New Post: Mac Pricing vs PC Industry

  • Posted: 21 December 2008 12:34 AM

    FYI- for those interested:

    Here’s my piece I promised awhile back:

    http://financial-alchemist.blogspot.com/2008/12/apple-inc-aapl-taking-look-at-mac.html

    Would love to hear any comments/thoughts.

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    Posted: 21 December 2008 12:45 PM #1

    Good post.  In any other economic environment I’d agree with you, but we are now in the midst of a deflationary event and I think Apple should seriously start cutting its prices.  Margins should (in theory) remain quite high but it wouldn’t hurt to see them come in a tad to boost sales.  At a time like this, it is important to be ahead of the curve and one could make the argument that Apple’s recent success went hand in hand with the very bubble that has now burst.  They don’t need to ‘match’ PC prices - maintain a premium.  Just make sure you keep up with the overall industry percentage-wise.

    Apple has always maintained a place ‘above’ PC’s and customers such as ourselves have always agreed to pay a premium to be with Apple.  I cannot conceive of switching back to PC and I’m sure most Apple users feel the same level of loyalty.  But at a time when everyone is cutting back they should as well.  IOW, don’t take for granted what you have achieved.  I’d hate to see Apple market share flatten or even retrace because of hubris.  All you have to do is look at what Apple charges for 2 GB ram upgrades ($150) and then see the same chip go for $20 on newegg to realize Apple may be a little stubborn here with their prices.

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    Posted: 21 December 2008 01:11 PM #2

    Mayor Quimby - 21 December 2008 04:45 PM

    Good post.  In any other economic environment I’d agree with you, but we are now in the midst of a deflationary event and I think Apple should seriously start cutting its prices.  Margins should (in theory) remain quite high but it wouldn’t hurt to see them come in a tad to boost sales.  At a time like this, it is important to be ahead of the curve and one could make the argument that Apple’s recent success went hand in hand with the very bubble that has now burst.  They don’t need to ‘match’ PC prices - maintain a premium.  Just make sure you keep up with the overall industry percentage-wise.

    This deflationary environment is largely the result of the bottom falling out of oil. Food prices and the prices of basic goods have not decreased to any significant degree, if at all. And this discount we are getting will soon turn around when the bill comes due for the damage our government is doing to the US dollar. If you haven’t noticed, the USD is falling like a rock against the Yen and Euro. Also, these bailouts, now totaling near $7 trillion, where’s that money coming from? The answer is we are printing it. When we add an additional $7 trillion to the money supply, and at the same time the value of the dollar is dropping, we have the recipe for inflation, perhaps hyper inflation. And it’s just around the corner. The problem is that our government is on a save the world by borrowing binge. And they’re too stupid to realize the damage they are doing.

    Didn’t we get in this mess by over-borrowing? And now the solution is to borrow our way out of it? Think about it. If we continue down this road, hyper-inflation is the only end-game.

    -ernie

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    Posted: 21 December 2008 01:22 PM #3

    The VAST majority of the liquidity entering the system is going into deflationary assets.  It’s not entering the system.  Hyperinflation requires that the money enters the system in the form of demand that then drives up prices.  This is not what is happening.  There is no demand for lending.  It is not a lack of liquidity that is the problem.  Businesses are retrenching so lowering rates does nothing to help them.  They are already in debt and need to pay that off - lowering rates is great when your business is growing and you need to leverage up to grow.  At best, you get some refinancing to mitigate some downside.

    Right now the bailout money is ‘chasing the knife’ as 10 - 15 years of excess gets wiped out.  Oil may very well be cheap here but we won’t know until after the fact.  The price of oil (and housing and tech and food and everything) has gone up for well over a decade because money poured into those assets thus driving up the price.  We therefore do not have any true sense as to what oil ‘should’ cost.  So money is now pouring out of everything and we are in a short-term deflationary spiral.  What happens next is anybody’s guess.  But if I had to guess, I’d say the deflation continues.  There can be no bubble to replace housing (which replaced tech) without demand for SOMETHING.  And what will that something be?  Oil inventories are rising (which will lead to cheaper food), housing is still expensive (historically speaking).

    As for the dollar, it is only strong because we have an unwinding of the carry trade and 75% of the world’s debt is denominated in U.S. dollars.  So you need to buy dollars directly to pay off your debt or meet your margin call.  This strong dollar is probably artificial and should weaken dramatically once the deleveraging ends.  But right now, I just don’t see any of this leading to inflation at all.  At best, we get a softer deflation.

