Pixel Envy

Written by Nick Heer.

The Aptly-Named Motley Fool

Sam Mattera, for the Fool:

Apple’s 5% selloff on Wednesday seems justified, even tame, compared to the possible ramifications of its iPhone announcement.

Apple is doomed. Doomed, I tells ya. Why is Apple so doomed, again?

Ultimately, when it comes to smartphones, market share matters. Without it, Apple will lose its software advantage, something that sets it apart from the competition. Neither the iPhone 5C nor iPhone 5S will do much to improve Apple’s position; instead, Apple continues to allow Android to dominate in emerging markets, and Samsung to lead in screen size.

Why does market share necessarily matter? The Mac has maybe 10% market share in the PC market, yet development for it is strong and robust. His rationale is misguided:

But if Apple’s market share continues to dwindle, that could change. When it comes to operating systems, market share matters: Developers won’t waste their time and money coding for a platform few use. This is why BB10 and Windows Phone, with their small base of users, continue to lag far behind iOS and Android.

BlackBerry 10 and Windows Phone 7/8 came after the established platforms of iOS and Android. The newcomers didn’t gain marketshare while developers were doing well on both iOS and Android. It’s hard to convince developers to switch to a new platform with few users and little prospect of gaining more, but it is possible for developers to continue making apps for a platform that makes them more money than any other, despite its market share. Again, look at OS X.

As for the price of the 5C, Apple couldn’t win either way. Before the 5C was announced, pundits were predicting that a cheap iPhone would destroy the aspirational quality of Apple’s brand:

For Apple, the devil will be in the details: just how much lower the price of the cheaper iPhone is, and just how much cheaper it looks and feels. If the iPhone is deemed cheap, it could get into the hands of so many people worldwide that it loses power as a status symbol and turns Apple into a maker of commodity products like Dell, Hewlett-Packard or Asus.

Instead, Apple released an iPhone that uses previous-generation components, puts it in a new case which has personality, and is positioning it as a premium device. It’s doubling down on what Apple does best: accessible luxury. They preserve their brand, sell a high-quality product with the impression that it’s new, all while keeping margins higher.

I don’t understand why Mattera is whining about Apple’s margins on it, either. He’s previously mentioned that lower margins are an impetus for a lower share price. Shouldn’t he be impressed that Apple is not stooping to reducing margins?

Roughly half of Apple’s revenue and most of its profits come from the iPhone. Apple bulls can point to the dominance of the company’s iPad and Mac all they want — Apple is first and foremost an iPhone company. […]

As evidenced by Apple’s last earnings call, the company’s core business is deteriorating: growth is slowing and margins are compressing.

And:

Apple’s gross margin continues to fall. It’s now down to just 36.9% — from a high of 47% over a year ago. Apple expects gross margin to come in between 36% and 37% next quarter.

The longer Apple goes without introducing fundamentally new products, the more the company’s gross margin will decline.

I don’t understand that last point, by the way: Apple’s component costs usually decrease over time; if the products which use them are sold at a consistent price, their margins increase.

Anyway, Apple can’t compete against a free operating system of which an old version can be installed on hardware from 2009 and sold for an extremely low cost.

Finally, nobody expected a larger display in an iPhone this year. Hell, Mattera even points that out:

Unlike a cheaper iPhone, a larger one wasn’t expected. Still, it would’ve been nice.

Unlike a cheaper iPhone, a free unicorn for all existing Apple customers wasn’t expected. Still, it would’ve been nice.

Although Samsung is often derided for copying Apple, this is one area where the Korean tech giant has been the innovator. The GS3 was the first phone to popularize the concept of a larger screen: at 4.8-inches, the GS3 is massive compared to the iPhone. The GS4 is even bigger, and Samsung’s lineup of Note phablets absolutely dwarfs the iPhone.

Yet the 3.5-inch iPhone 4 and 4S continue to sell extremely well. It’s almost as if not everyone wants a phone with a giant display.

Then again, there are probably some iPhone users who stick with the platform because they like iOS, but would rather a larger display. But that’s more likely next year.