Wednesday, September 26, 2012

An Apple Paradox: from the top of the charts to the ground?

September 21 2012, Apple Inc has already broken a record; its market capitalization has been above other any listed companies for more than a week. This could have logically thrilled investors and bankers. And that is the case. At least in the near future.
For Apple Inc., today is one of the most important event of the life of the company, the sixth model of IPhone is about to hit the market with great expectations. Figures are big: 10 million devices expected to get sold just over a week end.
As Apple is quoted for $700 as of IPhone 5 launch day, market capitalization has reached out an incredible $ 656,280,741,000. Yes, $656 billion. Greatest capitalization ever. When the first IPhone was released, June 29 2007, Apple was quoted at $122.04. How come can’t we say IPhone is the Apple star product.[i]

Is something wrong with this new phone? IPhone 5 is the sixth IPhone in 5 years. IPhone 2G, 3G, 3GS, 4, 4S and 5. As its performances should meet expectations and consumers requirements for the next 2 or 3 years, Apple has never been so close to the end of a cycle.

1/ Purely marketing:

We can make this statement; iPhone and iPhone 3G and 3GS went on a much anticipated hype and hope[ii] for consumers to get a 100% original product in terms of design, style and performance. Probably one the most anticipated tech product ever.[iii]  4 and 4S correspond to the period when trend continues to grow with a different design. Quality of engineering was no longer a debate as opposed to supply chain issues. Matured production or so.
Here comes 5. Same design, lighter and longer. Overall performance is a non brainer (processor speed, Camera resolution, functionalities, etc.). But the design makes us feel that Apple is running out of idea. IPhone is a jewel; we want to use it as a purse or a watch. Question (which is actually not a question): would you like paying hundreds of dollars almost every year to buy something that quite not everyone has already on hands? Yes you would. So now would you mind getting the new iPhone 5 which barely looks like IPhone 4 regardless its new combination of performance/adaptability? Unless you are an Apple addict, the question deserves to be asked, because paying the price for a design that you have already experienced/enjoyed is like offering the same toy to your kid every Christmas, even if it goes faster or it is more solid. Apple has taken a risk by keeping things too stable at some points. By doing it, the company is about to get non geek consumers slowly annoyed. And lose its reputation as a creative manufacturer. IPhone would be more a toy than the phone it should be. When pleasure comes up with social representation. When 4G is not enough to change your mind.

2/ Tech industry experience:

When we look back in the rear mirror, we can remember a couple of brands that has a comparable path. Sony was well known for the high standard quality of its products and when it has decided to enter into video game console market; gamers have not awaited for so long to get things changed. PlayStation has become the new standard in a very competitive environment. Those 3 versions have kept Sony on the top of the manufacturer ranking for almost a decade. Not easy to stay alive and performing in such a competitive market as long as we would like it to[iv]. Tech industry basically needs to be nurtured by R&D and as a result, investments happen to be. Also, large investments mean taking risks. From now, Sony has to find a way to survive as a major player[v]. So has Nintendo[vi]. So has Nokia which was the top selling cell phone constructor 10 years ago[vii]. And so on (Sega, Ericsson...)

3/ Duplication in question:

A quick thought about what movie industry has done for a long time. Once you get a blockbuster, a second movie is coming next and a third and so on...until audience drops to the point there is no profit anymore. Sure those episodes rarely make as enough money as the previous ones. Let's take a look at Batman[viii], Superman[ix], or Spider man[x]: Box office shows up an earnings decline (Gross US) whenever a movie is cloned.
Not difficult to imagine Apple may have copied its business model from such a respectable and so traditional industry. And should take valuable lessons avoiding predictable issues.

4/ Value for money:

IPhone 5 worth the money? Definitely not, from now. Being either a unique product or crystallizing any fan desires have made it a top price range kind of device for the last 5 years. Deserved but not a sustainable strategy while economy turmoil implies different logic of spending your money[xi] and competitors strength got better and faster[xii].

5/ Investment cycle:
Plain and simple as below:
Introduction = IPhone 2G
Growth = IPhone 3G, 3GS
Maturity = IPhone 4, 4S
Decline = IPhone 5
Looks like a paradox when it comes to the numbers. Every new model has seen its sales figures soaring and be greater than its predecessor. iPhone 5 might be the most popular and profitable smartphone ever. Another clue came from the first week end sales report of iPhone 5. Shortfall appeared between predictions (around 10 million units) and reports (around 5 and 6 million)[xiii]. Even if it is still an absolute record, Apple could oversee analysts’ exaggerating expectations as an indicator. Reality does not always comply with forecast, indeed. As a consequence, stock price fell down from $700 to $665.18 less than 1 week (as of September 26, 2012) after iPhone 5 launch. So did Market capitalization from $656.2 bn to $623.5 bn.
6/ Geek and other Apple addicts should be valued as a fixed asset:
On a short notice, it is hard to see the company having financial trouble, too big too fail, obviously. Especially, since it has had the largest loyal customer base in the world. Millions of people ready to spend the Apple money, and it may not stop given the Mini Ipad next launch supposed to hit the market by November 2012. On a business side, while an large investor evaluates the fair price of its future commitment, it may not avoid assessing any potential goodwill from its transaction. Question: What kind of Apple asset would be the most important driver to retain or raise the customer base? Samsung lawsuit could give us some interesting tips.

The ability to protect its business model as well as the way to make it evolve by releasing a brand new technology remain some reasons Apple should consider not extending its marketing approach of duplicating its product indefinitely with having the risk of getting most loyal client base frustrated.