Thursday, January 31, 2013

Apple could lose its strength with its suppliers and partners

Apple Inc shareholders have been hit by one of the bloodiest weeks in the history of the actions, but the brunt of this weakness could be more important for the long-term value of their investments.

 Apple PodrĂ­a Perder su Fuerza con sus Proveedores y Socios

While the iPhone, iPad and Apple Mac remain gold standards, signs that the company is losing some of its edge in the smartphone market, suggest that his influence with trading partners could decrease.

Recent comments from some executives of phone companies and component suppliers show they see room for at least some change in the balance of power.

In particular, the fourth largest telecommunications company in the U.S., T-Mobile, just stopped subsidizing smartphones when it began selling the iPhone 5 in order to put pressure on Apple, especially if other companies follow suit.

Most U.S. telecommunications companies subsidize the terminals in exchange for two-year contracts. If customers start paying full price for an iPhone could seek cheaper alternatives.

Asked if the companies are now in a better position to negotiate lower prices with manufacturers of smartphones like Apple, Fran Shammo, CFO of Verizon, said to have four strong platforms (Apple, Android, Windows and BlackBerry) is leading at more competitive prices.

"The more mobile operating systems have greater competition"

Verizon is the largest mobile telecommunications provider in the United States.

Lower gross margins

Apple sold a record 48 million iPhones last quarter, but its overall market share is expected to reach 22% this year and become dependent on customer purchases brand loyal, unless they agree lower margins, making a low-cost iPhone, according to a study by ABI Research.

Meanwhile, his arch-rival Samsung, with a variety of devices on the market, has overtaken Apple as top seller of smartphones in the world.

If customers and suppliers of Apple, which by themselves are already rivals. smell blood and take a much tougher line in negotiations, could erode Apple's gross margins, which fell to 38.6% last quarter from 44.7% a year ago.

Apple declined to comment on its business with partners, but when asked Tim Cook, in the conference call on the results, the potential reduction in subsidies from telecommunications companies, said the total payment subsidies for companies is quite small compared to revenues once the two-year contract. He said the iPhone has many benefits for companies, such as reducing the rate of rotation and the ability to sell shared data plans for other Apple products like the iPad.

Indeed, the ever-increasing volume of sales of the iPhone in the last decade Apple has given unprecedented power to negotiate with mobile operators and component suppliers.

The results of the last week fell below Wall Street estimates, dropping the price of Apple shares over 14%. These are signs that Apple is returning to Earth, becoming the undisputed darling of Wall Street that Apple has something more normal, but remains a highly profitable company.

A less powerful Apple might be welcomed by telecom operators and component suppliers that have come to the difficult conditions has been able to impose Apple with its undisputed leadership in the market.

Mobile operators continue to agreeing contracts and grants substantial unfavorable because they still can not live without Apple, but experts say they could have more freedom of action in the future if manufacturers like Samsung and others continue to gain market share.

What subsidies pose

Grants have been an important factor for the success of iPhone and therefore the earnings momentum of Apple. Analysts estimate that operators pay a subsidy of about $ 400 for every iPhone they sell compared with subsidies of between $ 250 and $ 300 for other smartphones.

But this could be changing. T-Mobile has not revealed the details of its agreement with Apple, but its CEO, John Legere, said it will not be as onerous as Sprint's commitment to pay 15,500 million dollars in four years. Instead of subsidizing smartphones, T-Mobile will allow consumers to pay the full price of the device in monthly installments, as some companies already do in Spain.

Randall Stephenson, CEO of AT & T, Apple's first partner for the iPhone, applauds the idea of ​​T-Mobile:

"It's something we've seen on several occasions. We also study the idea "

Verizon CEO, Lowell McAdam, told Reuters that the strategy of T-Mobile was very interesting, but wondered whether consumers will be willing to pay the full price of the terminal. A 16GB iPhone 5 without contract will cost $ 649 at any Apple Store.

If subsidies are removed and payment plans widely adopted in the United States, some experts say consumers could opt for cheaper devices.

"The illogical love story is over. Now Apple is just a great company, "said a former senior executive of a rival in the business of smartphones.

Already there are signs of resistance. The company is negotiating with executives and television producers to try to reach agreements and launch the Apple TV, according to some sources. But these efforts are hampered by the reluctance of the producers of movies and TV shows to reach favorable content deals for Apple. Viewed as iTunes helped decimate the earnings of the recording industry a few years ago and are very cautious, according to some analysts.

Samsung leads the global smartphone market with 29% market share in the fourth quarter, an increase of 22.5% compared to a year ago. Apple was number 2, reducing its stake to 21.8% compared to 23% a year, according to IDC.

Apple's ability to achieve lower prices to manufacturers of chips and other components is one of the reasons why media retains margins 40%. However, given the increasing competition in the United States and its relatively weak position (sixth in sales of smartphones) in the growing Chinese market, this power can be difficult to maintain.

The stock prices rise or providers plummet depending on whether they were elected or rejected by Apple. Chipmaker Audience Inc went public last year having a contract with Apple, but the stock plummeted when Apple stopped using its chips. Audience's main customer is Samsung and their actions now are recovering.

An executive of chipmaker said he would like to have the possibility that one day his company could rely less on Apple. Sell ​​to Apple is "a double-edged sword," said the executive, who was not authorized to speak about his company's relationship with Apple. Having Apple as customer guarantees high volumes, but at the cost of accepting very low prices that can cripple profit margins, said this executive.

Meanwhile, a few component manufacturers are investigating a possible scenario without smartphones and Apple tablet. InvenSense Inc reported a 58% jump in quarterly profit on Wednesday and its shares rose 11%, in part because its chips for gyroscopes used in Android devices such as the Nexus 7 of Google, the Samsung Galaxy S3 or Amazon Kindle Fire HD. InvenSense is definitely trying to do business with Apple, but even without them, has become a key supplier in the market of smartphones and tablet.

In addition, Samsung is also growing as much in the market, also forcing their suppliers to accept lower prices, said Mark McKechnie, an analyst at Evercore Partners.

Cult Status

For now Apple is still a super player in the market of smartphones and tablet, but Samsung phones sell less. For many consumers, the cult of the brand remains unchanged.

Despite recent market losses (Apple has lost more than 230,000 million dollars of its value since September) only the iPhone has achieved revenues of 30.66 trillion last quarter, 43% of total sales of Microsoft in the same period.

"Although they are gaining share, are an important piece of the market and a volume controller customers," said David Yoffie, a professor who specializes in strategic competition in the Harvard Business School.

"In the long term it is clear that Apple will have more and more pressure if you do not find new ways to innovate."

Even with slower growth, Apple is still a highly successful company with a bright future and a lot of potential to produce another revolutionary product.

"What will be drawn from a hat to Apple once again transform the industry?" Asks Joseph Doyle, who co-directs the management strategy of large-cap equity firm Morris Capital Advisor. "And if you can not, Apple does this makes a terrible investment? No, that will make it more like all other companies ".

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Track | Reuters

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