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Month June 2010

Apple's supply problem

With the iPad still unavailable three months after its launch and with only 1.7 million iPhones available for purchase in the first three days, Apple’s inability to meet demand is surfacing as its most immediate and glaring problem. This problem merits the deployment of some of the cash Apple is hoarding.

As I wrote in May, Apple’s next billion users are in waiting. However, to serve them in a timely manner requires a new approach to product launch and ramps.

Apple has imposed upon itself a yearly product cycle for the iPhone and the iPod [and, probably for the iPad].  This is a brilliant move because it keeps the product fresh without having it seem disposable.  It also keeps competitors within its turning radius. However, the challenge is that the distribution network has to be filled rapidly and drained rapidly to maximize availability. This gets harder and harder as the volume grows. Imagine having to manufacture and ship into the channel a billion devices in less than a quarter.

This year’s iPhone 4 launch was heavily over-subscribed.  If Apple had enough supply, launch sales could have gone as high as 2.5 million, one analyst believes. Apple admitted mis-diagnosing demand and problems arose during the reservation process. There were insufficient units for pre-order, never mind for users walking into stores.  The shocking thing is that three months on, the iPad is still unavailable to impulse buyers who might want to pick one up with their iPhone.  This despite the fact that most of the world does not have any purchase option.

Now I ask what will happen next year?  Supply may balance with demand by October and strains will show again around Christmas.  Then what?  The iPhone 5 will be getting prepared with another 50% to 100% growth in demand.  How will June 2011 and June 2012 look?  Will Apple have 4x the supply of iPhones and iPads needed to maintain growth?

There are various solutions possible, but if Apple wants to maintain the product cycle, the event marketing and the “reveal” that builds brand value, it needs to change the way it manufactures.  By investing in automation, locating plants near to buyers and by integrating suppliers into production, it can get the quantum leap in supply it needs.  These are capital-intensive solutions, but Apple’s capital is underemployed.  I see no better use for the rapidly-building cash pile.

Kin(dling)

Verizon slashes Microsoft Kin phone prices • The Register.

My guess is that Microsoft’s business model for the Kin was always to share revenues for Kin data plans.  Trouble is that users won’t pay high monthly fees for data without a significantly more flexible device.  Thus even making the Kin free won’t get a large user base.

iPad still sold out three months post-launch

With the recent iPhone 4 launch the media spotlight has faded on the iPad.  However, the iPad is still missing in action at many (most? all?) Apple stores.  I called four stores in the Boston area and they are only available by reservation.  The waiting time varies but I’ve been told to expect one week wait at one store and an indeterminate wait at the others.

The online store shows 7 to 10 business days waiting time for all models.

Asymco estimates for Apple's third fiscal quarter

The third fiscal quarter is at an end and it’s time to estimate performance.  Andy Zaky has kicked off earnings season with his detailed accounting of what could be a $63.5 billion year for Apple.

I put forward below my estimates side-by-side with Zaky.  I come in at $62.6b for the year, differing by just under $1b or 1.6%.

His numbers are certainly within what I would consider a margin of error of mine.

My estimate for iPhones this quarter are lower due to possible slowing of sales before the iPhone 4 launch.  My Mac numbers are higher based on some early estimates of industry pick-up. I concede that my FQ4:10 iPad estimates are low, but sticking with them for now.

Android is a BlackBerry killer

Much has been made of the potential for Android to reduce the growth of iPhone. The iPhone seems to be doing very well and continuing to be supply rather than demand constrained.

RIM however seems to be under significant pressure.  A Goldman Sachs analyst first pointed this out in her last report and placed a “Sell” on RIMM.  The fact is that most of RIM’s sales are in the US on the carriers other than AT&T.  In those very same carriers, Android is being pushed hard as a customer retention strategy, so iPhone is pressuring RIM only indirectly through Android.

The evidence is also in survey data.  In the graph below, we see how iPhone buyers are considering Android as the most credible alternative to the iPhone whereas they considered BlackBerry the best alternative a year ago.  In terms of vendors, what RIM lost HTC gained.

One can only wonder what will happen when the iPhone enters unrestricted distribution in the US.  The results in other markets speak for themselves.

AppleInsider | Apple’s recurring revenue stream: 77% of iPhone 4 sales were upgrades.

Microsoft's 7 Mobile Operating Systems

Adding this all up, Microsoft has several mobile OS products in various stages of production, including

  1. Windows Mobile 6.5
  2. Windows Phone 7
  3. KIN
  4. Windows Embedded Handheld
  5. Windows Embedded Handheld 7
  6. Windows Embedded Standard 7
  7. Windows Embedded Compact 7.

