MorningWord 9/10/15: $AAPL: Carrier Pigeons

by Dan September 10, 2015 9:29 am • Commentary

While most of the tech and finance world spent the last 20 hours deciding which Apple iThingy introduced yesterday was the shiniest, the WSJ’s went with this lead tech story:


Why is AAPL taking aim at wireless carriers in the U.S.? Aside from increasing smartphone saturation rates in developed markets, and less differentiation and innovation on the devices, I think this stat from the article says it all:

The average upgrade time in the U.S. has risen from 18.2 months in 2010 to an estimated 26.3 months in 2015, according to data from telecom consultant Chetan Sharma.

The combination of fewer technological advances spurring upgrades, and fewer first time smartphone buyers could be a problem for the profit leader in the space.  AAPL’s average selling price for iPhone’s in the June quarter were almost $400 above the average for Android (dominant market-share leader) phones globally.  What’s clear is that AAPL dominates the premium smartphone category (estimates range from 50 – 70% market-share above $500 asp smartphones).  I suspect AAPL’s move to break the wireless carriers hold on customers has been a long time coming, but I also suspect that the timing is crucial as AAPL’s future growth around the world may be less dependent on higher end smartphone buyers and their ability to own their customer in countries where a new iPhone 6s/6s+ is not upwards of 15% of annual household income. Last month in a post titled Blind Faith in Your Leaders… Will Get You Killed – $AAPL I had the following to say on this topic relating to Tim Cook’s email to Jim Cramer on sales in China:

As for Apple, Tim Cook is echoing what he has said on the last few conference calls, and the emerging middle class trends he refers to will continue for years. But in the near term, remember that we are at a critical moment in China. I am hard-pressed to think all of the fiscal and monetary policy that the PBOC is throwing at their economy is so their citizens can spend13.8% of their annual household income on a freaking iPhone (vs 1.6% in the U.S.), from


Last October I wrote a post titled Subsidies and Mirrors – $T $AAPL where I took a look at the teardown of AAPL’s iPhone and iPad’s, the cost to make the devices and retail pricing. What you find makes little sense, except for the inclusion of wireless carriers to the equation:

Is the conclusion that the much smaller, less resource intensive iPhone is more complicated to manufacture?  But considering how many more iPhones sold than iPads (39.3 million vs 12.3 million in fiscal Q4), it is safe to assume that Apple gets much greater economies of scale on iPhone.  Teardown of iPhone 6 Plus places costs for 64 gb model likely around $250 (here), while last year’s iPad Air showed cost to build of about $300 (here).

I guess my conclusion is simple – if consumers are no longer going to get ripped off by Wireless Carriers’ ridiculous pricing plans for hardware, then consumers are not likely to upgrade every two years if they are expected to pay $700 to $900 for the new hot iPhone. Either that, or the pricing is going to have to come down substantially to encourage this behavior. Or the business model will be unrecognizable from what we now know.

The last part is really important. We are about to enter an age where consumers may be faced with sticker shock on the price of a smartphone, which is why the carriers and AAPL would rather have you think of the monthly cost to finance the purchase. This battle between AAPL and the wireless carriers is one for the ages but has been brewing since 2006.  Consumers will ultimately benefit from this competition at a time when access to the network is no longer the premium service as date rates are crashing, and low cost providers like T-Mobile have been very disruptive.  If AAPL can figure out how to get their customers to upgrade their phones every year, like many do with iPads, and had done with iPods, then there will be a certain amount of profitability they should be willing to do without.  This is not lost on the peeps in Cupertino.  Yesterday’s pricing for new iPhones highlighted just how important it is for the company to hold onto what ever margin they can on the device, that accounts for two thirds of their sales. For the third year in a row the lowest storage capacity for a new iPhone was 16 gb for $199 (with a 2 year contract, $650 without).  AAPL has done away with the 32 gb $299 option and gone straight to 64 gb at that price point the last two years. Why? AAPL knows that the masses will go for the lowest capacity cheaper phone, so why give them an extra 16 geebees?

So what’s the conclusion? Not a ton from an investment standpoint. From a consumer’s perspective this will be good, more choice of how to buy your phone, in both frequency and financing, which will ultimately speed the decline of wireless pricing plans as carriers will need to continue to fiercely compete for customers who no longer rely on the phone subsidy.

For those considering a new long in AAPL, or possibly replacing an existing long stock position into the company’s fiscal Q4 earnings event (expected the week of October 20th) yesterday we are detailed an options strategy that we feel offers an optimal risk reward to owning stock at current levels (Name That Trade – Bobbing for $AAPL).