Apple's Last Stand

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Well, here it is. After weeks -- months -- of nearly nonstop promotion from the tech and finance blogs of the world, the iPhone 5 is here. That trumpeting sound you may hear in the background is the angelic chorus, heralding the arrival of what's sure to be the most glorious phone the world has ever seen. Why, what's that? It's Steve Jobs himself, riding back to Earth on clouds of victory! Hail to Apple (Nasdaq: AAPL  ) ! Hail and hallelujah!

It's almost impossible to escape the hype machine behind Apple's announcement. Other phones get press conferences. Apple gets triumphal processions. Why, look, there's Tim Cook, emerging from beneath a victory arch built entirely out of Android phones.

Have we got that out of our collective systems yet?

Hype has its place. Without hype, Apple wouldn't be where it is today. The first iPhone rode into view behind years of speculation and enjoyed a six-month window from unveiling to its first sales that allowed the punditsphere to whip fans into a veritable froth. Even Apple haters can (or at least should) admit that the first iPhone was a transformative device in the mobile space. It created a new design paradigm, made touchscreens popular, and eventually helped create the app-ecosystem model that continues to be a defining factor in the success or failure of competing operating systems.

Now, what could Apple possibly add to the iPhone 5 that would be similarly transformative? The 4S's key new feature, Siri, was hyped to the moon and given prime billing on Apple's TV ads with celebrities. What was it in reality? A partly functional voice-activated personal-assistant software suite that so underperformed its commercial promise that a class action suit was filed over false advertising. The iPhone 4's key new feature was supposed to be a front-facing camera for video chatting with FaceTime, and a better display resolution to boot. Its most notable design feature turned out to be a poorly placed antenna that created reception issues when holding the lower left corner of the phone.

There are two key changes that got the bulk of the pre-release hype: The iPhone 5 will be taller, and its charging cable connection has been reworked -- the better to sell you new accessories, of course.

Is that enough to justify the hype? No. But Apple needs this hype in a bad way. The iPhone is Apple's major moneymaker, expected to account for more than half Apple's total revenue this year and probably more than 60% of its profit. The iPad expanded Apple's reach, but it didn't do much to reduce the company's dependency on the iPhone. When iPhone sales drop, revenue growth -- normally eye-popping in its pace over the past few years -- declines substantially. The most recent quarter's dip in iPhone sales even undid a long-running trend toward higher profit margins:

AAPL Revenue Growth Chart

AAPL Revenue Growth data by YCharts.

Analysts and Apple bulls have largely built their case on the premise that Apple's popularity will remain at high levels, perhaps indefinitely. But the evidence shows otherwise. Last month, I highlighted a rolling poll by brand-analytics company YouGov that showed a gradual long-term decline in Apple's "buzz score," or the difference between positive and negative consumer perceptions of the company.

Since then, Apple's highly publicized global patent battle with Samsung was decided in its favor in American courts, but it saw less success internationally. I said after that trial concluded that the fight made Apple seem like a bully. YouGov's polling agrees. Pre-decision buzz scores for Apple and Samsung had Apple with a clear lead. After the decision, Apple's lead evaporated among early adopters, narrowed to nearly nothing among the general population, and actually lost out to Samsung in the coveted 18-to-34 demographic, which now clearly favors Samsung.

Popularity is a fickle thing to build a brand on, and consumer trends can shift easily. The Fool's most dedicated fans already appear to be tired of our constant iPhone hype, even though many have been loyal Apple stockholders for years -- and I'm sorry for adding to that hype, folks, but some things need to be said. A quick glance at the Fool's Facebook feed shows a lot of weariness over frequent Apple updates. Many fans have expressed lack of interest, annoyance, or an outright desire to switch to Google's (Nasdaq: GOOG  ) Android or even a Nokia (NYSE: NOK  ) Lumia running Microsoft (Nasdaq: MSFT  ) Windows Phone 8.

One way for Apple to overcome this domestic apathy would be an international sales boom. Gaining access to China Mobile's (NYSE: CHL  ) huge subscriber base would generate a ton of sales, the theory goes. The only problem with that theory is that China Mobile's own employees don't see that happening any time soon, and a lack of official support hasn't stopped an estimated 15 million Chinese subscribers from using the iPhone on the carrier's network anyway.

Then there's the fact that an iPhone costs about $800 in China, as carriers don't offer the subsidies American subscribers are used to. That means a Foxconn worker -- not poorly paid by Chinese standards -- would have to spend more than two months building iPhones on the assembly line before he could afford to buy one of his own. The war against cheaper Android phones hasn't put Apple on top. The company saw its share of the Chinese smartphone market cut from 19% to 10% in the second quarter of this year. Sure, there's some status to having an iPhone, but if Americans can get tired of it, why should the Chinese be any different?

Every new iPhone needs to sell many more units than its predecessor to maintain Apple's momentum and justify the continued increase in its stock price. The next few months will go a long way toward telling us whether the iPhone 5 will do so. The smartphone industry is mature, saturated, and established. Apple's now playing an incremental game, but its strength is in transformation. The last time Apple had to fight for inches, it lost badly to competitors who were less concerned with near-term profit margins than in growing long-term market share. Will that happen again? It may not take long to find out.