As ZD blogger Mary Jo Foley noted recently, this fact is somewhat amusing in the wake of Microsoft CEO Steve Ballmer’s criticism of Google for having two different mobile OSes (Chrome OS and Android.)

via Microsoft’s Mobile Strategy Isn’t A Strategy. It’s A Mess.

That’s not version 7 of an OS, that’s 7 different OS’s in the market at the same time.

RIMM near 52 week low

RIMM shares dropped more than 5% after hours after company reported “light” units and a 20% rise in profit with a 24% rise in revenue.

RIMM sold 11.2 million units (of which 4.9 million were new subscribers and the rest replacement units–a deterioration in replacement rate). This represents 43% growth. The unit growth is nearly double the revenue rise implying a lower ASP ($300–half the iPhone) and margin (45.4%).

RIM passed another milestone: 100 millionth BlackBerry was sold during the quarter. We’ve noted before that Apple will also pass its 100 millionth iOS device this month. RIM sold 20 million units as of October 2007, right on the heels of the iPhone launch. That means that iOS grew 100 million to BlackBerry OS growing 80 million in the same time frame.

So why are shares at a P/E of 13? 20% EPS growth would be respectable numbers, but the smartphone market is growing faster than that. The implication is that RIMM is losing share and everyone is expecting that loss to accelerate.

Simona Jankowski from Goldman Sachs repeats her Sell rating. “RIM has now missed top-line expectations for three of the last four quarters, in our view demonstrating the building competitive pressures on its business from the iPhone and more recently from Android,” she writes. “We estimate that net subscriber additions in North America declined on a sequential basis, which we attribute primarily to the success of Android-based phones, such as the Motorola Droid and the HTC Incredible at Verizon.”

Research In Motion Limited (USA): NASDAQ:RIMM quotes & news – Google Finance.

YLE: Nokia's smartphone share crumbles in Finland

Roughly translated:

Nokia is rapidly losing share in the smartphone market in Finland. The iPhone is becoming a large part of the market.  Sales grew in the first quarter but a growing slice of revenues is going to Nokia’s competition.  iPhone share of the Finnish smartphone market has not been previously disclosed but Sonera Sales Director Juha Koivuniuemi reveals it to be more than 20 percent.

Nokian asema murenee huippupuhelimissa myös Suomessa | Talous ja politiikka | YLE Uutiset | yle.fi.

I should mention that I had previously estimated iPhone share at 17% in January.

Reminds me of another phenomenon: the iPhone in Japan.

Analysts predict iPad sales (part III)

Apple Sells Three Million iPads in 80 Days – Yahoo! Finance.

After 1 2 3 million units sold in 28 60 80 days, it’s time to review the analysts’ predictions:

First year iPad unit forecasts (sourced from TMO Finance Board)

  • Brian Marshall, Broadpoint AmTech 7.0
  • David Bailey, Goldman Sachs 6.2
  • Kathryn Huberty, Morgan Stanley 6.0
  • Shaw Wu, Kauffman Bros. 5.0
  • Mike Abramsky, RBC Capital Markets 5.0
  • Gene Munster, Piper Jaffray 3.5
  • Ben Reitzes, Barclays Capital 2.9
  • Keith Bachman, BMO Capital 2.5
  • Jeff Fidacaro, Susquehanna 2.1
  • Chris Whitmore, Deutsche Bank 2.0
  • Scott Craig, Merrill Lynch 1.2
  • Peter Misek, Canaccord Adams 1.2
  • Doug Reid, Thomas Weisel 1.1
  • Yair Reiner, Oppenheimer 1.1

Looks like at least half two thirds three quarters of these guys have already blown it.

For the record, in January I forecast 6 million units for calendar 2010 (and 10 million in first year).  It looks like I’ll be facing the iPad dunce corner as well.

See: Analysts predict iPad sales Analysts predict iPad sales (part II)

Apple considered less valuable than the average S&P 500 company [Updated]

Apple just reached a new all-time closing high.  It’s remarkable that so soon after a recession the stock is enjoying new highs.  The Dow would have to gain 40% to make the same claim.

So some may ask whether Apple’s stock is getting ahead of itself.  Perhaps it’s showing signs of “irrational exuberance”.

This is not the case.  In fact, the stock is showing signs of irrational despondency.  This is demonstrated with the following graph.