iPhone

Walmart Discounting Apple Products: Gloom or Boom?

This past Friday, Walmart announced on its Facebook page that it was rolling back its iPhone and iPad pricing for a limited time. Within minutes, the announcement flew around tech blog circles, quickly reaching mainstream publications such as ABC and CNN.  

The discussion soon took a new direction as bloggers began to wonder if Walmart’s discounted pricing actually meant Apple was imploding; unable to sell supply due to lackluster demand.  One blogger summed up that attitude well, writing: 

"Apple has finally thrown in the towel on pretending there is a supply shortage and admitted there is simply not enough demand at the given price point, by proceeding to sell the margin flagship iPhone 5 at a third off the original price, at the bargain basement commodity expert Wal-Mart of all places….And just like that, the “niche premium” magic of the once uber-cool gizmo is gone, not to mention AAPL’s profit margins, very much as the stock price has been sensing over the past two months…”

The blog known as Reuters added additional fuel and mystery to the Apple bear argument, in their usual naive style:

"Apple has focused on high-priced, premium gadgets for many years and has strictly enforced its prices with retailers and other distributors. However, a Wal-Mart spokeswoman said on Friday that the discounts were arranged with Apple.

'We worked together with them on this,' the spokeswoman, Sarah Spencer, said. 'They are a great partner.'

Why is Walmart Discounting Apple Products? 

Third-party retailer discounts are nothing new.  Best Buy and RadioShack routinely sell entry-level iPhone 5 units for less than $199 (Best Buy is currently selling the 16 GB iPhone 5 for $149.99).  Apple’s wholesale pricing and margins remain intact as these third-party retailers eat the discount (ignoring differences between wholesale and retail prices). Similar campaigns are seen with iTunes gift card promotions, where retailers offer free iTunes gift cards when purchasing Apple products. Best Buy is also well known for promotions similar to “Buy $100 of iTunes gift cards for $75”  - where Best Buy (not Apple) is responsible for the discount.

Diving into Walmart’s latest iPhone and iPad price discount campaign sheds additional light.

1) The promotion is only valid in-store. For brick and mortar retailers, store traffic and same-store sales metrics are important. One of Walmart’s ultimate goals in discounting iPhones and iPads is having customers travel to a Walmart and make their way through the store before finally reaching the iPhones and iPads (conveniently not located near the store entrance). Walmart feels confident that it will be able to sell additional items to these customers, similar to placing milk and eggs at the back of a supermarket so that a customer has to walk through the entire store just to buy a few essentials. In addition, many consumers will narrow their holiday shopping destinations to a few stores over the next week and Walmart wouldn’t mind making that exclusive list - using discounted iPhones and iPads as the carrot for getting people into the stores.

2) The promotion is only good while supplies last.  Many consumers have flocked to Walmart’s Facebook wall to point out that quite a few Walmart locations don’t have iPhones or iPads in stock. Walmart receives good press coverage from discounting popular items, while not losing much money as product supply limits sales; sneaky, but efficient.

3) Brand awareness. By advertising discounted iPhones and iPads, Walmart is using the promotion as a marketing campaign to strengthen consumer’s association between Walmart and Apple. Many consumers don’t think of Walmart as the first place to visit for iPhones and iPads. I can only imagine how many people now have Walmart at the top of their destination list in search of that perfect Apple gift for the holidays. 

What about that little gem from Reuters indicating Apple was working with Walmart on this discount?  On the surface, it sounds somewhat damning for Apple, but in reality, it doesn’t mean much; only that Apple is okay with Walmart eating iPhone and iPad price discounts. Sounds like an iPhone and iPad boom to me. 

A New AAPL Era

Apple reported its most recent quarterly earnings this evening.  Impressive would be an understatement.  

Here are some talking points:

1) Emerging Market Growth.  Skewed perspective is making it hard to understand how fast Apple is growing. Many tech analysts are situated in developed countries and economies where the Apple brand is well established, and accordingly have a harder time conceptualizing how Apple can maintain dramatic growth rates.  The combination of rising standards of living and the increasing availability of lower-priced Apple products is a new trend for emerging markets, and it is reasonable to expect this scenario to drive Apple’s growth in the future. 

2) Product Line Diversification. Similar to the iPod, we are seeing the emergence of the iPhone product line: a series of iPhones with a sliding scale of features and capabilities. By the end of 2011, iPhone 3GS, iPhone 4, and iPhone (4S or 5) will most likely round out Apple’s iPhone line. Importantly, each iPhone utilizes iOS apps and has access to the iTunes store.  I see the same trend happening with the iPad in due time; multiple versions sold simultaneous at different price points.  Apple will rely on this product line diversification to cater to different market segments using price as a key differentiator. Emerging markets will have iPhone 3GS, mainstream will be content with iPhone 4, and early adopters will go crazy over iPhone (4s or 5).  In addition, Apple’s overall margin benefits from the continued sale of “older” products as component pricing generally declines over time.  

3) Big Losers and Winners.  Apple management was very clear on the earnings conference call: iPads are eating away at Windows PC sales and iPhone continues to grow like a wild weed.  Companies focused on selling consumer hardware (Dell, HP, RIMM, Motorola, and Samsung) are in a very difficult position as each is starting to understand that having good software is just as important as selling sexy hardware. Big winners (besides Apple) include companies who luckily aren’t competing in the consumer market, and are instead focusing on selling enterprise services or infrastructure needed to foster commerce and further innovation (IBM and Oracle come to mind).  It is no coincidence that Dell, HP, RIMM, Motorola, and Samsung have indicated (or will indicate) an interest in entering the enterprise services market. 

