Armchair Quarterbacks Dictate to Tim Cook & Always Lose

| Particle Debris

No one understands Apple's customers and the company's sales figures better than Tim Cook. No one understands the build and inventory process better than Tim Cook. And yet, many seem to be flowing with the technical currents sweeping the Internet. The disconnect couldn't be greater as Tim Cook continues his attempts to instruct us.

At the end of Apple's earnings report on January 23, Tim Cook said something remarkable and subtle. He was asked by an analyst about the apparent strength at the low end of the product line. For example, Apple couldn't meet demand for the iPhone 4 in the last quarter. "There seems to be a lot of demand at lower price points for the iPhone," he asked. "Why not move down market in the iPhone business?" Here's what Mr. Cook said.

[Very, very long pause to reflect.] I'm not going to go into our pricing strategy, but we feel great about the opportunity of getting product to customers, and a percentage of those buying other Apple products. We've obviously seen evidence of that throughout our history and continue to see evidence of that today."

This was a remarkable exchange. The analyst presents a question, apparently derived from group think, perhaps fanned by the flames of Internet conventional wisdom, and Tim Cook directly contradicts him by pointing out:

  1. Lower cost iPhones (4, 4S) are already available and selling so briskly that Apple can't keep up with demand.
  2. Apple has observed (and reiterated previously in that session) that when a customer buys an iDevice, it's very likely they'll buy another iDevice in the future. This, in turn, fuels more sales.

So, in other words, if you reduce the price of your flagship product, all you do is push all the prices down across the board, leave money on the table and detract from your reputation as a premium brand.

Along with that money making strategy, Apple has also found that getting one iDevice into customer hands invariably leads to them buying another Apple product, the well-known halo effect, making additional money for Apple in a way that isn't commonly connected to the pricing scheme.

It's clear that an understanding of who is buying Apple products and how they buy them has led to a pricing strategy that Apple favors. In fact, it's so nifty that Mr. Cook declined to get into the details, probably for competitive reasons. What's clear from the exchange above is that these simple, armchair quarterback ideas about how Apple should price and sell its products are at variance with Apple's internal strategies that are working so well.

How well? Apple can't keep up with demand for iPad minis, iMacs and iPhone 4s. Mr Cook explained that the iPhone demand also exceeded supply early in the quarter, and as supply increased, sales increased. Even so, iPhone 5s flew of the shelves to the tune of almost 48 million sold in 13 weeks. How does lowering prices improve upon that?

The only logical conclusion to draw is that Apple has developed a product and pricing formula that takes into account how its customers perceive and buy the first Apple product, and then the second, and so on. We should all key in on these remarks.

And yet bloggers, tech columnists and at least one major analyst has decided that simple minded ideas about lowering prices to increase demand and market share are more insightful that Apple's own internal knowledge of its business operations.

It boggles the mind.

Tech News Debris

This week I found two very good articles that explain, in interesting detail, the key differences between the business models and motivations of Amazon, Google and Apple. In the first article, Google's Larry Page provided his views on the Google-Apple rivalry. "What Google Does Best Is A Stark Contrast To Apple, According To Larry Page."

In the second article, a former Amazon manager explains, in contrast to the conventional wisdom, why a low margin business is good for Amazon and makes life difficult for competitors. It's a long but fascinating article, full of juicy tidbits of wisdom from a fellow who fought in the trenches at Amazon. "Amazon, Apple, and the beauty of low margins."

We often talk about the loss of privacy nowadays, but there is an interesting angle on that. One path to protecting information is "practical obscurity," that is, information that's available to the public, "but could only be found by spending a burdensome and unrealistic amount of time and effort in obtaining it." This applies in many areas, and a thoughtful, enlightening discussion of it is found in: "Obscurity: A Better Way to Think About Your Data Than 'Privacy'."

Has cyber warfare crossed the line? Will it end up being something like chemical warfare, some thing that humanity has to pull back from? Moreover, as the article states, "In human history ... we sometimes had to stop using new technologies like the airship or the Concorde after major accidents. What if the threats on our cyber systems lead us to have to quit using some forms of IT and store government data on paper again?" All this and more is explored in: "Eugene Kaspersky And Mikko Hypponen Talk Red October And The Future Of Cyber Warfare At DLD."

Lots of people have their opinions of the Surface RT and expectations of the Surface Pro. But you're not fully informed until you've read Anand Lal Shimpi's technical assessment at AnandTech, and I urge you to do so. "Hands on with Microsoft's Surface Pro, Available in US & Canada on February 9th."

Not every company that has catered to business and then had designs on the consumer market has had a successful venture. Sometimes, the structure of a company and its business practices just can't be modified to meet the demands of the consumer market place. Or perhaps the company finds that it just doesn't enjoy dealing with consumers -- that isn't in its DNA. Here's one such story. "Cisco’s Flirtation With Consumers Is Over, as Belkin Buys Linksys Unit."

We know that Corning is doing an amazing job with its Gorilla Glass used in consumer electronics. The thing is, once you get very good at one aspect of a technology, often, new opportunities arise. Here's a fascinating story about Corning's Willow Glass.

