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Apple’s Troubles Extend Beyond China

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Apple’s Troubles Extend Beyond China

Postby smix » Fri Jan 04, 2019 5:38 am

Apple’s Troubles Extend Beyond China
The Wall Street Journal

URL: https://www.wsj.com/articles/apples-tro ... 1546565062
Category: Technology
Published: January 3, 2019

Description: Confluence of events raises doubts about iPhone maker’s business strategy
Apple Inc. chief Tim Cook blamed China’s accelerating economic slowdown for stumbling iPhone sales that hurt its global revenue in the past quarter. The company’s problems run deeper in China and extend to markets beyond. Chinese rivals including Huawei Technologies Co. are selling feature-competitive smartphones at lower prices, squeezing Apple’s share of the world’s largest smartphone market. Meanwhile, it has faltered in the biggest untapped smartphone market, India, where Apple accounts for a scant 1% of overall sales, according to market estimates. Mr. Cook also acknowledged trouble at home in his letter to investors on Wednesday. In the U.S., Apple has been stung by smartphone owners lengthening the amount of time they hold onto their devices. The confluence of events poses a formidable challenge for a company whose revenue has grown 11-fold in the iPhone era. With global iPhone sales stagnant, Apple isn’t able to rely on big emerging markets for explosive growth. And it hasn’t yet found a transcending product that can offset the lost iPhone revenue. After Mr. Cook highlighted the problems in China in a revenue warning Wednesday, Apple’s stock fell 10% on Thursday to $142.19, its biggest single-day percentage drop in nearly six years. The slide wiped $74.65 billion from the company’s market value. At Apple’s California headquarters Thursday morning, executives held an all-hands meeting to address questions about its performance, including the company’s monthslong stock slide, said people familiar with the matter. Some employees have a significant portion of their compensation tied to restricted stock units. and, among other things, are concerned about when to pay taxes on them Apple’s stock has fallen nearly 40% since peaking Oct. 3 at $232.07. The growth problem is exacerbated by Apple’s reluctance to change its profitable strategy of selling a limited number of devices at premium prices. Apple didn’t fully appreciate that its pricing power has diminished in price-sensitive markets, analysts say, the result of cheaper rival products, a lack of compelling new features and slowing economies, particularly China. “There’s nothing Mr. Cook said to make you believe there are disruptive opportunities for Apple around the corner,” said Tom Plumb, president of SVA Plumb Financial, a Madison, Wis., wealth-management firm. It has $2.6 billion in assets and counts Apple among its top holdings, though it sold some shares in the past two months. “They’re still a leader in many areas, but as large as they are, they need something really big,” Mr. Plumb said. In his Wednesday letter, Mr. Cook said the company is “confident and excited” about its product pipeline, adding that “Apple innovates like no other company on earth, and we are not taking our foot off the gas.” One component of Apple’s strategy long considered its greatest weapon: an ability to charge ever-higher prices for its marquee device. The average selling price for the iPhone has increased 12% over the past four years to $749.63 in fiscal 2018, helping to make up for slowing unit sales. When Apple said last year it would stop reporting unit sales for its iPhone and other products, the company signaled sales volume wasn’t as important as pricing, said Wayne Lam, a mobile analyst at IHS Markit. That strategy appears in trouble. “The price elasticity snapped” in the fourth quarter, Mr. Lam said. Apple misread the market because it has always been able to sell iPhones at premium prices, he said. “There’s going to be a lot of soul-searching within management now.” Mr. Cook acknowledged that the forecast revision would prompt review. “We manage Apple for the long term, and Apple has always used periods of adversity to re-examine our approach, to take advantage of our culture of flexibility, adaptability and creativity, and to emerge better as a result,” he wrote in his letter to investors. Apple often had the ability to forecast iPhone sales “to the third decimal,” said Daniel Ives, a Wedbush Securities analyst. That is what makes the revision so stunning, he said. “This is the biggest miscalculation by Apple in the iPhone era.” The macroeconomic issues cited by Mr. Cook probably accounted for about 20% of the shortfall, Mr. Ives said. “Eighty percent of it is that Apple just swung and missed,” he said. “Fundamentally, this was an Apple execution issue.” A prime example of Apple’s execution woes is the iPhone XR, its more modestly priced device among three new handsets it released last fall. For China, Apple had placed big orders for the XR, anticipating strong demand after it went on sale in October, according to a person familiar with the matter. Apple is now grappling with excess XR inventory, this person said, a tough pill to swallow for a CEO who once described inventory as “fundamentally evil.” Apple may have underestimated how competitive domestic smartphone makers have become, analysts say. With a starting price of 6,499 yuan ($945), the XR is priced well above a competing model from Huawei that also launched last year, the Mate 20, starting at 3,999 yuan. The Mate features a triple camera system while the XR features only a single camera. Apple’s iOS operating system also is less of a selling point for Chinese consumers than in other markets because smartphone users spend a large chunk of their phone time inside WeChat , a chat, payments and social-media app from Tencent Holdings Ltd. that is identical on phones running Google’s Android software. The company has weathered poor performance in China before—sales there dropped in both fiscal 2016 and 2017. But those moments usually were negative blips in otherwise stellar quarters of growth, fueled by the runaway success of the iPhone. Now, Apple is facing greater challenges at home. The iPhone’s first decade was driven by significant innovative leaps in everything from battery life to screen quality to camera performance. Two-year contracts from mobile-phone carriers coupled with subsidies for devices drove recurring sales. But the breakthroughs have slowed, said Chetan Sharma, a mobile-industry consultant. While some changes in recent years, such as bigger screens with the iPhone 6, goosed iPhone sales, consumers in developed markets these days aren’t jumping to new models as quickly as before. Just four years ago, U.S. consumers upgraded phones every 24.4 months, according to BayStreet Research LLC, which tracks device sales. The upgrade rate hit 36 months in the quarter that just ended, the firm estimates. And it expects the length U.S. consumers hold their phone to average 38.7 months over the course of this year. Average sales prices of iPhones are nearly five times the average price of non-Apple smartphone sold globally, according to Sanford C. Bernstein analyst Toni Sacconaghi. That discourages upgrades, he said. Melissa LeRitz used to upgrade her iPhone every two years. But the 29-year-old quit doing so when her phone provider stopped covering the majority of the cost. Her iPhone 7, purchased a couple years ago, still works fine, she said—even without some fancy new features. “I kind of find it ridiculous to spend $1,000 on a phone when there’s not really too much of a difference,” said Ms. LeRitz, an attorney in Medford, Ore. “I feel like they are churning them out so quickly I can’t keep up anyways.” Mr. Cook said in his letter that Apple is trying to counter the trend in part by making it simpler to trade in a phone in stores and finance the purchase of a new one over time. If Apple keeps its premium-pricing strategy, customers might hold on to their devices even longer and prospective new customers might opt for cheaper alternatives. Dropping prices to lure more buyers will pressure its margins and could cannibalize sales of its premium devices. “It’s a challenging and arguably intractable issue that Apple faces,” Mr. Sacconaghi said. “There’s no easy solution.”



