Apple— What’s For An Encore?

My last article on this much loved firm was written on before the announcement of the new products on Sept. 9, 2014. That article discusses the contracting financial metrics of Apple. In the article below I discuss the newly announced products. Here are my impression. Some readers may disagree but these are my opinions, not based on emotions, but on facts and observations:

Over the next several weeks, investors will hear a lot about soaring Iphone sales, the wonders of Apple technology, the Apple watch next year, Apple Pay, etc. When all the hoopla is over, and the emotions die down, could we find that reality may not be that great? Investing for more than four decades has shown me that whenever the crowd is overly excited about something, it pays to go the other way. You may wish to consider the following.

This week Apple enthusiasts got a lot of what they had waited two years to get. Their patience is admirable. I didn’t have it, and therefore switched to Samsung Galaxy exactly two years ago. Since that time, I have had a beautiful, large screen, making it possible to sit on a bench and read a book or websites in great comfort, without squinting, while my wife is shopping.

Now the Applephiles can do that too.

I have been able to take great photos of scenery or parties for two years, encouraged by my Iphone-carrying family members, because as they say, my “photos are much better.”

Now Applephiles can take nice photos, too.

I have a big memory of 64 GB I purchased to fit into my phone, for around $12 at a time that I-phone upgrades cost around $100.

Now Applephiles can get additional memory at much lower prices, but they still can’t insert it themselves.

Now Apple phone users can use “Apple-pay” for their cup of coffee or other purchases. With my phone, I could just get the “Square” or other inexpensive add-ons to do the same thing for the past two years.

The Applephiles think this Apple-pay will drive Iphone sales. But they forget that 80% of the smartphone market is Android. Apple has now done the hard work of getting credit card firms to work with the NFC (near field electronic payment) although fewer than 20% of all phones are Iphones. Now comes the hard part: convincing stores to use another expensive gadget, the reader,  introducing another risk for hacking. Eventually the greatest beneficiary will be Google’s Android if the adoption of NFC payment takes off.

Oh, and one more thing.

There is the “I-watch”, now apparently called the Apple-watch, to be available sometime next year. To me, it’s an alleged solution looking for a problem. When other firms, like Samsung, announced their versions at least 1.5 years ago, we were very skeptical. They need a smart phone to work with the watch. Who really wants another gadget, more cords, more chargers, and to do what? Perhaps, in 5 years such watches will be useful when they work with “voice commands,” but not now.

Even if you assume that the Apple-watch would take 100% of that market (very unlikely), it might produce $10 billion in sales or about 5% of total annual Apple sales. That’s a drop in the bucket.

The Iphone 6 will sell for around $900-$1000. (According to CNET, T-Mobile lists a contract-free option for the iPhone 6 Plus for $949.) For the emerging markets, even China, that is much too expensive. How many phones would Apple sell in the U.S. for almost $1,000 each?

Oh, did you notice that the much promoted “sapphire screen” did not appear? Would it have shrunk profit margins too much?

Apple lovers always have trouble differentiating between the products, which are beautiful in design, beautiful to hold and use, high in quality, but deficient in innovation versus the actual business numbers, like shrinking sales growth, shrinking profit margins, shrinking market share, etc.

The latter series of financial numbers should matter to investors, unless they leave their brains on the nightstand. In the end, it’s the growth in these metrics that counts. Unfortunately, for Apple, these metrics are all contracting at the present time. (See my prior article on

Apple’s long-term problem and obstacle to growth is the proprietary, closed system. When Apple had a monopoly, that allowed huge profits. But it also encouraged a corporate attitude of arrogance towards their customers. The attitude was, “if you don’t like our policy, tough!” When you have a monopoly, you can do that. But those days are over.

Many Apple product owners still feel they can’t leave the “eco-system.” But that obstacle is more psychological. Once you see and use the many features the competition offers, as I did two years ago, I didn’t miss the “eco-system” at all. Once you perform the “jail break,” you will experience great relief and joy.

History shows, that a closed system eventually always loses out to the open system. Remember the “beta-max” from Sony? It died although technologically it was superior. I don’t think Apple will meet the fate of “beta max,” but it is going down the same road as Sony, which at one time was the technology king, and took advantage of that by always offering fewer features at higher prices. That business model doesn’t work.

Perhaps Tim Cook will learn that as well as he learned the concept of “financial engineering” from Carl Icahn. Apple’s future depends on that.

The fact is that all the new products have been announced. The stock has been bought by the bulls. What’s for an “encore?”

Bert Dohmen, Founder
Dohmen Capital Research, Inc.