Much Ado about AAPL

How much much breathless whining about the latest generation of iPhones have we seen over the past 24 hours?

Even Bloomberg is on the bandwagon with Apple Drops as iPhone Models Reflect Shift From Pioneer:

Apple Inc. (AAPL) fell the most in almost five months after unveiling two iPhones that were criticized by analysts as lacking a low enough price or ample new features to attract a broad range of new customers.
. . .
The devices underscore a shift in the $280 billion smartphone industry, as the novelty of Internet-connected handsets wears off and the gadgets share many of the same basic features. Facing increasing competition from rivals such as Samsung Electronics Co. (005930) that offer mobile phones with different designs and prices, Apple Chief Executive Officer Tim Cook is following suit and expanding his company’s own lineup to court more style-conscious customers and users in developing markets.

I am going to get to the Peter Lynch point quickly. Consider the following, in no particular order:

  1. After Bill Gates achieved the goal of putting a PC on every desk at $3,000 a pop, the product cycle slowed down because hardware caught up to software. At this point, only hard-core PC gamers ever buy new PCs.
  2. The problem for Microsoft, then, became the slow-down of sales of Windows operating systems and Office. What does MSFT sell to the average person with a PC? Nothing. Because their next purchase is an iPad. The big money is coming from enterprise AKA the business side where they have a lock on all of it.
  3. There hasn’t been a new Xbox in years but guess what? It’s made tons of headway and is now firmly entrenched on TV screens in the living room. But there is a problem: gamers keep buying stuff, but MSFT is unable to take a cut of every sale, resulting in Xbox having “an operating margin in the past 12 months of just 8.7 percent, versus 34 percent for the entire company.
  4. Amazon’s Kindle Fire is a loss leader. Because there is so much money in selling content for the device. AMZN makes money on every single sale.

So what is AAPL’s business model and mission? To put a device in every hand, so they can buy from iTunes and the App Store FOREVER. Sure, margins for hardware is being eroded. Sure, there is saturation. But look at the competition. AAPL is not competing against Samsung, HTC or LG. They are already dead because i.) a phone must have a purpose — for the manufacturer, ii.) they have no way of racking up sales after they put one in someone’s hand, and worst of all, iii.) they are unable to provide timely security updates to their devices thanks to being at the mercy of the wireless carriers. Do you really feel good about doing mobile banking on an Android device?
AAPL is competing against GOOG, and maybe AMZN. Again, the key is to build hardware and software to support and enhance sales of media and apps while providing the latest in security. That’s the reason for the A7 chip and the 64-bit computing environment.
Think about it. “When Paul Allen and I started Microsoft over 30 years ago, we had big dreams about software,” recalls Gates. When they quit Zune, they proved that the vision never went beyond Windows, Office and Xbox. It took Steve Jobs to re-imagine hardware/software as an ecosystem to support a dedicated, cash cow sales channel of media and games that you buy until you die, which means right now, the only true competitors are GOOG and AMZN.
The 5C is not really for China. It’s a way to graduate kids from an iPod touch when they go to school. You get to keep all your game data, and it only sets Mom and Dad back $99.