Is Apple the Next Sony or the Next RIM?

Let's take a little trip down memory lane.

It's Jan. 9, 2007. Legendary Apple (Nasdaq: AAPL  ) CEO Steve Jobs has just presented the first iPhone, sparking a smartphone market that still unfolds some five years later. The established leaders in high-end handset wizardry at the time are Research In Motion (Nasdaq: RIMM  ) and Nokia (NYSE: NOK  ) , though Americans might be forgiven for recognizing the BlackBerry fever faster than the more global Symbian phenomenon.

It's all good. A rising tide lifts all boats, but Apple's more than others. The whole sector is on the rise.

That is, until the next holiday season reveals Apple as the obvious winner in the early smartphone wars. Nokia and RIM failed to adjust to the new reality, and this is what happened:

NOK and RIMM Market Caps Chart

NOK and RIMM Market Caps data by YCharts

This was unthinkable five years ago. The CrackBerry craze seemed unstoppable. Nokia owned a $150 billion market cap on a parabolic rise. Apple knew nothing about mobile phones. How could an iPod Touch with some phone circuits possibly challenge the entrenched top dogs?

But that's what happened. Today, RIM and Nokia are on life support while Apple is the world's largest company by market cap. There's no stopping the Cupertino cash machine.

Stop me if you've heard that one before
History is apt to repeat itself, my friends. Apple and Android are killing the Nokia and BlackBerry platforms, which already destroyed Palm, pagers, and PDAs. There's always another revolution waiting just around the corner. How do you know Apple's head won't be next on the chopping block?

I know, you've heard this song before: The sky is falling, the wolves are coming for real this time, Apple is too big to fail. Go home, you eternal Apple bear, Chicken Little, boy who cried wolf.

Laugh it off if you want, but don't act too surprised when Cupertino's collapse comes. It's been lonely here in the land of Apple skeptics, but that's changing as we speak.

Listen to this broken record
You might remember High-Tech Strategist editor Fred Hickey as the guy who called the demise of RIM before it happened. Here's a clip from fellow fool Rick Munarriz's take on that call:

"RIM has a market valuation of $75 billion, but just 1% of the cell phone market. Nokia has a market cap of $100 billion, and a 40% market share. What kind of upside is there at this valuation?" Sure, he didn't point out how RIM milks a whole lot more out of every BlackBerry user, but it's an interesting point.

Chilling, isn't it? Collecting the lion's share of smartphone profits on a minuscule market share didn't work out so well for RIM in the end. Why would Apple be any different?

Indeed, Hickey is back with harsh analysis of the new profit leader. The latest installment of his newsletter says that the "parabolic fever" for Apple stock has broken, perhaps forever. "If so, Apple's stock will continue to break down, frustrating the Appleholics who will buy on every dip, citing the 'low' valuations," Hickey says. "They will buy it all the way down."

Hickey's motivations for shorting Apple ring all too true: "Only in hindsight (years later) will they know that Apple's $600 billion valuation could not be sustained, that Apple is a consumer product company subject to the whims of consumers. That Apple sells commodity type products: phones, PCs and PC-type products (tablets) where margins could not possibly be sustained at current levels."

That's the ultimate insult for many Apple fans. Have you ever thought of Apple as a simple commodity player? But it's true. If every iPhone suddenly disappeared from the market today, you could pick up an Android or a Windows phone instead. The Macbook Air is a fine machine, but Intel (Nasdaq: INTC  ) presents the Ultrabook form factor as a solid alternative. The chip champ is pouring $300 million into marketing the concept. iPads own the tablet market, but is it because they're so much better than the Android competition, or is it simply a result of brilliant marketing with a first-mover advantage?

Delete the iPhone, iPad, and Mac from today's markets, and they would surely be missed -- but they would be easily replaced. "Commodity" may be a strong word to use here, but that's the way the cookie is crumbling now.

Apple's dilemma
Clay Christensen wrote The Innovator's Dilemma, reportedly one of Steve Jobs' favorite books. He's worried about what remains of Jobs' brainchild.

Apple runs a tightly integrated business model, where the company controls every piece of the puzzle with an iron grip and everything links back to the iTunes hub. It's great while it works, but it's destined to fail: "The transition from proprietary architecture to open, modular architecture just happens over and over again," Christensen recently said on the Critical Path podcast. And Apple is in danger of becoming another Sony (NYSE: SNE  ) , protecting successful products at the expense of missing out on the next revolution.

As a reminder, Sony's earnings peaked at $1.8 billion in 1998 before the wheels fell off. In the just-reported 2012 fiscal year, Sony lost $4.8 billion. Apple's stakes are higher by an order of magnitude, but it's clear that Cupertino doesn't want to copy Sony's failures.

But wait -- there's more!
Other observers expect mobile-network operators to stop cutting such generous subsidy checks for each iPhone sold, instantly slashing Apple's margins at the kneecaps. Share prices would soon follow suit.

The Loomis Sayles Growth Fund isn't buying Apple shares. "In the end, we believe that its margins, market share and the business model are not sustainable," fund manager Aziz Hamzaogullari told CBS News. Receding subsidies play a large part in his gloomy conclusion.

The Pax World Growth Fund owns Apple but isn't a buyer right now. Manager Tony Trzcina explains why: "Its revenue projections assume that every new product introduction will be a hit." That's a big worry given how often Apple replaces each of its major product lines with a new model -- what happens if the iPhone 5 is a dud? Or the iPad 4? Apple can hardly afford to replace a winning model with a stinker, but it's bound to happen someday.

Apple is fighting an epic battle against history while trying to avoid some very scary pitfalls here. CEO Tim Cook could very well solve every problem discussed here, but he stares down some long odds. Chances are, several of these factors will combine to bring Cupertino back to earth.

