and another chance for me to share this classic Futurama clip.
Both iPhones will be available in the United States starting September 20th. This announcement had been expected for quite some time now. Over the past year or two, Apple had been facing several troubles.
1) It has lost the majority in the smartphone market share to Samsung. Though Apple is extremely dominant in the United States, Samsung, integrated with Google’s Android operating system, is outselling Apple in the rest of the world thanks to its cheaper prices.
2) Its earnings have dropped. Yes Apple’s products still have a very high profit margin and the company’s overall earnings are relatively high, but this year, the company reported its first decrease in earnings since 2003. As evidenced by the following graph provided by Yahoo Finance, this caused the price of Apple’s stock to decrease from above $700 in September of 2012 to a low of less than $400 in April 2013 (Apple’s current share price is at $467). The drop in price eroded almost $57 billion of market capitalization.
The expectation was that Apple would release a much cheaper iPhone, so as to sell more units in emerging markets such as China and India, where Apple is being outsold by firms that produce cheaper smartphones. China and India are the two most populous countries in the world with a total of over two billion people. Additionally, China is the 2nd largest economy in the world and India is the 10th largest economy in the world. The cheaper iPhone would have given Apple deeper penetration into these markets and would have allowed Apple to recapture the majority of the global smartphone market share, not to mention boost profits. What we got was the iPhone 5S and iPhone 5C.
The iPhone 5S is a more developed version of the current iPhone 5. Its most buzz creating features include its ability to allow the user to secure their phone with fingerprint recognition, noteworthy advancements made on the camera, a faster processing speed, and additional features added to Apple Maps and Siri. A side note on the faster processing speed. How much faster can phones get? Seriously! It already takes a mere second or two to run any application. If that’s what draws you to drop $500-$600 on a new phone, you are insanely impatient. I digress.
Apart from a few minor upgrades, the iPhone 5C on the other hand is extremely similar to the iPhone5. This is what was supposed to be the ‘cheap iPhone’. However, with its price, Apple revealed that they are not willing to give up their position as the premium seller in the market. The entry level iPhone 5C without a contract will be roughly 599 Euros in Europe, 4488 Renminbi in China and 35,000 Rupees in India. Those are still pretty high prices for those countries. Even though wages have risen in China over the past few years, they are still much lower when compared to developed nations. It is much more sensible for an Indian or Chinese individual to buy a cheaper lower-end smartphone.
The question is, will these new series of products (and the newly revealed ios 7 operating system) bring Apple back to its former glory? There isn’t much doubt that Apple’s new series of products will mend its short term concerns. The cheaper iPhone will help sell more units in emerging markets even if less than expected. It is also crucial to note that Apple is on the verge of hammering out a deal with China mobile, a Chinese mobile network provider that services 700 million users. Penetrating that customer base of 700 million will be a huge win for Apple. Again, the new products will surely bring excitement to Apple and boost the firm’s profits as well. However, if we look at Apple in the long run, it is possible to say that Apple has peaked. For the moment being, the company is no longer an innovator, but an emulator. This is to be expected. In any economic situation, when one party supplies a scarce product or service, they will be profitable and will be able to charge higher prices. That was the situation when Apple first entered and formed the smartphone market. But as supply increases relative to demand and the product/service becomes less care, the company most focus on keeping up with the competition (eg. Samsung, Nokia/Microsoft, HTC).
Of course we don’t know what crazy projects Apple has got brewing deep inside their headquarters. I expect them to develop something similar to Samsung’s recently released smartwatch. There are also rumors of Apple being in the process of developing a television. I’m not saying that Apple is dead or that Apple’s days are coming to an end. The company is founded and run by innovators and visionaries. But competition is no longer idle, and unless Apple leads the way into a new revolutionary market, its highest point is behind us.
To end this post, here’s a little tip for all you investors out there. Don’t assume that the hype created by Apple’s product announcements equate to a massive spike in share prices. The following graph assembled by Bloomberg shows that after Apple’s past product releases, Apple’s share price either stayed stable or dropped in the short term. Play it safe for now.
“You have to be burning with an idea, or a problem, or a wrong that you want to right. If you’re not passionate enough from the start, you’ll never stick it out”