    Think of it this way - the only way many Americans could afford to pay $4.50/gal for gas was because of their credit lines.  In a true sense, much of what happened the past 10 - 15 years was completely unaffordable.  College tuition, gas, housing etc.  Gvmt subsidies and HUGE debt increases allowed it to appear affordable but it wasn’t.  And all you have to do is look at the national debt to see that we’ve now just shifted a TON of the burden onto future generations so much so that it may lead to default and/or bankruptcy.

    [ Edited: 21 December 2008 01:26 PM by Mayor Quimby ]

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    Posted: 21 December 2008 01:29 PM #4

    There’s no evidence that the money entering the system is all going towards deflationary assets. In fact, most are concerned that the lenders are simply bank rolling the money to keep themselves solvent. The fact is that the government is printing money and the dollar is about to fall off a cliff, and oil will creep up.

    -erntheburn

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    Posted: 21 December 2008 01:37 PM #5

    As long as the money is ‘out of circulation’, it cannot drive up prices at all.  Oil could go up (if sidelines cash pours in for some reason) or it could go down, but short-term, the fundamentals will favor it going down as economic growth and driving habits retrench and demand for goods abates.  Inventories will keep rising and so you get oil prices in decline as inventories rise.  This is why OPEC cutting was so bearish for oil.  We also have to remember that we were all a bit traumatized by high oil prices so $40 a barrel seems really cheap but we’re still at recent price levels.  Eventually, peak oil is a factor so in the very long term view, oil will go up.  When that starts is anybody’s guess but I think we have some more downside to come first.

    Put it yet another way - perhaps we’ve already had the hyper inflation.

    [ Edited: 21 December 2008 01:41 PM by Mayor Quimby ]

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    Posted: 21 December 2008 02:02 PM #6

    I agree that in the near-term we will become more deflationary, but I also believe the government is actively fighting this, as they can’t afford further declines in real estate values. I think the government is intentionally cranking up the inflation, by buying these assets. In the near-term mortgage rates will be kept low, for those who qualify, and house values will remain stable, and all will seem good. In fact I’m banking on refinancing my 5.25% 30 year fixed loan to a 4% or less 30 year fixed, or even a 20 year fixed.

    So, while the Fed is artificially propping up values and keeping lending rates low, for those that qualify, the vast majority of potential lenders are kept out of the market. In the mean time, the side effect of keeping rates low will be a falling dollar. Foreign investors won’t buy up our debt, it would be crazy, to buy it when prices are artificially kept high while rates are artificially kept low.

    This meddling will result in a dollar that will eventually spiral out of control to nothing, and with an ever increasing money supply, as the Fed tries to be the nations bank, inflation will crank up. It will be like the frog and the boiling pot of water.

    -ernie

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    Posted: 21 December 2008 02:25 PM #7

    erntheburn - 21 December 2008 06:02 PM

    I agree that in the near-term we will become more deflationary, but I also believe the government is actively fighting this, as they can’t afford further declines in real estate values. I think the government is intentionally cranking up the inflation, by buying these assets. In the near-term mortgage rates will be kept low, for those who qualify, and house values will remain stable, and all will seem good. In fact I’m banking on refinancing my 5.25% 30 year fixed loan to a 4% or less 30 year fixed, or even a 20 year fixed.

    So, while the Fed is artificially propping up values and keeping lending rates low, for those that qualify, the vast majority of potential lenders are kept out of the market. In the mean time, the side effect of keeping rates low will be a falling dollar. Foreign investors won’t buy up our debt, it would be crazy, to buy it when prices are artificially kept high while rates are artificially kept low.

    This meddling will result in a dollar that will eventually spiral out of control to nothing, and with an ever increasing money supply, as the Fed tries to be the nations bank, inflation will crank up. It will be like the frog and the boiling pot of water.

    -ernie

    I agree about the dollar but not about inflation.  Demand for product drives up prices not demand for derivatives.  Buying MBS does nothing but help banks remain solvent.  Lowering rates helps but refinancing is only available to those who qualify and increasing risk of unemployment, wage cuts, ot cuts, credit card limits as well as the risk that one can no longer ‘flip’ a house all drive people away from housing.  Let’s face it, housing is done as a fad and bubble.  I’m not sure you’ll even get 4% because, like you, I believe foreign buyers of treasuries will slowly pull back and that will drive up yields.  Refi while you can.  Quantitative easing will only go so far.  At the end of the day, the system is broken and we’re doing absolutely nothing to address the real problems.  We’re only making them worse by taking on exponentially more debt.  Obama’s 3 million job plan (just upped from 2.5 mil - how nice) is a non-starter.  We have no money.  Only a tiny fraction of the money spent on creating all of these jobs goes back into the economy.  Most gets burned up and it is all being financed by a government drowning in debt.  All we need is for China/Japan to pull back in terms of financing and we’re toast.

