Apple Squash « Ultimi Barbarorum

It’s all about margins. In its iPod franchise, Apple has reigned supreme, developing a 100% owned closed system used by millions. The “halo effect” of the iPod drove Mac sales. Over the past 6 months Apple’s EBIT margin has been a rather tasty 20%. But as iPod dies, this margin will tend to go down. The strategic imperative of finding a replacement for the iPod and the importance of the handset as an emerging computing platform means that, as so often in technology, “things must change so they can stay the same”. Clearly, from Apple’s perspective, they needed a beachhead in mobile handsets.

However, handset market EBIT margins are structurally lower than what AAPL shareholders are used to. You can, with the scale that comes as number 2 or 3 in the industry, if you are lucky, earn a 12-13% EBIT margin, exactly where Samsung and Moto were. Nokia’s is about 20% in a good quarter too, but it owns 40-50% of the market. So iPhone, were it to be successful, would be seriously dilutive for many years to come.

Happily for Apple, pure smartphone players tend to have better margins, as their GM base is higher. For instance Taiwanese HTC earns 23% But it has a special (hybrid OEM/ODM if you really want to know) business model where it has avoided having to pay so much in marketing to date, and has a lower R&D cost base in Asia. So not much chance of Apple copying that successfully. Research in Motion, at a whopping 29% EBIT margin, is much more the thing. So Apple cheerfully set out to rip off RIM. RIM’s business model is a beautiful thing: it combines the leverage of a smartphone hardware model with the recurring revenue from subscription to its push email service and software upgrades. It has a lock on the business market, and legions of addicted users prepared to pay whatever it takes to keep getting their fixes, and upgrading to the latest models.