The iPhone Canary
The Wall Street Journal

URL: https://www.wsj.com/articles/the-iphone ... 1546560144
Category: Technology
Published: January 3, 2019

Description: Apple’s sales plunge shows the need for a U.S.-China trade deal.
Investors have been searching for signs of how President Trump’s trade standoff with China is affecting the U.S. economy. Judging by the market reaction to slumping iPhone sales in China, many fear Apple is the canary in the global economy. This may be an overreaction, but the Apple warning does underscore the interdependence of the U.S. and Chinese economies and their joint stake in a trade deal. CEO Tim Cook told investors late Wednesday that Apple is cutting its quarterly revenue forecast for the first time in 15 or so years amid falling iPhone sales in China, its third-largest market after the U.S. and Europe. “Over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad,” Mr. Cook wrote. He added: “While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China.” Nor did investors, as Apple’s stock fell nearly 10%, leading a broader stock selloff. The 10-year Treasury yield also fell amid concerns of slowing U.S. growth and investor flight to safety. Mr. Cook is an engineer by training, though he diagnosed the problem like an economist when he said, “We believe the economic environment in China has been further impacted by rising trade tensions with the United States. As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well.”
***
Note that word “uncertainty.” These columns used that word often to describe the impact of Barack Obama’s regulatory war on business. When CEOs don’t know when government might harass them next, they postpone or cancel investment and hiring decisions. That explained much of the capital strike and slow growth in the Obama era. Trade uncertainty has a similar secondary economic impact beyond the immediate higher costs of tariffs. If CEOs aren’t sure of their supply chains, or whether tariffs will raise their costs and limit their markets, they also postpone or reduce capital spending. This explains a large part of the investment slowdown in the last half of 2018. China’s growth rate was slowing before Donald Trump was elected, but trade tensions with the U.S. have further depressed business investment and put a dent in worker incomes, which has reduced consumer spending. Retail sales growth in China hit a 15-year low in November, and the government estimated third-quarter growth clocked in at 6.5%, which would be the lowest in a decade and is likely overstated. Prominent economist Xiang Songzuo shocked some China-watchers in December when he said China’s real growth rate may be only 1.67%. U.S. businesses across sundry industries have been complaining about the costs and supply-chain complications of the Trump tariffs. In its third-quarter earnings report, Tesla flogged “increased import duties on components sourced from China” that are used to make its Model S and Model X in Fremont, California. As Chinese consumers tighten their belts, iPhones have been losing market share to less expensive domestic rivals like Huawei and Vivo. Overall Chinese smartphone sales have also been falling, which has knock-on effects on U.S. businesses and workers. China is the second-biggest buyer of U.S. semiconductor exports, and its telecom firms rely on components from U.S. businesses including Qualcomm, Broadcom, Intel and Micron Technology. American car makers have also reported falling sales in China. General Motors sales fell nearly 15% during the third quarter while Ford’s dropped 43% from the prior September. Lower foreign profits could reduce U.S. investment and returns for American shareholders and workers. Weakening growth in China has also put downward pressure on oil prices, which could prompt U.S. shale producers to reduce drilling. The point is that President Trump can’t shield U.S. businesses from the collateral damage of his trade brawl with China even if he tried. The two countries’ economies are entwined for better or worse, which is why there’s a political and economic incentive for both sides to cut a trade deal that protects intellectual property, lowers tariffs, and above all reduces uncertainty. The President seems to think his negotiating leverage increases as the Chinese economy suffers, and the temptation in some U.S. quarters is to see a Chinese recession as just deserts for Bejing’s policy of condoning intellectual property theft and other depredations against U.S. business. But as Apple’s Mr. Cook made clear in his letter, a Chinese downturn will hurt U.S. businesses and economy as well. Hear that iPhone warble, Mr. Trump?



The Phone That’s Failing Apple: iPhone XR
The Wall Street Journal

URL: https://www.wsj.com/articles/the-phone- ... 1546779603
Category: Technology
Published: January 6, 2019