    This is why the banks are STILL liabilities.  We’ve injected capital but nobody knows what’s on their balance sheets.  They could ALL be completely underwater.  Remember Fannie?  This all started when the gvmt realized Fannie had changed what it ‘deemed’ a past due loan from 60 days to ~300 days.  For all we know, BAC, MER, C, JPM, MS all have 150 day past-due 50% default rate MBS all over the place.  Giving them cash gives everything the appearance that all is well but as more and more houses are underwater and foreclosures increase, it may all be for naught.  And we have 3 straight years of option arm resets coming up.  Ben HAS to keep rates super low for all of this time to prevent a repeat of subprime.  So Ben and Hank etc. are doing everything they can to keep prices up and money moving through the system.  The problem is that it is still really early and prices for most things are way high.  So they are fighting a tremendous amount of gravity and interest rates are bottoming.  Printing will come very soon.

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  • Posted: 21 December 2008 02:41 PM #8

    erntheburn - 21 December 2008 06:02 PM

    I agree that in the near-term we will become more deflationary, but I also believe the government is actively fighting this, as they can’t afford further declines in real estate values. I think the government is intentionally cranking up the inflation, by buying these assets. In the near-term mortgage rates will be kept low, for those who qualify, and house values will remain stable, and all will seem good. In fact I’m banking on refinancing my 5.25% 30 year fixed loan to a 4% or less 30 year fixed, or even a 20 year fixed.

    So, while the Fed is artificially propping up values and keeping lending rates low, for those that qualify, the vast majority of potential lenders are kept out of the market. In the mean time, the side effect of keeping rates low will be a falling dollar. Foreign investors won’t buy up our debt, it would be crazy, to buy it when prices are artificially kept high while rates are artificially kept low.

    -ernie

    Ern, banks are making their margins between the cost of funds and current mortgage rates. I don’t see the feds propping up home values as much as an effort to stem further declines which would make foreclosure rates even higher. Banks are of course padding their margins. I think the primary goal is to fatten banks profits to keep the remaining big money centers from coming back for more government support.

    Home values follow a predictable pattern. There’s little help to home values from buying hundreds of billions of dollars of troubled mortgage debt. This is an effort to save banks with a little indirect support to homeowners who can qualify for traditional loans. The problem is without alternative forms of financing (non-traditional loans) there’s little relief for homeowners in trouble.

    Each day that passes makes a solution more problematic. By the time January 20th comes (new president and a new Congress that was seated earlier in the month), the bulk of the foreclosure catastrophe will be behind us in terms of the percentage of homeowners at risk.
    No matter the effort, troubled homeowners will not qualify for traditional loans due to lack of homeowner equity.

    Inevitably interest rates will rise and any efforts now to support or subsidize home loans will do little for the home sales and mortgages 24 to 36 months from now.

    The risk here is the federal government overshooting its goals as the hefty stimulus packages work their way through the economy at a heavy cost in terms of the national debt. Looking long-term, taxes will need to be raised in a catastrophic way at the local, state and federal levels. Combined, we are looking at a nasty multi-year cycle of tax and spending increases to try and forestall or change a naturally occurring economic cycle. Time more than immediate action will solve the economic woes. The more action taken now (even if well-intended) will only exacerbate economic and tax conditions down the road.

         
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    Posted: 21 December 2008 02:46 PM #9

    Dawntreader-  I agree with everything except the statement that the worst in foreclosures is behind us:

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  • Posted: 21 December 2008 03:12 PM #10

    Mayor Quimby - 21 December 2008 06:46 PM

    Dawntreader-  I agree with everything except the statement that the worst in foreclosures is behind us:

    One of the worst things the federal government can do now is attempt to deal with 2011 mortgage issues now. We will inevitably face rising interest rates which will choke bank earning and exacerbate the federal debt if efforts are made today to soften 2010 and 2011 interest rate resets in early 2009. It will create and second wave of bank liquidity issues.

    Our civilization continues to make more people and people require housing. Long-term the housing market outlook is quite bullish. Efforts now to forestall future pain based on near-term economic circumstances and projections for future loan resets will create more problems than it solves. The issue now is lack of equity, not an issue of interest rates. Housing problems are symptomatic of the American addiction to cheap and free-flowing credit. Until that issue is addressed, there’s little that can be done now to change economic prospects for the future.

    By the time the Obama Administration takes office, the first calendar quarter’s economic fate will already be determined. Attempting to solve tomorrow’s problems today based on current short-term economic conditions is folly. We will end up with one very frustrated president if his answer now is to feed the American addiction to credit with greater amounts of cheap credit.

