Monday, February 25, 2008

Why the iPhone Won't Kill Apple

You go two steps into a mild economic slowdown with Apple predicting a softening of sales and analysts all around are crying "the sky is falling" or the iPhone will kill Apple. Sometimes I get real tired of the nonsense that people write.

First of all, unlike other consumer products such as the XBox, Apple could halt production today, sell off the remaining supply, and walk away from the iPhone and probably generate a profit, or at worst, a negligible loss. That is a great position for Apple to be in. If the iPhone were to suddenly become a disaster, it might hurt the stock short term but it wouldn't take the company down. And Apple doesn't need to dominate the market either. With the way that they have structured the iPhone transaction, they could be very profitable with only a small slice of the market.

Second, Apple has a range of options to respond to market conditions. They could drop the price to the fire sale level and dilute the iPhone brand (never happen) or simply reduce manufacturing orders for now as they gauge demand. In addition, Apple can do what it did during the last downturn - innovate. By continuing to drive value by adding features and functionality to the iPhone, they build demand for it, even if some of that demand is pent up until disposable incomes or discretionary dollars are available. One thing is certain, Apple is not acting like a company whose sales are desperately low.

Third, Apple has a host of delivery channels for the iPhone that have yet to be explored. The business market has not fully embraced it for a number of reasons that I won't go into here. But suffice to say, solving just a few of those issues could open up significant demand in the business sector without having to compromise the device. 

Apple hasn't fully explored its Best Buy relationship either which could realize significant bump in sales just from having the iPhone on display but with iTunes activation, the buying process is simplified. And there are a bunch of high street retailers that Apple could chose from to sell the iPhone.

The international market is barely tapped potential. The release of a 3G model would be a boon to the international market, which has much more density in 3G coverage than in the US. Sometimes, it's a detail like this that can move a product from being a "cool device" to a "must-have device". 

Fourth, the release of the SDK (software development kit) should provide a wealth of third party applications that provide tremendous functionality or entertainment value. While other smart phones can already do this, none have been able to do it with the panache and interface of the iPhone.

Fifth, it's the only device out there that does the music and movie stuff right. Competitive offerings typically are a hodgepodge of services and features that don't work seamlessly together. Most of these boiled down to nothing more than schemes to line the pockets of the wireless providers. Remember the $2.50 song download that could only be done on the phone, not synced from a computer, and the quality of the song was lower than the $0.99 version from iTunes? 

Because of all these things, I don't have any long term doubt about the iPhone even though there might be some short-term softness in demand. However, I think we'll all be surprised when Apple announces their next quarter's results.

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