Description: The lowest-priced new iPhone has yet to win over consumers in China and elsewhere, falling short of hopes
BEIJING—When Apple Inc. launched the iPhone XR in October, Tim Cook singled out the device to his more than a million followers on Weibo, China’s equivalent of Twitter . “Wonderful to see so many people in China enjoying the new iPhone XR,” he said. The message underscored Apple’s hope that the device, the cheapest of its three iPhone releases, would be a strong seller in the world’s largest smartphone market. Instead, the XR has fallen far short of Apple’s expectations, forcing the company to reduce production of the device drastically and cutting into overall revenue projections. While Apple doesn’t release sales data on its phones, demand has been weaker than expected, people familiar with the matter say, and lackluster China sales of iPhones in part contributed to Mr. Cook last week announcing Apple’s first cut in revenue guidance since he took the helm in 2011. Mr. Cook blamed China’s slowing economy for weakened demand. It is too soon to call the XR a flop after only a few months, analysts say. But early indications of sagging sales threaten to derail Apple’s profitable strategy of selling premium smartphones at varying prices, and its plan to jump-start stagnant iPhone growth. Sales have been weak, analysts say. In Japan, Apple cut the price of the XR and the model is lagging beyond iPhone models from previous years, including the iPhone 6S and 8, according to data research firm BCN. The XR hasn’t sold as expected in China because it is being passed over by both price-conscious buyers and status seekers, analysts say. Some Chinese consumers have perceived the sticker price of 6,499 yuan, or about $945, to be too expensive even though it is at least 25% cheaper than the higher-end iPhone XS and XS Max models. The XR’s touted features, such as facial recognition and dual-SIM support, were already available on cheaper phones from Chinese rivals. Consumers coveting status are opting for the top-priced iPhone. Li Derong, a Shanghai-based programmer, said he is thinking about changing his iPhone 7 to Huawei Mate 20 Pro. As he browsed at a mobile phone shop, Mr. Li said the iPhone is “overpriced,” even though he thinks its ecosystem is great. Huawei’s battery and camera perform well. The Mate 20’s chipset makes it good for playing games, he said. In China, Apple recently has started offering discounts to the XR for trade-ins with older phones. By analyzing procurement data and talking to suppliers, UBS analyst Tim Arcuri estimated as of October that Apple planned to have roughly 45% of all new iPhones made be XRs world-wide. “They just built too many XRs and people just aren’t buying them, particularly in China,” he said. Deepening the problem: Apple got hit by currency changes in China, Mr. Arcuri said. As the dollar rose against the yuan, he said he thinks Apple raised the local price of the XR to maintain margins, pushing it further above rival phones from Huawei Technologies Inc. and others with more features. Mr. Cook acknowledged some of the currency challenges in his letter to investors Wednesday, saying “we knew the strong U.S. dollar would create foreign exchange headwinds.” Apple began selling the XR with the liquid crystal display in late October, five weeks after its pricier organic light-emitting diode, or OLED, models went on sale in September. The staggered timing was supposed to allow Apple a month to sell the higher-end models without cheaper competition from itself, analysts have said. But in an early sign that initial sales failed to meet Apple’s expectations, Apple had already cut its production forecast for the phone just days after it went on sale with liquid crystal display, a person familiar with the matter said. In early November, Mr. Cook, who is usually bullish regarding demand for iPhones when they first go on sale, ducked a question from analysts about demand for the device two weeks after preorders began. In recent years, the lowest-priced entry model among the newest iPhone lineup, such as the 7 and 8 when they were launched, was popular in China, said Mo Jia, a Shanghai-based analyst at research firm Canalys. Apple likely wanted to continue having such an entry model among its 2018 lineup, though it was likely difficult to offer it at a much lower price than the XS and the XS Max, as that could end up hurting demand for its pricier flagship by taking away customers, Mr. Jia said. Apple might have thought that the XR “should be attractive enough for the Chinese consumers,” said Mr. Jia. But China’s smartphone market structure had changed. Over the past year or so, Huawei has introduced competitive P20 and Mate series and Oppo and Vivo also offered premium models that are more affordable to the mass market that the XR. And even though the pricing of the XR hasn’t significantly changed from Apple’s past entry models, it is much higher than some of the flagship models offered by brands Oppo and Vivo. While the iPhone’s status symbol has somewhat waned over the years as the product became more commonplace in the Chinese market, it still retains cachet. Nowadays that comes more with the highest-end models—iPhone XS Max, starting at 9,599 yuan in the country. In China, Apple has been grappling with excess XR inventory, a person familiar with the matter said. Over the past two months, Apple has slashed its production forecast for the XR multiple times, including in January. By now, Apple’s volume outlook for the initial six months or so of production has roughly been halved to between 30 million and 40 million units, people familiar with the matter said.
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Tim Cook Needs Better Ideas Than This for Apple

Postby smix » Fri Jan 04, 2019 5:44 am

Tim Cook Needs Better Ideas Than This for Apple
Bloomberg News

URL: https://www.bloomberg.com/opinion/artic ... -than-this
Category: Technology
Published: January 3, 2019

Description: Encouraging iPhone trade-ins isn’t going to counter the growth trends working against the company.
Toward the end of Apple Inc.’s stunning disclosure about its worse-than-expected sales, the company’s boss suggests a tactic it will use to counter surprisingly meek demand for its smartphones. I hope Apple has better ideas than this. In a letter to stockholders, Chief Executive Officer Tim Cook said that Apple couldn’t change global economic conditions that are hurting sales but that it would do more to control what it can. The single specific initiative Cook mentioned was making it simpler to trade in an older model iPhone at Apple’s stores, finance the purchase over time and get help transferring apps and other data. Apple already offers a program in the U.S. to spread out the cost of an iPhone purchase, as do many mobile phone companies. That’s critical because, in the U.S. at least, the vast majority of smartphones are sold by mobile phone companies rather than by Apple or other handset makers. Existing initiatives haven’t altered the smartphone market reality. Smartphone users in the U.S. and many other established markets are holding on to their gadgets longer than they used to — more than three years on average in the U.S., up from about two years in 2014, according to mobile industry consultant Chetan Sharma. That’s a big reason global smartphone sales were estimated to have fallen slightly in 2018, as they did the previous year. It’s a pity that in trying to justify Apple’s financial disappointment Cook didn’t offer stunned investors any better solutions than the tactics the company and its partners are already trying. After Wednesday’s announcement, investors should be forcing Apple’s management to show them under the hood of its business in China and the rest of the world. Until now, they have been too content with executives’ pablum and bromides. The time for pablum and bromides should end now. I must say another word about the chief culprit Apple cited for its surprising 5 percent quarterly revenue decline: China. Cook said Apple was surprised by a sharper slowdown in economic growth in China, which he said had hurt demand for iPhones, iPads and Macs. He also said the tussle over U.S.-China trade policies is unsettling Chinese consumers. That explanation deserves more attention. Cook’s letter hinted at data showing smartphone sales in China have been falling for 18 months. He didn’t mention that Apple has fairly steadily lost smartphone market share in that country to local rivals such as Huawei and Oppo, which generally charge far less for their phones than Apple does. The falling smartphone market and lost market share haven’t shown up in Apple’s financial results — at least until Cook’s revenue warning — in part because Apple increased prices for many of its devices and enough people in China and other countries were willing to pay what Apple was asking. There was a natural limit, however, to Apple’s growth potential in a saturated smartphone market in a country with a slowing economy and other anxieties. China, in short, is becoming like many other countries when it comes to smartphone buying trends: There is less natural growth left as fewer people are buying their first smartphones. And people are holding on to their old devices for longer before splurging on new ones, which weighs on new smartphone sales. This appears to be a permanent shift in the country that accounts for one-third of global smartphone sales. But Apple never, ever was candid with investors about the potential for its business in China to hit a wall. Cook has consistently flubbed opportunities to give investors an honest account of what has been happening with Apple’s business in China — and beyond, but that’s a topic for another column. When Apple sales started falling in China in 2016, Apple executives gave every excuse in the book, including slower economic growth in the country. Sound familiar? Some of those excuses were valid then. Others weren’t. Apple belatedly acknowledged it was caught off guard by a hangover effect following blockbuster sales of the 2014 iPhone 6 model in China and elsewhere in the world. In interviews over the years, Cook sought to accentuate the positive about business in China, notably by saying one or more iPhones were the most popular smartphones in China. Cook’s comments papered over the reality that Apple not long ago was the top-selling smartphone maker in China and slipped to fifth in the second quarter of 2018. The company deserves credit for showing strong growth in China despite declining smartphone demand there, economic strains and declining market share. But that didn’t mean everything was trouble free, as Cook repeatedly suggested. Economic hiccups in China were obvious, but Apple never suggested they would affect the company. As recently as November, executives said Apple’s business was going strong in China, even amid signs at the time that slower economic growth was hurting Chinese sales of some consumer items such as cars. Cook had also expressed confidence that the U.S. and China would resolve their trade disputes amicably. Changes in smartphone buying trends in China, and Apple’s falling market share there, were obvious, but Apple brushed off any concerns or ignored reality. Cook suggested in his investor letter that what happened to Apple was a temporary blow from unforeseen economic weakness in China. That isn’t entirely true. Apple’s failures to be honest about what could go wrong are coming back to haunt the company and its investors.



