MorningWord 9/23/14: The Next Big Thing Is Already Here

by Dan September 23, 2014 9:53 am • Commentary

A big part of Steve Jobs’ genius was nudging consumers towards what they should desire.  Apple always emphasized aesthetics but it wasn’t until the introduction of the i-Series, starting with the iPod 2001 (I suggest you to re-watch Job’s 2001 iPod intro event here), that that emphasis paid off mig time as computing turned mobile. Aesthetics are important when it comes to something people will be carrying around in public all day. While the aesthetics of their mobile devices was a key differentiating factor from their competitors, it is important to note that Apple and most likely Steve Jobs was wrong on one crucial form over function decision – size.

The advancement of flash memory (doing away with hard drives) continuously gave opportunity for smaller and smaller devices.  The iPod is a great example as Apple routinely struggled to find the sweet spot, with many iterations, starting with the classic, and then smaller sizes of Nanos, to shuffles… but in the end, when video started to be as or more important to audio and the advent of touch screens and wi-fi enabled iPods, size won out, and the devices will eventually die with the largest surface size to date.

As for tablets, Jobs famously stated after the intro of the 9. 7 inch “Magical and Revolutionary” in 2010, that the entrance of 7 to 8 inch models by competitors would be “Dead on arrival”.  Less than two years later Apple would introduce the iPad Mini to great success.  With iPad sales growth declining, the company is now looking to their recently minted partnership with IBM to get iPads used in the enterprise, and there have been rumors that they may soon launch a 12 to 13 inch iPad for business uses.

On the iPhone front, Steve Jobs was fairly adamant that the size they chose to redefine the smartphone space, originally at 3.5 inch, was the right size for the mobile phone experience.  Well, this past week’s success of 4.7 and 5.5 inch phones and the dramatic market share lead by Android (with dozens of models with 5 inch screens) suggest that they were wrong on that front too, until now.

Which is why the release (due out Sept 26th) of Samsung’s top of the line Galaxy Alpha at 4.7 inches, made with glass and metal (as opposed to their typical plastic) with flat edges is almost hilarious.

Samsung Alpha Galaxy 4.7 inch
Samsung Alpha Galaxy 4.7 inch

Remind you of anything???

iPhone 5s 4 inch
iPhone 5s 4 inch

What is shocking is that the over the last few years ,the Samsung PR machine has attacked Apple with their Next Big Thing Is Already Here campaign.  This reversal in Samsung, moving their high end phone down in size to Apple’s new phone, to look like last year’s iPhone 5S model is a sad sign for Galaxy fans that the company has finally acknowledged how turned around they are, and how they really never innovated on the hardware front.

Investors have taken notice.  Samsung shares closed at their lowest levels since mid 2012, closing overnight in Seoul below key technical support:

Samsung 4yr chart from Bloomberg
Samsung 4yr chart from Bloomberg

Apple and Samsung bears would argue that the developed world is saturated with high end smartphones, while bulls would argue that Apple’s weekend sales of 10 million units signals healthy demand.  I would suggest that even at the high end, it is feast or famine.  The tables have clearly been turned in Apple’s favor as they finally have a three phone offering that can compete with any competitor.

As for Apple, regular readers know that I am a huge fan of the products, but not a fan of the hype around the stock or the stock at current levels (here is my defined risk bearish trade from last week).  I believe that the next real driver for Apple will not be iterations of iPhone or upgrade cycles but a suite of services and possibly wearables (but not the 1st Watch).  Near term, I believe the stock is devoid of catalysts, and with expectations just massively raised, I see sentiment waning in the coming months as the lines dissipate and lead times shorten. Yeah, the China launch will be big but what percentage of the last week’s sales are headed to China??? (must watch about those long iPhone lines here).

Samsung’s chart should scare the hell out of Apple investors, despite it being clear that Apple is hurting Samsung on the high end. I suspect that the disparity between Apple’s $650 or so ASP and the avg Android ASP at $250 will be the germane issue that Samsung will choose to compete on from here on it, which could be a drag on Apple margins from here on out.