The Motley Fool's built a premium research service to help you stay a step ahead of the talking heads. Subscribe today and receive a premium report outlining the bear and bull cases for Apple. Best of all, it comes with a full year of updates by our top tech analysts -- all at no extra cost! Find out more.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more news and insights.

The Motley Fool owns shares of Microsoft, Apple, China Mobile, and Facebook. Motley Fool newsletter services have recommended buying shares of Apple, Facebook, Google, and Microsoft and creating a bull call spread position in Apple and a synthetic covered call position in Microsoft. We Fools don't all hold the same opinions, 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. The Motley Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (7)

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 September 12, 2012, at 10:12 PM, JHawkinTexas wrote:

    LMAO! Where do they find these people. Go back a year and read pundit's comments after the iPhone 4S launch. From an investor's standpoint, this article is just more dribble.

    What the bloggers and Apple haters don't seem to realize is that this is Apple's game to lose. They rail on about the iPhone 5 not being some revolutionary device that breaks the mold...again. Well, Apple is smart enough not to take that bait. Question. Why would I as a user with a substantial investment in apps, music, understanding the current UI, and ecosystem want to dump all that and learn something completely new? Hey idiots, that paradigm already exists with Android and Windows phones. If I wanted to dump everything I knew and loved for something different, it's already out there.

    To the bloggers...get a clue. Write something of use to the investor. I already know Apple will not rise for ever. Try, for once, to tell me something I don't know rather than a bunch of subjective dribble. It doesn't really move the needle with me. If the hedge funds are paying you...they're wasting their money.

  • Report this Comment On September 12, 2012, at 11:04 PM, H3D wrote:

    Apple is taking 2/3 of the profits from the mobile phone industry an 90%+ from tablets.

    Make or break moment?

    Only for click farmers!

  • Report this Comment On September 12, 2012, at 11:36 PM, TMFFlushDraw wrote:

    Good points!

    As someone who uses Apple everything I am seriously considering an Android device for my new phone. The only thing that will likely keep me with Apple is the compatibility devices have but I'm not excited about the new iPhone.

    At the very least, I'm much less in iLove with Apple than I was 2 or 4 years ago at the times of my last iPhone purchases.


  • Report this Comment On September 13, 2012, at 6:09 AM, billiebvdcgrt wrote:

    you think a class action suit means something like non performance, etc.? wow! Motley Fools is well titled. One should stop reading at that point, but it was a slow day so,

    but your 'foolishness' is not unalduterated: you claim no iPhone subsidies in China, so you add ignorance to the mix.

    China Unicom offers plans a la the US.


    Oh, and if you want someone to subscribe to "The Fool" you need to do a lot better than this, and the good news is that you usually do.

  • Report this Comment On September 13, 2012, at 6:13 AM, billiebvdcgrt wrote:

    and I add to the ignorance; sorry for the mis spelling

    not unalduterated: but unadulterated


  • Report this Comment On September 13, 2012, at 7:44 AM, llIlllIlllIlllIl wrote:

    Nokia Lumia 920, wheee!! :)

  • Report this Comment On September 13, 2012, at 12:11 PM, Valorale wrote:

    Apple has an excellent user base built in thanks to the adoption of itunes back when it launched the ipod. The heavy users of this ecosystem are full fledge apple devotees and are unlikely to leave the altar any time soon.

    Music and Apps are what rule the market place.

    What I will find more interesting as the younger crowd coming up, what will they adopt. The idea of downloading mp3s is slowly fading away. People more and more are switching to services like Pandora instead of launching a personal playlist. Once you start to care less and less about where your music is handled, the whole feeling of being locked in to the apple network starts to unravel.

    So this leave apps. Right now Apple is still king .. by a good margin. Thanks to their proprietary system and the benefit of getting early adopters to Objective C, there are many really nice apps and games that simply dont exist on the android market. This is despite the fact that android apps are coded in Java which is a far more popular language in the programming world. This is slowly changing as companies are slowly starting to see revenue potential in jumping through the hurdles to make their app work not just on the android but on the hundreds of different android devices out there.

    A similar dilemma game developers encountered when making a game for console or PC. Console hardware specs are the same, PC is ever changing. It is harder to support PC.

    Google working with the Japanese hardware manufactures on Android devices, I believe are playing a deeper and longer game here. They were aggressive in getting their hardware into all major markets of the world especially the lucrative Chinese market. The battle isnt for the users who have smart phones today, their loyalties are largely on lock-down for the foreseeable future. The battle is for the new up and comers who havnt bought in yet.

  • Report this Comment On September 13, 2012, at 1:12 PM, FROGHOTEL wrote:

    HAHA I like how even though he didn't want to keep reading @Billyboytoyblahblahblah kept reading this well thought out and simply put article and was so offended he commented not once but TWICE to try and offend back...JOB WELL DONE MR. ALEX PLANES you're good you

  • Report this Comment On September 13, 2012, at 1:14 PM, FROGHOTEL wrote:

    hahah I just read the second comment from @billyboytoyblahblahblah.....he was so mad typing his first response that he had typos and didn't proof read becuase of the quick fury of anger you caused him @ALEXPLANES made him want to get his two cents in.

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