Apple Had Five Ways to Fuel Earnings. Only One Still Works
Bloomberg News

URL: https://www.bloomberg.com/opinion/artic ... utlook-cut
Category: Technology
Published: January 3, 2019

Description: A changing smartphone market calls for new strategies to boost profit. Most of what Apple tried has run out of steam.
If it weren’t for that darn trade war, Apple Inc. might just have squeaked through. In the three years or so since it became clear that global smartphone sales were slowing, Chief Executive Officer Tim Cook has deployed five key strategies to maintain earnings growth. After Wednesday’s cut to the sales outlook, it’s clear that only one has unquestionably succeeded.
Higher iPhone Prices
As unit sales slowed, Apple has kept revenue ticking up by boosting the iPhone’s average sales price. It hit a staggering $793 in the three months through September, up from $618 a year earlier. Unfortunately, that seems also to have made it particularly vulnerable to economic weakness, most obviously in China. Consumers with a perfectly serviceable iPhone 8 are less likely to want to spend as much as $1,449 on a top-of-the-range iPhone XS Max.
Services
Apple’s services have been the brightest spot of the past few years, averaging 26 percent annual growth since 2014. But the $2.4 billion jump in revenue that the division enjoyed in the holiday quarter was nowhere near enough to offset the overall sales miss of as much as $9 billion. The offerings, which include music streaming, the App Store and iCloud, still represent less than a quarter of iPhone sales. And it’s become harder to make money from these in China, which has banned several products and hundreds of third party apps. It’s also unclear whether Apple gets the same revenue from traffic acquisition payments in China that it does elsewhere. Alphabet Inc. pays Apple up to $9 billion a year to make Google the default search engine in the iPhone’s Safari web browser, but it doesn’t operate in China.
India
Cook has long talked up India as Apple’s next great source of growth. Back in 2016, he told investors that it was “where China was maybe seven to 10 years ago.” On that basis, sales in India should be growing at 80 percent to 90 percent a year, as they did in China in 2011 and 2012. Yet revenue from the subcontinent was flat in the fourth fiscal quarter. Cook has struggled to convince Indian consumers to spend hundreds of dollars on older hardware when rivals such as Samsung Electronics Co. and Xiaomi Corp. offer newer handsets for less money.
New Technologies
Apple’s research and development spending has more than doubled since 2014. So far, it has little to show for it. The innovations added to the iPhone, such as Face ID and faster chips, are now failing to attract enough new customers. The Apple Watch, while improving, generates less than a tenth of the revenue of the iPhone, and the health and fitness ecosystem that was supposed to develop around it has yet to materialize in any significant way. Efforts to develop a self-driving car have faltered. Smart glasses remain the great new product hope, but it could be some time before that market is mature enough to ease the earnings burden on the iPhone.
Buybacks
First-quarter gross profit is set to decline for the first time in 15 years, based on the revised guidance. Yet Apple is still likely to increase earnings per share, not least because of its buyback program. The company’s vast cash pile has helped it return some $239 billion to shareholders through stock repurchases, in turn reducing the number of shares outstanding by almost 30 percent. That has turbocharged EPS expansion, which almost doubled in the same period. Financially, Apple continues to be a well-managed company. It is generating returns for shareholders in spite of operational missteps. But once again, it’s fair to question Cook’s ability to steer Apple successfully out of the iPhone era.