Could we see that, someday, wrapped around our arms or legs, perhaps in the style of Kiera Cameron's devices in Continuum? It's fun to ponder. (I couldn't find the Continuum photo I wanted, so here it is, synthesized, in two parts.)

(L) Rachel Nichols in Continuum (NBCU/SyFy) and (R) concept via lirenshuai

Finally, following up on that, I can see two technologies that could become the next generation of technology beyond four ounces of smartphone aluminum and silicon bulging in one's pocket. The first is curved glass, mentioned above, that could be worn on the forearm.

Image credit:  Google

The second is Google Glass and, incidentally, Goggle is setting up an event for Google Glass developers called the Glass Foundry. The company is keep strict wraps on the technology, but ReadWrite found out some of the details. "The Super-Secret NDA For Google's Project Glass Event Next Week."

That boggles the mind as well.

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11 Comments Leave Your Own

1stplacemacuser

That analyst must be an economic idiot. If demand exceeds supply, you should RAISE your prices, not lower them. That’s basic econ 101 knowledge. How does that guy put on his shoe every morning?

nealg

I think here is another point in the argument against a lower priced iPhone right now. In looking over the data, it is clear to me that the main reason why Apple did not have better earnings growth this quarter was that their margins went down. One of the reasons their margins went down was because they introduced the lower priced Mini which has lower margins. I think if Apple introduces any lower priced phone, it won’t be a piece of junk so Apple will have to sacrifice margins, to a degree, to be able to get it out the door working reasonably. That will decrease margins further which, I am thinking, wont be made up by increasing sales. One of the reasons for Apple’s selloff is the decreasing margins causing some issues with earnings comparisons from the previous year, same quarter. Looking back at the dec 2011 quarter, there were a couple of things that were unique to that year that may not happen again. The form factor for both the iPad(although this changed a little except for the screen) and the iPhone didn’t really change and I think that really helped with margins. All the new products introduced in 2012 appear to be harder to produce and that increased the pressure on margins and I think this is part of the profit from increasing sales went. Even though Tim Cook warned about this in his previous CC, I guess people weren’t listening.

Many analysts don’t know what they want and shouldn’t be telling Apple its business. If it makes sense for Apple to make a lower priced phone, they will do it just as I am sure they will make a larger screened phone if they can do it reasonably while keeping the quality of the Apps and the phone up to its standards. Didn’t Jobs say something to the effect that consumers don’t know what they want until we give it to them so that is the reason why we don’t do focus groups. I think analysts are the same way.

aardman

The Windows PC market has already demonstrated that in the computer industry, where the OS is the primary differentiating feature, the introduction of a low-cost and low-margin line alongside a premium line will kill the premium end of that market*.  That is why Steve killed the Mac clones.  Now comes an analyst who says why not offer a low cost iPhone?  Breathtaking.

Bosco (Brad Hutchings)

Did anyone watch the final episode of Last Resort last night? PTL and pass the ammunition for the DVR, because I actually blinked a few times and had to rewind 30 seconds to figure out all the loose ends. This Apple thing is like that.

Paul Goodwin

Margins on new devices is always hard to come by. The iPad Mini margins will go up. Apple will pressure the suppliers to either get their costs down or they will go elsewhere for their parts. All smart business owners operate that way. It may take a year to get the higher margins though. Producibility design improvements will be made, contracts will be renegotiated for production, and Apple will be making even more money. The idea that Apple should compete in a low margin cheap phone market is absurd. They knew it wasn’t profitable in the PC market, and how many PC vendors dumped their PC businesses because there was so little money to be made? So why on earth would any idiot think it would be a good idea to do it with the phones. It just amazes me how dumb most of the news writers are these days. What’s even more astounding is how many more gullible morons believe what they are saying. Jaheezus.

Paul Goodwin

John…I didn’t say it as nicely as you did.

Paul Goodwin

I read the AnandTech article on the SurfacePro. Sad that the next gen SurfacePro might be the one to get. With a 4-5 hr battery and 2 lb, with no way to hold it in your lap for extended periods it’s a poor tablet. Not to mention no 3G/4G. And not being able to run x86 software, existing in a software desert, and needing all the external kluge pieces, it’s a poor PC. What it’s good for I don’t understand. The comments from obvious PC users were negative on it mostly - I’m guessing by a 3-4 to one margin negative. Most of the comments boiled down to if you wanted a tablet get an iPad or an Android tablet. If you want a PC, get an ultrabook.

The author clearly thinks some of the issues could be solved with future lower power processors, and redesigns to get weight out, and make it more tablet-like for holding in your lap.

Lancashire-Witch

Shareholder meetings and earnings reports seem to be full of people who want if things will be done in future to their way of thinking. Very few people bother to find out what happened and why.

wab95

John:

I appreciate your analysis regarding the ‘arm chair quarterbacks’ and the late spate of irrationally negative blog posts about Apple, and by irrational is meant that they ignore or contradict available data, as Farhad Manjoo points out (http://www.slate.com/articles/technology/technology/2013/01/apple_earnings_report_don_t_let_its_stock_slump_fool_you_the_company_is.single.html). Some analysts perhaps are less irrational than simply in want of capacity to properly interpret data (which is not as easy one might think - very often correct interpretation requires supplemental background data that is not be available or is itself abstruse), or simply use faulty reasoning.