You don't have to expose yourself to all of Apple's risk factors to invest in the trillion-dollar mobile-computing revolution. The Fool's finest analysts lay out the case for an alternative smartphone and tablet play in this special report. Read it to understand what really drives this market, but grab your copy quick -- the report won't be free forever.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Intel and Apple and has sold shares of Sony short. Motley Fool newsletter services have recommended buying shares of Apple, Intel, and Nokia and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.

We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (10) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 15, 2012, at 8:20 PM, bugnuts wrote:

    Add another to Anders' long list of "Apple is doomed" predictions. How many more times are you going to recycle this failed prophecy?

  • Report this Comment On May 15, 2012, at 8:37 PM, tychicum wrote:

    This whole oped just makes no sense at all. It is as scientific as if the author had just simply stated "what goes up must come down".

    I just wish I had a few thousand BERKSHIRE HATHAWAY shares.

  • Report this Comment On May 15, 2012, at 9:01 PM, SSchlesinger wrote:

    Anders is not only right, but I've heard it put this way "Even under Steve Jobs Apple couldn't maintain it's growth."

    I've done the checking. iPhone to iPad was 2 years. The iPad will be moving into the third year in January. In order to really set it's place for growth Apple needs another iDevice that brings it along. Something cool and innovative that has another 2 year growth trajectory.

    If you don't see it by the end of January 2013 I suspect that you'll start to see real problems in Cuppertino that year.

  • Report this Comment On May 15, 2012, at 9:29 PM, fool94085 wrote:

    Oh Come On! you are better than this.

    Can you post this article when Apple is going up? Where do you hide when that happens?

  • Report this Comment On May 15, 2012, at 9:55 PM, JHawkinTexas wrote:

    Although I am an Apple fan and Apple bull, I am also an investor and my love of money (i.e. greed) far surpasses my love for Apple. As short investors know, you can make huge sums in relative short order if you get the downside right in a stock. Apple will be a fun ride down...but that won't happen for some time.

    Unfortunately, your prognostication of Apple's pending doom fails to mention a few important pieces of information:

    1) Nokia and Rimm are handset makers. You may have heard of some of Apple's other products but the key fact to remember is that Apple has been integrating its own hardware and software for more than 35 years. Before you dismiss people paying premium prices for iPhones, just remember they've been doing that a long time for Macs. BTW, your article seems to imply that the iPod touch came first. It didn't. If you want people to believe you, at least get your facts straight.

    2) Apple sells phones all over the world and not every market subsidizes to the extent of the US. However, in all those other markets the iPhone is still the aspirational device.

    3) Apple has iTunes and an App store the other handset makers don't have. In other words, Apple has a much more developed and mature ecosystem not available to Android & Windows users.

    4) Apple has retail stores that customers enjoy visiting. Microsoft is trying some limited retail efforts but has not experienced the same success as Apple.

    5) Any carrier that subsidizes will take share away from those that don't. Number portability is a beautiful thing. Also don't forget that none of Apple's other products are subsidized and they all seem to be growing just fine. What do you say about those products?

    6) I could go on and fact I have another 107 billion reasons why Apple's stock won't fall off a cliff anytime soon. By the end of this year I'll have 140 billion reasons. LMAO!

    I have no doubt that someday Apple will be like Rimm, Nokia, Sony, Kodak, and so many other companies that fail to innovate when the world is changing around them. However, that day is still several years away for Apple. Short Apple at your peril.

  • Report this Comment On May 15, 2012, at 9:59 PM, RaulR2 wrote:

    I fail to understand how a extremely succesfull Co like Apple which have shown more than 26 Q beating WS estimates, (I've not forgot fiscal Q4 2011, a quarter before an astonishing 4S Iphone launch), and last two stunning Q blowouts earning reports results, still to some "don't convince investors", "Co risk stock???", "business model not sustainable???". Comparing Apple long history of innovation with Sony and/or RIM history is like comparing US NASA with North Korea rocket Agency. With all due respect, to say the least, I feel my inteligence insulted by the comments expressed in above article. It does not worth any further comment because it is obvious that should obey to other reasons than serious analisys about performance of this Co.

  • Report this Comment On May 16, 2012, at 12:10 AM, makelvin wrote:

    What a pointless article about nothing. Of course Apple will not continue to grow indefinitely; of course, Apple might someday lose its leads and market share. No company can hold on to their position indefinitely. This is simply stating the obvious. This is like saying that the world will end someday and that our solar system will cease to exist a some point in time and that everyone will die. There are no new insight here.

    The question is not if someone can predict that Apple's reign will end; but the real question is when. And he/she should provide actual evidence of it for this to not seem like a pure guess. Is it 6 months from now, 1 year, 10 years, 50 years or 100 years?

    Stating such generic and obvious point does not make the author look like a genius, instead it really make him sound more like an idiot.

  • Report this Comment On May 16, 2012, at 12:41 AM, smartin619 wrote:

    Mobile phone carriers will do what he consumers demand them to do. If consumers want a subsidized iPhone they will find a carrier that will provide it.

  • Report this Comment On May 16, 2012, at 7:59 AM, jdmeck wrote:

    Apple does not just make phones. If they did you may be right, some day.

  • Report this Comment On May 21, 2012, at 5:22 AM, AppleHYPE wrote:

    I agree. Apple is basically a marketing house that makes use of existing systems. It is sure that people are not forever stupid and pay for the hype.

    There is a religous widely spread iCult around that makes its best to support their own iReligion - with their employer's money of course !

    I know this very well because I used to be part of this iCult myself. Fortunately after 17 yrs I opened my eyes. Now I will not put even one dollar on any hyped iThings - I will get much better return on my money elsewhere !

    You cannot forever claim that the emperor has clothes when it is actually naked.

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