Apple Comes Clean, Leaves Investors Stuck in the Mud
Bloomberg News

URL: https://www.bloomberg.com/opinion/artic ... in-the-mud
Category: Technology
Published: January 3, 2019

Description: It sure took a long time for a corporate icon to embrace transparency.
NOW You Tell Us, Apple
America’s corporate sweetheart had a bad day. Apple Inc. stock plunged 10 percent to early-2017 lows, shaving about 100 points off the Dow Jones Industrial Average all by itself. Live by the Apple, die by the Apple. Last night, the company cut its revenue outlook, citing Chinese economic weakness, and CEO Tim Cook declared the smartphone market a shell of its former self. But none of this should have been such a shock to investors, writes Shira Ovide: China’s economy has been in trouble for a while, though Apple executives declared everything fine as recently as November. Yet Apple has been whistling past the smartphone-market graveyard for years, writes Shira, who has herself been warning of it all along, with charts like this one: If you’d listened to her, dear Apple investors, you could have saved yourselves some money and pain. But maybe you believed Apple’s press releases instead – which turned out to be a mistake, Shira writes: “Apple failed in the No. 1 mission of being a public company: being honest with investors about its business.” For example, Apple said it was completely gobsmacked by the depth of China’s slowdown. But Anjani Trivedi points out Japanese companies such as Fanuc Corp., which make the machines that make iPhones, have been warning of weakness in China since at least last April. One big problem for Apple is that China’s weakness thwarts some of the maneuvers the company has used to keep revenue growing as phone sales stagnate, such as jacking up phone prices, writes Alex Webb. In fact, the only button that still jolts Apple numbers these days is stock buybacks – hardly the hallmark of a growth stock. Cook did say Apple would try to make it easier for customers to upgrade iPhones. But in a second column, Shira Ovide notes Apple already offers plenty of upgrade incentives, and those haven’t been working. “I hope Apple has better ideas than this,” she writes.



Apple’s iPhone Warning Comes Years Too Late
Bloomberg News

URL: https://www.bloomberg.com/opinion/artic ... s-too-late
Category: Technology
Published: January 2, 2019

Description: The company has reached the end of its denial phase.
The optimistic narrative about Apple Inc.’s iPhone business is falling apart in front of our eyes. The company on Wednesday stunningly slashed its own revenue forecast for its first fiscal quarter that ended in December. Apple led by blaming a slowing economy in China and the trade skirmish with the U.S. for worse-than-expected consumer transactions in the region that includes China, Taiwan and Hong Kong. Apple said its first quarter revenue is now expected to fall about 5 percent from a year earlier. China may be the new “weather” — a go-to excuse for companies whose sales aren’t up to snuff. But that wasn’t all. In an extraordinary letter to Apple investors, CEO Tim Cook also told stockholders what he should have been saying for years: The company’s iPhone business has shifted into a lower gear because of changes in the smartphone market and consumer behavior. This should have been absolutely predictable to anyone who was able to peer outside of Apple’s bubble. Executives have failed in their duty to warn investors ahead of time about all this, and reality is finally and all at once catching up to Apple. In his letter, Cook said in some established markets outside of China, iPhone “upgrades also were not as strong as we thought they would be.” (Upgrades are people with older-model iPhones opting to buy new models.) The company attributed that to economic weakness in some countries but also other factors, including people holding onto smartphones longer as mobile phone companies halt subsidies, the climbing prices of Apple’s devices, and users taking advantage of lower-cost battery swaps rather than purchasing the latest and greatest iPhones. In addition, Cook wrote on Wednesday that economic conditions slowed in China in the second half of 2018 and that shopping traffic was hurt by uncertainty about the U.S.-China trade war. Here, too, Apple missed opportunities to caution investors. Cook said two months ago that Apple’s China business was “very strong,” even amid signs of an economic slowdown and months of headlines about trade tensions with the U.S. He consistently told investors that he thought the U.S. and China would resolve their trade dispute amicably and didn’t give any indications that consumers were on edge or reluctant to shop because of the geopolitical fracas. It’s possible that the last couple of months of economic circumstances in China, Taiwan and Hong Kong caught Apple by surprise, but executives failed to give any hints of red flags in the region. It’s possible conditions in China changed quickly, but the broader trends in smartphone activity are not new. Why didn’t Cook make any of these admissions before now? Phone companies in the U.S. and some other big smartphone markets have for years sought to stop offering people iPhones at an artificially low price of $200 as they did in the iPhone’s earlier days. That factor — plus less drastic changes to each year’s model of iPhone or other smartphones and the rising prices of some new devices — has led people in the U.S. to keep their smartphones for more than three years on average, up from about two years in 2014, according to mobile industry consultant Chetan Sharma. Apple sells by far the majority of new iPhones to people who already owned one of the devices, which means sales are dinged if someone wraps electric tape around her three-year-old iPhone and soldiers on. This is a trend years in the making. But at each and every opportunity, Cook has dismissed questions about whether changes in upgrade behavior will hurt Apple’s revenue. In an August conference call with stock analysts, one of them asked Cook whether the company could continue to sell more iPhones in a few years in light of the smartphone market’s stagnation. Cook said he thought Apple could sell more phones to people who already owned iPhones, to those who had competing devices and to people who had never owned a smartphone. It was an answer straight out of 2015, when everything Cook said was true. It’s not true anymore, and Cook should have known that. The research firm IDC estimates global sales of smartphones declined slightly in 2018, as they did in 2017. Apple seemed to defy that smartphone gravity for a long time, but it didn’t. In Apple’s fiscal year ending in September, Apple barely sold more iPhones than it did the previous year. Revenue increased because Apple charged a super-premium price for the iPhone X and other new models — and Apple loyalists paid those higher prices. But there is a limit to how many people are willing to pay $1,000 out of pocket for a new phone, and it seems as if Apple reached that limit all at once. This isn’t to say that Apple’s business is falling apart. It is still generating levels of revenue and cash flow that are the envy of the corporate world. But Apple failed in the No. 1 mission of being a public company: being honest with investors about its business. The company simply denied the reality that was staring it in the face, until denial was no longer an option.
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Apple shares dive; rare revenue warning drags global markets

Postby smix » Fri Jan 04, 2019 7:14 am

Apple shares dive; rare revenue warning drags global markets
Reuters

URL: https://www.reuters.com/article/us-appl ... SKCN1OX0ZZ
Category: Business
Published: January 3, 2019