    Reducing mortgage rates to low long-term fixed rates may push mortgage rates below the levels of 2010 and 2011 inflation rates.  That will mean higher deficits and more national debt and the unattractive prospect of future government borrowing costs being higher than the rate of indirect mortgage subsidies. It’s a recipe for very high taxes to close the gap.

    High inflation will mean much higher interest rates and higher debt service payments on the national debt thus reducing the government’s flexibility in future years to control government spending. This could become an actuarial nightmare for the administration’s fiscal policies. In other words, deal with today’s economic realities not tomorrow’s realities based on short-term circumstances today.

    The debt burden to come will be enormous if shoot-from-hip policies are enacted now.

         
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    Posted: 21 December 2008 03:41 PM #11

    Not sure how most of this discussion relates to Turley’s post, but I think his discussion is well thought out and I would expect Apple to maintain pricing power even in this environment.  Apple’s biggest challenge is one of education.  Average PC users don’t know or care what hardware is under the hood if they can accomplish the tasks they have efficiently.  Apple must convince the switchers they will have a much better experience with Apple.  As far as MAC & PC sales I think 09 sales will have a tough time matching 08, the question is how slow and for how long.  Apple has already talked about reduced margins 30% for 09, but we know with current pricing the margins are better then that so either they plan to reduce margins on existing product or deliver future products with lower margins.  I don’t think Apple wants to create a pricing war with all the PC makers and so it will give up some sales short-term to maintain the brand.

         
  • Posted: 21 December 2008 04:04 PM #12

    pats - 21 December 2008 07:41 PM

    Not sure how most of this discussion relates to Turley’s post, but I think his discussion is well thought out and I would expect Apple to maintain pricing power even in this environment.  Apple’s biggest challenge is one of education.  Average PC users don’t know or care what hardware is under the hood if they can accomplish the tasks they have efficiently.  Apple must convince the switchers they will have a much better experience with Apple.  As far as MAC & PC sales I think 09 sales will have a tough time matching 08, the question is how slow and for how long.  Apple has already talked about reduced margins 30% for 09, but we know with current pricing the margins are better then that so either they plan to reduce margins on existing product or deliver future products with lower margins.  I don’t think Apple wants to create a pricing war with all the PC makers and so it will give up some sales short-term to maintain the brand.

    Let’s get back on topic.  grin

    Chasing prices down is a fool’s game. Apple maintains pricing control and should continue to reach for margin goals. Softening of the growth in unit sales due to short-term economic conditions is no reason to debase product pricing strategies with the company sitting on $25 billion in cash and no debt. Continued growth may now have an strong acquisition component as technologies become available on the cheap.

         
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    Posted: 21 December 2008 04:30 PM #13

    I don’t think Apple is interested adjusting the price of their products in an effort to find customers that couldn’t previously afford their products. I think they’re more interested in developing new customers by educating them, or indoctrinating them, so that they realize the benefit of owning an Apple product.

    It’s a fundamental difference in the way Apple markets, and to whom they market. Apple doesn’t market to bean counters or corporate buyers, they market to individuals that needs their products. Apple’s primary marketing strategy is to expand that pool of people that believe they need their products.

    -ernie

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  • Posted: 21 December 2008 06:00 PM #14

    erntheburn - 21 December 2008 08:30 PM

    It’s a fundamental difference in the way Apple markets, and to whom they market. Apple doesn’t market to bean counters or corporate buyers, they market to individuals that needs their products. Apple’s primary marketing strategy is to expand that pool of people that believe they need their products.

    -ernie

    Or at least want their products. There’s no reason to change the pricing strategy. I’m sure in time we will a new Apple product specific in function and at a competitive price to compete with netbooks. All around, a cheap PC that does nothing in particular very well is a lousy idea for Apple. Let the high volume, low-margin PC makers chase the market down on price. It will be that much harder to regain price control with new products later.

         
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    Posted: 21 December 2008 06:21 PM #15

    The problem confronting Apple and all PC makers is that if all you do is word process and email you don’t need the newest processors from Nvidia and Intel, on the other hand if you are doing speech recognition or encoding video etc then more is better.  We are at the point in hardware where more GHz just creates heat.  Intel has decided to go with multi-core.  The problem is alot of existing programs are not threaded and do not accelerate with additional cores.  Apple has taken the lead by moving to Snow Leopard with its Open CL and Grand Central technology this will make it much easier for developers to take advantage of the new mult-core architecture without rewriting everything from scratch.  Multi threaded applications already written in Cocoa should gain an immediate speed boost when recompiled under Snow Leopard.  I personally think the big event for 2009 is the release of Snow Leopard.  Apple has tied all its hardware architecture’s to the multi-core model and will use Snow Leopard to tighten the integration between devices making it simpler for a developer to move from Iphone to ATV to MAC depending on their target audience for their application.