Saturday, May 12, 2012

Inevitable Decline of Apple (Not)

After refuting Forrester's CEO's claim that Apple would inevitably decline as a result of Jobs' death, I spotted another Apple-is-Doomed article, this one baldly asserting without any evidence that Apple's margins were about to be cut in half. The only argument in the second post was that Apple's margins would attract margins-cutting competition.

That is how a commodity market works. As a differentiated product vendor, Apple isn't making hardware on which users will run the same OS as they would on an HTC, Nokia, or Samsung handset. Apple owns its own OS and doesn't pay a licensing fee to Redmond for it, and it has the ability to shut down hostile applications found in its ecosystem. Apple can nimbly make hardware changes, knowing exactly where the dependencies are and what APIs must be tweaked to give developers the same (or better) results they had on their development platforms.

Apple's products aren't coming under pricing pressure so much as they've been discovered to be supply-constrained in am international market famished to devour even more product. By year-end, China will be as large or larger a market for Apple than is the United States. Next year, China will be Apple's largest market. And they love the brand.

That's differentiation. It's how Gillette maintains pricing power in razor blades. Some folks just don't get it. Apple differentiates with branding and technology and user-experience and makes more than anyone in its material markets.

Short if you want, but I'm happy to stay long. At P/E <14 and profit growth ~100%, this isn't a company you will find many times in your life.

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