Description: (Reuters) - Apple Inc shares plunged 10 percent on Thursday after the iPhone maker blamed weak China demand for a holiday-quarter revenue shortfall, with many investors worried the rare stumble was a harbinger for slowing global growth. Global financial markets felt the shockwaves as Apple shares logged their biggest intra-day percentage fall in six years, sending the company’s stock market value to under $700 billion, well below its $1.1 trillion October peak. After Apple’s first revenue warning in nearly 12 years, investors also dumped chipmakers and tech stocks and flocked to perceived safe havens like U.S. Treasuries and the Japanese yen. Developments in a patent dispute between Apple and Qualcomm in Germany also rattled investors. A senior White House economic adviser said he expected trade uncertainty to hit earnings at many U.S. companies, but that sales at Apple and others with large exposure to China would recover once Washington and Beijing strike a trade deal. “That is having an impact on earnings and it’s not going to be just Apple,” White House Chairman of the Council of Economic Advisers Kevin Hassett said in an interview with CNN. “I think there are a heck of a lot of U.S. companies that have a lot of sales in China that are basically going to be watching their earnings be downgraded next year.” Economic deceleration in China had caught Apple off guard and trade tensions between Washington and Beijing were starting to hurt consumer spending on smartphones in China, Apple Chief Executive Officer Tim Cook said on Wednesday. Cook in November had cited slowing growth in emerging markets such as Brazil, India and Russia when Apple gave first-quarter sales estimates that were lower than expected. But he said then that he “would not put China in that category” of countries with troubled growth. The China slowdown comes as Apple faces other obstacles in some of its biggest markets. Qualcomm Inc said it had posted security bonds to enforce a court order banning sale of some iPhone models in Germany, meaning Apple would likely have to pull iPhone 7 and 8 models from its 15 stores in the country. The German case, part of a global patent spat between the two companies, is Qualcomm’s third major effort to secure a ban on iPhones over patent-infringement allegations after similar moves in the United States and China. Wall Street analysts scrambled to cut their price targets on Apple, with at least 27 lowering their estimates. The current median price target is $186. Shares of U.S.-based Apple suppliers and chipmakers including Cirrus Logic Inc, Skyworks Solutions Inc, Analog Devices, Broadcom Inc, NXP Semiconductors NV and Micron Technology Inc all tumbled. Many analysts and investors had worried about a slowdown in iPhone sales since the company said in November it would stop disclosing unit sales data for its phones and other hardware products. Apple’s latest comments fueled worries that its relatively high-priced devices may be falling out of favor in China, where rivals such as Huawei Technologies Co Ltd offer cheaper options. Peter Richardson, a research director at Hong Kong-based Counterpoint Research, said it was difficult to see a catalyst that would help Apple recover lost ground in China. “Until it changes this pricing strategy, it is unlikely to see market share growth and will most likely see a gradual contraction as iPhone users upgrade at slower rates,” said Richardson. Apple on Wednesday lowered its revenue forecast to $84 billion for its first quarter ended Dec. 29, below analysts’ estimate of $88.05 billion. Apple originally forecast revenue of between $89 billion and $93 billion. Apple shares were down 9.8 percent at $142.40. The stock has fallen about 30 percent since Cook said in November that the company may miss its holiday quarter sales estimate.



Qualcomm enforces ban to halt some Apple iPhone sales in Germany
Reuters

URL: https://www.reuters.com/article/us-appl ... SKCN1OX12O
Category: Business
Published: January 3, 2019

Description: (Reuters) - Qualcomm Inc on Thursday took steps to enforce a court order banning the sale of some iPhone models in Germany, a move that will likely see Apple Inc pull those iPhone models from its German stores. The U.S. chipmaker posted bonds of 1.34 billion euros ($1.52 billion) as part of a legal requirement by a German court, which found on Dec. 20 that Apple had infringed Qualcomm patents on power-saving technology used in smartphones. Apple had earlier said it would pull iPhone 7 and 8 models from its 15 retail stores in Germany when the order came into force. That order took effect when Qualcomm posted the bonds. Apple declined to comment on Qualcomm’s most recent move on Thursday. The German case is Qualcomm’s third major effort to secure a ban on Apple’s lucrative iPhones over patent infringement allegations after similar moves in the United States and China, and is part of a global patent spat between the two companies. According to the court order, Apple has to stop the sale, offer for sale and importation for sale of all infringing iPhones in Germany. Apple had said it was appealing the decision. The court also ordered Apple to recall the affected iPhones from third-party resellers in Germany, according to a statement by Qualcomm. In its previous statement on the decision, Apple had said it would continue to offer all of its phones at thousands of retail and carrier locations across Germany, a direct contradiction to Qualcomm’s interpretation of the order. The Munich regional court was not immediately available for comment. Kai Ruting, a German lawyer not involved in the case, said the court order was directed at Apple entities rather than third parties. “These third parties are still free to sell the (affected) iPhones, and they sell the majority of iPhones,” Ruting said, adding, “the question of a settlement will be driven by the U.S. litigation and not the German case.” Ruting said that Apple had strong arguments for the German court’s ruling to be reversed on appeal. If that happens, Qualcomm’s bond will be used to compensate Apple, he said. Apple’s announced intention to pull iPhones from stores in Germany contrasts with how it has handled a court decision in China, where there was a much broader ban on iPhone sales after a court ruled the devices violated Qualcomm’s patents. Apple has continued to sell phones in China, saying it believed its phones were legal in the country. Still, Apple also pushed a software update to address concerns over whether it was in compliance with Chinese courts. Qualcomm has said those software updates were insufficient and that Apple must still withdraw its phones. Apple had filed a request for the Chinese court to reconsider its decision, but no outcome has been announced.
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Apple’s mind-blowing warning means CEO Tim Cook now has a major credibility problem

Postby smix » Fri Jan 04, 2019 4:36 pm

Apple’s mind-blowing warning means CEO Tim Cook now has a major credibility problem
Yahoo Finance

URL: https://finance.yahoo.com/news/apple-mi ... 13885.html
Category: Business
Published: January 3, 2019

