The Bear Case for Apple

Cribbing, in part, from a recent Forbes article, here is the bear case for flavor-of-the-day Apple:

  • Macs have 30% margins and are growing slowly, while iPod with 20% margins (and 33% of revs) is growing quickly
  • Consumer electronics have only one rule: Rapid commoditization, leading to rock-bottom margins
  • There are no real IP or process barriers in iPod
  • iTunes does little better than break-even
  • Apple has reduced R&D (in relative terms) from 8% of sales to 4%
  • All the good news is out, with Christmas 2005 having been the company’s iPod’s  beanie-baby moment

Related posts:

  1. Apple Re-enacts Greatest Marketing Mistake Ever
  2. iPod = Walkman, sayeth Rollins
  3. More Fuel for the “Apple Buys Tivo” Fire
  4. The Kedrosky Crow Countdown
  5. Yi-Tan: Why Apple?

Comments

  1. Charles says:

    Interesting points…
    “Macs have 30% margins and are growing slowly, while iPod with 20% margins (and 33% of revs) is growing quickly”
    That Macs have a growing market share at all when other PC manufacturers are losing market share (Dell was down to 17.3% in the third quarter of 2005) is quite an accomplishment. Especially since Metcalf’s law holds true here — the value of having a Mac increases with every new Mac user.
    But have all the people who will be switching to Macs already done so? Price is certainly an issue, but according to Hoovers, Dell only pulls a 6.18% margin on computers, so it looks like Apple has quite a bit of wiggle room there.
    “Consumer electronics have only one rule: Rapid commoditization, leading to rock-bottom margins”
    That seems like a very narrow view. Consumer electronics are, potentially, status symbols… they are relatively expensive purchases for the average consumer, and if there is sufficient product/brand differentiation, there is no reason to assume that that consumer electronics brands can’t demand premium margins (As Apple seems to be doing). Proof: Look at any teenager who wants their ear-buds in “mug-me white”, or listen to any designer who says that they would rather barely make ends meet freelancing than take a job at a company where they had to use Windows. Seems to counter the “rule” to me.
    “There are no real IP or process barriers in iPod”
    The iPod has one thing that no startup with IP or process barriers can compete with — instand brand recognition and cultish customer loyalty. For the time being, it doesn’t matter that somebody else can copy it… the product won’t be an iPod.
    “iTunes does little better than break-even”
    All it has to do is break-even. Free software and break-even pricing to support a product with growing sales. Apple is only in the music business to support a music player that it sells… they are simply making sure that customers have access to product. Don’t think so? It fits with other Apple tactics… buying Shake, for example, to make sure that Mac users had the option to use Mac-based software for film.
    “Apple has reduced R&D (in relative terms) from 8% of sales to 4%”
    This is one that has to be watched. It doesn’t necessarily mean anything… R&D is about results not budgets.
    “All the good news is out, with Christmas 2005 having been the company’s iPod’s beanie-baby moment”
    Ok, this point shouldn’t have even made it on the list. But, for the sake of argument, let’s compare a functional product (one used daily by most customers) that is having a noticable impact on the company’s overall growth with a plush doll that sold for no reason other than faddish “investments” on the part of consumers… doesn’t make sense Paul.

  2. Anona says:

    They said the same thing about the Walkman. Sony did manage to sell more than 450 million of them over a decade.
    They said the same thing about the original iMac. After nearly a decade not a single Wintel manufacturer came close to duplicating it.
    They said the same thing about the iPod. Just how many iPod-killers can we tolerate per month?
    They said Microsoft’s $6B/yr R&D spending would kill off anybody else’s. What has it produced so far? Other than a jet and fancy kitchen for Myhrvold.
    If product design were so easy, monkeys could do it. Wait, there seems to be a lot of…
    Same old.
    Ya think, Apple will die soon? :-)

  3. grumpY! says:

    apple should be fine. not great, but fine. the ipod will continue to get revved with minor variations to keep early adopters upgrading (look at how many revs they/it has already been through). they’ll keep the margins wide and continue to find ways to get people to buy. osx will find competition from vista, which i suspect will also be fine and at long last there will ultimately be little value to be gained by switching OSs. with vista, the OS market becomes a loss leader.
    the bear case for GOOG and YHOO, now there is something with meat.

  4. kmr says:

    Being a father of two young girls who have just started to download music; I found the IPod-ITunes combination too expensive. Purchasing them both a generic MP3 player (