Asymmetrical Information - Megan McArdle
01.15.13 3:25 PM ET
WSJ: Apple Cuts iPhone Parts Orders on Disappointing Demand
This morning, I see that Apple bloggers have been hauling out the conspiracy theories, accusing shadowy "stock manipulators" of leaking false rumors--even though analysts have been expressing concerns about iPhone orders for a while.
"Shadowy stock manipulators" and "short sellers" are, of course, the first resort of a company whose stock gets into trouble. Few immediately embrace the more parsimonious theory that the market is selling off their stock because expectations about future earnings are legitimately falling.
But there are perfectly good reasons to think that iPhone 5 sales might not be as stellar as the company might have hoped. More than half of the US population now has a smartphone. Europe's biggest markets are also there. That means that the explosive-growth phase of the iPhone's product life is coming to an end in Apple's richest markets, the ones where you can anticipate that close to 100% of the population will adopt smartphones in the fairly near future. Future growth will increasingly come from taking market share away from other companies, or persuading your customers to upgrade faster.
But Apple's customers already upgrade pretty fast. And one can argue that in the future, they're more likely to slow down than speed up. As it happens, we just upgraded our phones, but only because the previous phones were on the verge of death--the battery depleting faster and faster, the OS running slower and slower.
Early in a product's life cycle, you see enormous leaps in the quality of each successive generation. Think of the changes that occurred in automobiles between 1910 and 1935, for example. In 1910, a car looks a lot like a horse-drawn carriage. By 1935, cars pretty much look like cars. They are enclosed, usually with hard tops and heaters and roll down windows. You don't have to crank the car to spark the engine, risking a broken thumb, or worse, if the engine backfires. The difference between 1935 cars and ours is huge, of course, but arguably, not as large as the difference between those cars and the steampunk golf-carts that our great-grandparents drove. And either way, the important point is that the improvements from 1935 to now were largely incremental. While there were a few big discontinuities, like automatic transmissions, in any given year, the differences between this year's model and last were rarely revolutionary.
Most products go through a similar cycle. And as the pace of improvements slows, so does the impetus to upgrade. Market share seems more promising, but this is not an unlimited strategy; a lot of that market is price-sensitive consumers who won't support Apple's current product margins.
This is hardly the death knell for Apple even if it's true; they'd remain a hugely successful company with great products and great profits. But it may signal that they're becoming more of a normal company, with normal company problems, rather than weird, Apple-type problems like "I can't produce enough of my amazing product to satisfy all the demand" or "my customers are mad because I just released another, even more awesome new version of my product eight months after the last blockbuster."