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Apple's Business Model Changing?



April 01, 2013 – Comments (0) | RELATED TICKERS: AAPL , MSFT

Board: Apple

Author: Goofyhoofy

A while back I was thinking about the possible threats to Apple, some of which have been hashed out here (margin compression, Android competition, fashion), but one I don't think I've seen mentioned is the possibility that the entire business model might change.

In no particular order: consumer replacement cycles are lightning quick in the smartphone industry. A couple of years is "old" for a smartphone, and lots of customers turn them in almost as soon as they are eligible, or so it seems.

Businesses used to turn over their PCs every couple years; now that the products have matured that has stretched to four years or more. (Just look at how hard Microsoft is working to wean people off old OSs these days. Same for software, apparently.) The changes in hardware are now more incremental, not revolutionary, so people don't feel the need to have a brand new machine on the desk as they used to. Automobiles are being replaced every 5-6 years instead of every 3-4. That is likely driven, at least in part, by the soft economy, but it certainly has impacted the car business. Likewise home appliances and most anything else costing more than a few discretionary dollars.

[It appears to me that smartphones have reached the "evolution not revolution" plateau. The Windows8, the Blackberry10, the litter of Androids, HTCs, etc. all look pretty much the same. The form factor doesn't get much different from here, so now it's all about increasing memory, 4G, etc. But those are just refinements, not breakthroughs, yes?]

Smartphones have stood against this elongating replacement cycle trend, in part because the differences between the first models (iPhone) and later models (early Android, later iPhones) was pretty significant. But mostly the fast replacement cycle was a result of the carrier subsidy model, where there is no penalty in trading in an "outdated" phone following the contract period. If that model disappears, I would expect the market to slow down, perhaps dramatically - on the order of 10-30%.

T-mobile has just introduced the 'no contract" iPhone, and along with other smartphones allows you to purchase the phone outright, or buy it on time and own it, which allows for a much lower monthly bill once the phone is paid for. While I don't expect a massive rush to T-mobile (owing largely to their spotty coverage and lack of widespread 4G) it could be a harbinger of things to come. If there is movement, it seems likely that AT&T and/or Verizon would offer a similar plan - even though it's not in their own short term interest (because they clean up every time somebody doesn't upgrade timely. But a slightly less profitable customer is still better than a lost customer.)

Apple itself acknowledges the importance of having a low entry price, which is why they're setting up a time-payment plan in India, where the telecoms don't offer the subsidized model, and where the iPhone's high price has confined it to a tiny marketshare. (Why it has taken so long to do this is beyond me, it's not as though they don't have a lot of overseas cash to play with. They don't need to "invest" much, except to find a local partner to handle the messy credit details for buyers.)

Anyway, just one more thing to worry about. Heh. I am influenced in this partly by my own experience, of course. I reach the end of my break-in period with my iPhone4 in a couple days, and yet feel no compelling urge to upgrade. (Sure, it would be great, but it's not as though my phone doesn't do everything I want it to.) What I would like is for my bill to drop, and it nags at me that I will continue to pay the usurious fee Verizon tacks on to subsidize the phone in the first place. So I think about the T-mobile option, and even if I don't go for it, it will nag me - whether I stick with the 4 or upgrade. Either way I'm being pushed into a corner I don't want to be in. I can't imagine that other customers won't have similar feelings - and of such things are business models destroyed. 

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