Mon, 21 Jan 2013 Good profit margins, not growing market share is best for Apple

Reports claim that Apple is suffering and that its way out is to release a new product, do something completely different, grab more market share from Samsung, grab more marketshare full stop. But is this really what is best for Apple? 

Another suggestion is that the best thing Apple can do is preserve its profit margins, and one way to do this is not to change anything. 

Wells Fargo Securities analyst Maynard Um noted that the fact that the iPhone 4S and iPhone 4 shared common components helped boost Apple's gross margins. Hence it follows that Apple’s next phone should share design similarities to the current iPhone 5, helping to improve margins.

"While this requires some patience as the cycle transitions and then matures to drive gross margin, we believe valuation will rise with sentiment," Um said, according to Apple Insider’s report. 

Apple margins and profit 

Apple’s current decline in share price could be down to investor concerns, claims Business Insider in a report that suggests that EPS (earnings per share) cuts are being driven by a belief that the iPhone 5 is less profitable than the iPhone 4S. 

In addition, investors may fear that the iPad Mini, is cannibalizing sales of the more profitable iPad. 

Redesigned products may be what get consumers excited, but it’s not necessarily what makes Apple profitable. In the past few months the company introduced has launched a number of redesigned products: the iPhone 5 with a redesigned body; the completely new iPad Mini; and MacBook Pro with a Retina display; even the iPad now has the new Lightning dock connector. Redesigning a range isn’t cheap. There are costs associated with such dramatic change.

Those three product families [iPad, iPhone, Mac] combined comprised 83% of sales last year, so changes in those cost structures carry a lot of weight when it comes to Apple's overall cost of goods sold, explains Motley Fool.  

And Apple is this week set to announce financial results that come at the end of one of the most prolific product launch periods in Apple's history. 

Some analysts think that the results announcement may mark the first time for a long time that Apple posts a year-over-year decline in net income as a result of lower margins. 

Apple marketshare verses margins

At the moment many are calling for Apple to produce a budget-level iPhone, suggesting that the company must go after the massive untapped market in the BRIC countries (Brazil, Russia, India, China). In the West the move to smartphones has been happening for a few years now, while there are 2-3 billion people still to go through the transition to smartphones in these countries.

However, for Apple to make the same kind of profits from lower cost products with smaller profit margins it would have to win the battle for marketshare, and that would likely mean canibilising sales of its more profitable iPhones. Forbes explains: “A $100 iPhone would be great for market share but wouldn’t contribute $300 or more to Apple’s bottom line as the current ones do.”

This is the issue: If a small number of people buy the budget phone rather than a more expensive iPhone, Apple would be giving up very little current profit to increase marketshare. However, what seems more logical is that a large number of people would buy the cheaper iPhone rather than the more expensive model, and as a result: “Apple would be sacrificing large amounts of current profit in return for no more than the hope of some in the future,” notes Forbes. 

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