Description: Apple CEO Tim Cook and his management team should read the coverage of their mind-blowing warning to every investor on the planet on Apple News and then ask: “Should investors trust us right now? And, how can we regain that trust.” No doubt January 2, 2019 will go down as one of the worst days in Apple’s history. It’s not akin to 1997 when Apple founder Steve Jobs returned to a flailing tech company that was losing billions. But still one that amounts to a complete smashing down of the reset button on how Wall Street and the average investor views Apple (AAPL). And as tough as it is to say, given Cook’s generally strong leadership since the passing of Jobs, he and his management team bare the responsibility for the shocking warning. They failed to keep it real with investors on what they were seeing in iPhone demand data late in 2018. Simply no longer providing unit sales data wasn’t enough of a signal to investors that something was wrong, bottom line. As a result, Apple’s stock could be “broken” until credibility is restored. “Apple’s stock is now at a crossroads. Some investors will consider the stock broken and never reward it with a “proper” multiple, but we’ve followed the company long enough to know there is cyclicality in the market’s relationship with Apple,” cautions long-time Apple analyst Gene Munster of Loup Ventures.
A poor job done with guidance.
Apple said in a filing released after market close Wednesday that it now sees first quarter revenue of about $84 billion. It previously anticipated $89 billion to $91 billion. In the filing, Cook attributed the reduced guidance to weakness in emerging markets and in Greater China as well as supply constraints on new products. Cook also hinted strongly that Apple felt resistance from consumers to the new $1,000 plus iPhone XS line. While Cook tried to hype strong demand in AirPods and Apple Watches, investors weren’t buying it. Trading was halted Wednesday for Apple shares at about 4:25 p.m. ET in advance of the release of the announcement. The stock declined 8.49% to $144.51 per share when trading resumed 25 minutes later, hitting the lowest level since July 2017. Shares dropped about 8% in early trading on Thursday. But a little more than two months ago Cook and Apple Chief Financial Officer Luca Maestri were singing from a different hymn sheet. Judging by their comments on Apple’s fourth fiscal quarter earnings call on November 1, Apple was in fine standing around the globe. Interest in new iPhones was running high. Investors should ignore executives deciding to remove a key piece of guidance (iPhone unit sales) that has been key in assessing Apple’s fundamentals for years. Some comments of interest from that November call.
Maestri Comment 1: “Third, starting with the December quarter, we will no longer be providing unit sales data for iPhone, iPad and Mac. As we have stated many times, our objective is to make great products and services that enrich people's lives, and to provide an unparalleled customer experience so that our users are highly satisfied, loyal and engaged. As we accomplish these objectives, strong financial results follow. As demonstrated by our financial performance in recent years, the number of units sold in any 90-day period is not necessarily representative of the underlying strength of our business. Furthermore, a unit of sale is less relevant for us today than it was in the past, given the breadth of our portfolio and the wider sales price dispersion within any given product line.”
If Apple hadn’t pulled its unit guidance and kept it real by leaving it intact, investors could have gotten a truer picture of the business more than two months ago. Instead, they are gifted an unwelcome holiday surprise on the first day of trading for 2019.
Maestri Comment 2: “At the revenue level, we started from the fact that we are very, very excited about the lineup of products and services that we have getting into the holiday season. It's the strongest lineup that we've ever had. And our guidance range, by the way, represents a new all-time quarterly revenue record.”
Apparently, not that strong given the almost $7 billion haircut to revenue guidance.
Maestri Comment 3: “The third point that I think it's important to keep in mind, and Tim has talked about this, we are launching, in the last six weeks, we've launched an unprecedented number of new products. They're all ramping right now. The ramps are going fairly well, but obviously we have some uncertainty around supply/demand balance for some of these products.”
Not that well it seems. Cook devoted a good chunk of his letter on Wednesday to the impact to sales from supply constraints for the Apple Watch 4, iPad Pro, AirPods and Macbook Pro.
“And then finally, the last point that we've taken into account is what Tim's talked about in terms of some level of uncertainty at the macroeconomic level in some emerging markets where clearly consumer confidence is not as high as it was 12 months ago.”
Cook cited “macroeconomic” issues holding back results three times in his new letter. That isn’t exactly on par with Maestri’s “some level of uncertainty” expressed in November.
Tim Cook: “To give you a perspective in of some detail, our business in India in Q4 was flat. Obviously, we would like to see that be a huge growth. Brazil was down somewhat compared to the previous year. And so I think, or at least the way that I see these, is each one of the emerging markets has a bit of a different story, and I don't see it as some sort of issue that is common between those for the most part. In relation to China specifically, I would not put China in that category. Our business in China was very strong last quarter. We grew 16%, which we're very happy with. iPhone in particular was very strong, very strong double-digit growth there. Our other products category was also stronger, in fact, a bit stronger than even the overall company number.”
Nothing here from Cook indicates China would be mostly blamed as the culprit for a nasty financial warning some two months later.

cook-too-optimistic.jpg

The bottom line
Unsurprisingly, most Wall Street analysts remain upbeat on Apple in the wake of the warning. Price targets have been slashed by most firms, but analysts continue to think Apple is unrivaled in tech and that positioning will bring massive future earnings. Canaccord Genuity analyst Michael Walkley captures the mood of most of his peers right now rather well. “With a mature smartphone market, we believe Apple has locked up strong share of the premium tier market and will continue to dominate high-end smartphones sales and capture the vast majority of smartphone profits for the next several years. While the smartphone market is slowing to low single digits annual growth, Apple’s dominant profits of the world’s largest consumer electronics market is likely to continue,” Walkley writes. But the bottom line is that Cook & Co. temporarily must be viewed skeptically by Apple’s entire investor base. Stock analysts’s musings be damned. Cook & Co. must lay it all out on the table when the company officially reports earnings in coming weeks. More transparency, not less on business performance. A more measured tone, not another hype job as is typical in Silicon Valley. Clear insight into when completely new products will debut and what they could be (augmented reality, TV, streaming service). Specific details on efforts being taken to jump start the China business. Says Munster, “We expect the company to focus on Tim Cook’s promise to “focus really deeply on the things we can control” and help investors better understand the underlying strength of Apple’s business. It will probably take a new product category, large M&A (to restart growth narrative), a more aggressive buyback, or providing greater insights into their business, particularly services, to persuade investors to think differently about Apple’s multiple.” If Cook & Co. don’t do these things, their new credibility problem will likely rage on for most of 2019. That would be unfortunate given their level of expertise and Apple’s standing in the world.
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If Tim Cook’s all-hands meeting doesn’t fix Apple’s pricing, it’s pointless

Postby smix » Fri Jan 04, 2019 4:56 pm

If Tim Cook’s all-hands meeting doesn’t fix Apple’s pricing, it’s pointless
VentureBeat