Random Bytes:

-) Look for Android activation numbers to become less relevant as time goes on. I have this growing feeling that Google is nervous that Android is becoming nothing more than a large void, taking up mobile space, and is relying on activation numbers to impress app developers to dedicate resources to the platform. It’s not working. iOS reached critical mass a few quarters ago and Android will not stop iOS momentum. 

-) While I will keep AAPL stock thoughts to myself (at this time), it is important to remember that the large institutional holders control Apple stock and many of these entities are not interested in quick 5-10% stock moves, but instead the attractiveness of AAPL 5-10 years out.  Potential AAPL dividend payout ratios, cash flows, and cash holdings will begin to matter just as much as iOS market share, iOS user statistics, or other random Apple product data points.  The big boys will continue to support AAPL as long as they feel confident they will receive an annual return that beats other asset classes (fixed income, real estate, etc.) over an extended period of time. 

iPhone Can Still Beat Android in Smartphone Market Share

On smartphone battlefields where iPhone hasn’t yet arrived, Android is winning the battle. 

It is premature to declare Android the eventual winner in the smartphone market share race, even with Google now activating 300,000 Android units/day. Steve Jobs noted on Apple’s recent quarterly earnings call that there is "no solid data" on Android phone shipments. For this argument, let me assume Google is actually selling 300,000 Android units/day (27 million/quarter). Apple sold 14.1 million iPhones in the most recent quarter and is on track to sell 15-16 million iPhones/quarter.  

How can iPhone outsell Android if these sales numbers are correct? Here are the reasons why I think iOS can still beat Android in terms of smartphone unit market share:

1) iPhone (4 and 3GS) is outselling Android (dozens of models) in markets where both iPhone and Android are competing face-to-face on the same carrier.

iPhone dominates European mobile ad market

Mobile OS usage; iOS #1 in North America, Europe, and Australia

When a customer has the choice between iPhone and Android, side by side, they are choosing iPhone. 

(I recognize that these links rely on data that carries a number of disclaimers and is often based on some sort of survey, to which I say, show me clearer evidence. With Google, mobile carriers, and phone manufactures not releasing actual Android unit sales figures, what other type of evidence can be obtained on a regional basis? The only surveys and evidence that even try to depict OS mobile market share continuously point to iOS leading Android in regions where both are sold on the same carriers)

2) Verizon. Android has received a ton of attention and mind share due to its strong hold on Verizon’s 90 million customers. While a few million Verizon subscribers have jumped ship over the past three years to buy iPhone on AT&T, the majority haven’t due to high carrier switching costs, including termination fees, sticky family plans, and differing coverage areas.

Why are Verizon customers buying Android phones?

A) Coming from a feature phone, any Android phone will appear amazing. The ability to use the internet or check email on a touchscreen is truly amazing for someone coming from a basic phone. 

B) Android phones are in front of Verizon customers.  Most Verizon subscribers pick a phone from the selection that they see in a Verizon store or kiosk. If the only thing a customer sees is Android, chances are good that they will buy an Android phone. 

C) Verizon customers have few options: stay with a feature phone, buy Android, or leave Verizon and buy iPhone on a network that doesn’t support phone calls due to their awful coverage and service.  Which option would you choose?

In addition, with Sprint and T-Mobile not selling the iPhone, Android has the perfect incubator to flourish - a market of about 180 million subscribers with no access to iPhone (AT&T has 90 million subscribers).  

3) Interesting Android developments in recent weeks have actually supported my thinking that iOS isn’t in as bad shape as some may say. For example, the Samsung Galaxy Tab has sold 1 million units in its first 28 days - nearly as fast as the iPad - pretty remarkable.

Although the Galaxy Tab is a tablet computer and not a smartphone, I think there is an interesting development to be seen from this data. The Galaxy Tab has done well thanks in part to its sales in South Korea, a country where android has 80% market share, a country where Samsung is a source of national pride. Reports indicate that approximately 50,000 - 70,000 Galaxy Tabs were sold in South Korea in the first 28 days (the Galaxy Tab went on sale in a total of 30 countries). What about iPad? In South Korea, the the iPad just went on sale three weeks ago and initial sales are already on par with Galaxy Tab and I imagine iPad sales will soon exceed the Galaxy Tab. The Galaxy Tab entered a market that was void of iPads, with people eagerly wanting to get their hands on iOS. 

Google VP of Engineering Andy Rubin recently said, “After the US, (Android) saw Asia go crazy” with sales in South Korea going “berserk” in the past four months. Once again, it’s funny how Android is doing so well in South Korea. How about iPhone? Well, South Korea recently decided to allow iPhone sales in South Korea.  So Android was doing great in South Korea, a country where iPhone was banned.  A true battle is one where both sides are present.

China is another interesting story. China Unicom, China’s second largest mobile carrier with approximately 175 million customers, is the exclusive provider of iPhone in China. Last year, the iPhone unveiling was a disaster in China due to restrictions imposed on the device by the Chinese Government. In 2010, iPhone 4 is a complete success with over 200,000 pre-orders being taken for the device and curbs having to be put in place to control the buying frenzy in Apple stores.  Overall though, Apple still has a small presence in China with only four retail stores and the largest mobile carrier, China Mobile and its 570 million customers, still not carrying the iPhone.  A true battle is one where both sides are present. 

My thesis will be validated, or disproven, by Verizon iPhone data in 2011 (and possibly by China Mobile carrying iPhone in 2011). If Verizon sells the same number of iPhones as AT&T (somewhere in the neighborhood of 10-15 million in the first year), my thesis will most likely hold true and iOS will be the top selling smartphone platform in the U.S.