One of my medical school professors once took me on clinical rounds during my first year and made an observation that has stayed with me. He said that we make diagnoses based more on pattern recognition than on reasoning. As a freshmen med student, I was still at the stage of trying to painfully cobble disparate pieces of information together, de novo, to form assessments - an inefficient and slow approach to be sure. The goal, was his point, is to organise that informational foundation into a library of preset patterns that a permit an almost instant recognition of a pattern, with sufficient sensory input to the trained mind.

The relevance? The magnitude and nature of the negativity by, not only analysts, but everyday bloggers is a pattern that I’ve seen before - in addictive personalities undergoing imposed withdrawal. A clinician knows that, in dealing with addicts, you go from hero to zero in a heartbeat once you deny them their fix. The addict devalues you to absolute wretchedness, treachery and villainy. Even though others may have even physically abused them (usually a drug dealer or the police), you, the physician, are worse because, they believe, you have the ability to supply the fix but have withheld it.

Despite Apple’s having outperformed the competition, e.g. Samsung and its entire quarterly profits, together with its flagship Galaxy S III in units sold, Apple is the focus of ire because they failed to meet expectations. In my view, the consensus cardinal crime consists in Apple not delivering a new breakthrough innovation in, well, months. Did anyone else do so? No, but that’s irrelevant. Additionally, missing the Street’s expectations, however grounded in voodoo, merely added insult to injury. We have become addicted to Apple supplying one new ‘big thing’ after another, and this has, I believe, been the most oft-cited sin committed by Apple; no new innovation in months. 

I have argued before that innovation can only occur against the backdrop of a critical upwelling of new technologies. Consumer electronics companies like Apple do not invent all of these technologies (there have been posts here on TMO that, amongst Apple’s shortcomings, they don’t ‘invent anything’). Leaving aside Apple’s thousands of patents, invention is primarily done by scientists and engineers elsewhere e.g. NASA. Innovation amongst commercial companies consists primarily in recognising when a critical mass of new tech can be assembled into a breakthrough consumer product; and being first to successfully do so defines industry leadership. That no tech company is announcing breakthrough products indicates that we have yet to reach that next inventive crest. To punish Apple alone is, by definition, irrational and indicative of unreasoned letdown or betrayal.

At most, Apple’s competitors are adjusting features on extant technologies, often ahead of supportive infrastructure. Apple will, and should, only do so if these enhance user experience with consistency; otherwise inconsistent user experience will redound negatively to Apple’s reputation, not necessarily for others, but certainly for Apple.

My advice to Apple, not that they care what I think, is to manage expectations as well as to ride out this current wave with laser-like focus on their primary goal. There is a cognitive disconnect between Apple and consumers around refresh cycles. Apple plans on a faster CPU and improved power consumption; we expect a device with teleportation capability. Apple could temper expectations by outlining, in broad strokes, where they see current post-PC technology going. This would help ground consumers in finite tech timespace, a ‘you are here’ in the observable post-PC universe, without divulging their own next moves.

Apart from that we would do well to regard Apple as neither a religion nor a magic kingdom, but as a consumer tech company that strives to produce best in class end user experiences around new products whenever next generation technology makes it possible, and no sooner.

paikinho

wab95:
Enjoyed the comment. I guess I think so because it coincides with my view which shows a certain bias on my part, but your comment expresses, rather well, my own thinking.

Additionally, it seems to me that a lot of the Apple stock plummet is based on over valuation to begin with. There has been a bit of a euphoria driving the stock to greater and greater heights. But now the readjustment has happened so I fully expect the stock to begin to rise again.
The stock is likely undervalued where it sits now, but was over-valued when it was over $700. This is merely a gut feeling on my part and there are more savvy numbers people who could do a great analysis of where the value should be sitting.

I believe Apple will be in for a more rational, gradual, and long sustained rise based upon expectation of the real numbers that Apple continues to pile up. I expect no more buying frenzy until Apple comes out with their derivation of the hottest new tech, which I don’t believe has revealed itself to me at least. Apple, according to its financials is a very robust and healthy company at the top of its game. I would not be surprised if next year they set a new quarterly record for sales and profits.

I agree with you that the commentary coming from the blogosphere echo-chamber seems to be stemming from a lack of understanding of that Apple hasn’t invented the technology they are selling, they are taking the tech they find pertinent and making it consumer worthy. These folks would wish for Apple to do something they have not done before (Invent something new).

Apple success has never really been about creating new products. Just in recognizing potential for currently existing technology and repackaging it in a highly attractive package. This started way back when Steve Jobs went to Xerox-Parc and saw the mouse based GUI they had developed.

So your point that expectations of Apple creating a new product and yet not holding other companies to the same metric are apt.

I look forward to the next product lines from Apple, but I can’t really determine what they might be. I simple see nothing by any company that is revolutionary. Once there is some new product, I’m sure Apple with its billions in cash reserves will be able to leverage their position quite well in relation to everyone. They will simply make the cutting edge version of whatever it is and sell it at a premium.

 

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