URL: https://venturebeat.com/2019/01/03/if-t ... pointless/
Category: Business
Published: January 3, 2019

Description: As yesterday’s surprise announcement of a significant holiday revenue shortfall made clear, Apple is in trouble — not the sort of “capital T” trouble facing soon-to-be-bankrupt companies, but the nuanced dysfunction of a company that has lost more than 30 percent of its value, over $300 billion, in the past two months. Today, Apple CEO Tim Cook will hold an all-hands meeting to discuss the situation with employees, following his publication of a lengthy letter to investors. My concern is that Cook will downplay or ignore the critical issue that has become obvious to virtually everyone outside the company: Apple’s pricing. It is the common thread underlying Apple’s most serious problems, yet as any economist will gladly explain, it’s easy to fix — lowering prices makes more people buy what you’re selling. It’s unclear whether Apple believes the laws of supply and demand don’t apply to its products or whether it thinks it can keep skirting those limitations by offering financing plans and milking existing customers until they’re dry. When Cook was asked about the iPhone X’s ultra-premium price tag, he suggested that consumers would accept the higher price as a small uptick in a monthly payment plan — a short-term answer to a longer-term problem. Throughout 2018, Apple wasn’t afraid to push the envelope further. The company unrepentantly jacked up the prices of new iPhones, Apple Watches, iPad Pros, and Macs while killing off many of its more affordable entry-level models. It also released a new round of ridiculously overpriced accessories: Apple’s vinyl Smart Folio for the latest iPads sells for $79 to $99, compared with identical third-party versions sold for $15, while Smart Keyboard Folios with plasticky keyboards inside sell for $179 to $199. These prices aren’t just insulting to the word “smart” — they’re unsustainable for a business that hopes to keep growing. There’s a finite and relatively small number of people who will pay two or four times the objectively reasonable price for a product. Even with that group as a “loyal” customer base, a company that keeps raising prices will reduce the frequency of their purchases, a problem that would be reflected in declining unit sales. Apple apparently hoped to distract from this reality by stopping unit sale reporting as prices went up, telling investors to focus on its aggregate revenues instead of how many products it was selling. But that’s a patently unwise way to grow a business. Cook’s letter primarily pinned the revenue shortfall on weakening sales in China, suggesting that “rising trade tensions” might be to blame. But he also noted a lower than expected rate of iPhone upgrades in “some developed markets” and hinted that a temporary low-cost iPhone battery replacement program had cut into new iPhone sales. In my view, pricing is at the core of all of these issues. Should anyone be surprised that iPhone sales fell in a particularly price-sensitive country when Apple killed its lowest-cost iPhones and raised prices on its new models? (Hint: Apple has huge problems in India, too.) Is it really surprising that sales weren’t as strong as Apple expected elsewhere, despite last-minute trade-in promotions that didn’t actually reduce the new phones’ higher prices? Or that customers would keep using their old devices with new $29 batteries rather than spend $749 or more on the latest models? Tim Cook has two choices at today’s hands-on meeting. He can keep finding alternative ways to placate Apple’s current customers and hope they don’t leave, or he can make the difficult choice to shave down Apple’s insane 38 percent profit margin to expand the company’s user base. The latter solution would position Apple for future growth across all of its markets, rather than just the wealthiest ones, while the former seems destined to slowly but surely reduce Apple’s footprint worldwide. I’m not an investor in the company, but as a nearly lifelong user of Apple’s products, I’m hoping Cook will do the right thing. Apple is at its best when it’s making great products more widely available, and at its worst when it’s restricting them to people with deep pockets. The last year was particularly bad for Apple investors and consumers alike; a major change in Apple’s pricing strategy would make all the difference in 2019.
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This is why Apple doesn't want you fixing your smartphone

Postby smix » Fri Jan 04, 2019 5:08 pm

This is why Apple doesn't want you fixing your smartphone
ZDNet

URL: https://www.zdnet.com/article/this-is-w ... martphone/
Category: Technology
Published: January 4, 2019

Description: Amidst all the finger-pointing associated the sudden and unexpected profits warning from Apple was a revelation about how much the company relies on premature obsolescence to drive sales.
Apple's first profit warning since 2002 has clearly generated a significant amount of finger-pointing at the Cupertino giant's HQ, so much so that in the letter to investors Apple may have said more than it had planned on saying. Apple listed several reasons why it had to backtrack on its 60-day old revenue guidance to issue the profits warning, but one of the reasons listed seemed particularly candid [emphasis added]:
"While macroeconomic challenges in some markets were a key contributor to this trend, we believe there are other factors broadly impacting our iPhone performance, including consumers adapting to a world with fewer carrier subsidies, US dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements."

Apple introduced this reduced pricing for iPhone battery replacements following the discovery of code in the iOS operating system that throttled the performance of iPhones if the battery was showing signs of wear (which itself appears to be a side effect of Apple's pursuit of thinner and lighter iPhones). Now, this statement about battery replacements having an impact on iPhone sales raises a number of questions. First, and perhaps most significant is this – How many iPhones does Apple sell to people simply because the battery in their existing iPhone is worn? Over the years there's been a great deal of chatter around the subject of "planned obsolescence," and here we have Apple essentially confirming that this is indeed part of the business model. Which leads on to the next obvious question – How many iPhones are being junked or recycled just because they need a new battery? For a company that likes to boast about its environmental credentials, this should be a concern. Another question – Did the battery replacement program only have an effect on sales over the holiday period, or has this been a factor all year? After all, Apple kicked off the program in December 2017. I have talked to a few people, both at Apple service centers and at third-party authorized repair centers, who report that there had been a significant uptick in iPhones coming in for battery replacement over the final few months of the program, so maybe this did indeed have a bigger than anticipated effect on holiday sales. At this point, it's worth pointing out that if indeed the battery replacement program was a significant factor in the profits warning, Apple only has itself to blame because got itself into this mess in the by throttling iPhones in the first place. Seems like in the middle of all the finger-pointing Apple may have said some things that will add to the "planned obsolescence" narrative and cause further problems down the line. If you don't want to fall victim to planned obsolescence, then you can either get your battery replaced by Apple, or do it yourself using the excellent kits and clear information provided by iFixit.
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