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Time for Apple to Face Reality

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It's been a year since Verizon and AT&T went on record as fans of Nokia's (NYSE: NOK  ) then-new Lumia 920, running Microsoft's new Windows Phone OS. Why would the two undisputed leaders in mobile-phone sales, both of which had already profited handsomely from their respective relationships with Apple (NASDAQ: AAPL  ) , go on record as rooting for the "other guy"? Because at the time, Apple could call the shots, even to wireless leaders like Verizon and AT&T -- and it did.

Now, fast-forward a year to the drastically changed mobile computing world of today. Samsung is the No. 1 mobile-phone company in the world, there are more smartphone alternatives for consumers to choose from than ever before, and Apple is still trying to dictate iPhone subsidy specs to wireless carriers around the world.

The issue
Domestically, things haven't changed much for Apple; it still rules the smartphone roost, and U.S. consumers benefit by getting iPhones for a fraction of the non-subsidized price. While iPhone sales jumped to 37.4 million units last quarter, the 6.5% increase that represented from the year-ago period was woefully shy of the 36% jump in overall smartphone sales, and it was the smallest gain since the iPhone was introduced.

Even more concerning for iFans is the lack of international smartphone growth, and it's in the overseas markets that changes need to be made in Apple's overly confident attitude. There are literally billions of potential smartphone customers worldwide who either don't have the benefit of smartphone subsidies or have wireless carriers unwilling to kowtow to Apple's demands. The most notable carrier unwilling to bend also happens to be the largest in the world: China Mobile (NYSE: CHL  ) .

China Mobile's recent partnership with Nokia should be a model for Apple of how things are supposed to work with international carriers. When Nokia introduced its Chinese market-ready Lumia, the two were able to work out a deal in which China Mobile would subsidize virtually the entire cost, along with the usual data plan contract. Why was "little" Nokia able to work out a subsidy deal with China Mobile for a phone that retails for about $740? The negotiations weren't made public, of course, but it stands to reason that Nokia needed to bend a bit to make the China Mobile deal a reality, and that's the lesson Apple needs to learn to get back on the growth path.

While it is the largest, China Mobile is hardly the only international carrier unwilling to play by Apple's rules. According to an analyst with Asymco, Apple has about 240 carriers worldwide offering its stable of iPhones, and less than a dozen of those have been added in the past three years. By comparison, Samsung has agreements with about 840 carriers around the world.

What now?
The Catch-22 for Apple is finding a way to build productive relationships with international wireless carriers unwilling to play by CEO Tim Cook's rules, as it faces rapidly declining margins. Apple's gross margin in its recently completed fiscal Q2 was 37.5%, down from a whopping 47.4% in the year-ago period. That, along with a perceived lack of innovation and delays in introducing new products, are largely to blame for Apple's recent slide in share price.

As Samsung is demonstrating, there's a lot to be said for sales volume, and there's only one way to achieve that on a global basis: increase the number of worldwide carriers. It's time Apple recognizes it can't call the shots the way it once did -- not on the international stage. The market's changed, and it's time for Apple to set the ego aside and change, too. The alternative is to continue missing out on billions of potential customers.

There's no doubt that Apple is at the center of technology's largest revolution ever. With pressure on its stock price, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on reasons to buy and reasons to sell Apple and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Read/Post Comments (9) | Recommend This Article (2)

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  • Report this Comment On May 08, 2013, at 12:22 AM, techy46 wrote:

    Nokia's Lumia 521 4" 4G WP8 smart phone is now selling at WalMart stores for $129.88 unlocked and you can get a monthly unlimited data and text T-Mobile contract for $30.Next up will be Nokia Lumia 928 on Verizon in May 14th. The PC's Mobile with smart phones and tablets doing everything a Windows 8 notebook can do including Office documents. Try that on your Android or iPhone.

  • Report this Comment On May 08, 2013, at 2:47 AM, neocolonialist wrote:

    iPhone still calls the shots cuz everyone still likes the iPhone best when they use it. AAPL is and is going to do in the Asian markets exactly what they did here. They are going to have a rather large, but less than largest share of the market, but they are going to make all of the money. Margin compression is AAPL's biggest enemy right now, but where they bruise their competition will bleed like a stuck hog. Not sure why all the fear around AAPL, but I sure am glad as it keeps giving me cheap shares.

  • Report this Comment On May 08, 2013, at 5:49 AM, H3D wrote:

    Very little rational argument here.

    Nokia / Microsoft have failed.

    Apple is still making well over half of the total profits in the mobile phone industry.

    Any fool with a half decent product can get all the carriers simply by giving way to the carriers demands, whether that helps their bottom line, or not. And for that matter whether those demands are in the end user's interests or not. Apple have done a splendid job of stopping carriers degrading the functionality of the product with the usual bloatware and lack of OS upgrades.

    Your statement that

    "...there's a lot to be said for sales volume, and there's only one way to achieve that on a global basis: increase the number of worldwide carriers."

    Is clearly garbage.

    Yes, it's a way of increasing it. But the only way?

    Apple sells substantial volumes though its own brick and online stores and continues to build new stores.

    In markets where upfront cost is an issue and the carriers won't subsidise, Apple is right to finance the devices itself rather than cut price. And Apple can afford to do that.

    If you come back in 5 or 10 years, I suspect the retail iPhone carrier in regions where there currently aren't enough carriers, will be Apple.

    How much wholesale carrier they buy in, and how much network they own, is down to local economics.

    In fact maybe they will offer that everywhere as part of offering the customers a better service, reducing business risk, and not leaving easy money on the table.

    It will also give then a smother route into dominating mobile payments and an eventual satellite phone network.

  • Report this Comment On May 08, 2013, at 6:19 AM, MarcMiami wrote:

    Your headline story yesterday about Apple's tablet sales declining again was a gross misrepresentation, factually untrue--in other words--a Lie!

    Isn't there enough factually available to attack the arrogant Apple and it's tortoise-like CEO? You don't need to resort to headline sensationalism and fraud to make a point....

    But congratulations!-- your story seemed to stop Apple's upward trajectory yesterday in its tracks--again Congratulations on a journalistic achievement!

  • Report this Comment On May 08, 2013, at 8:12 AM, dwilh51183 wrote:


  • Report this Comment On May 08, 2013, at 1:16 PM, CNQFool wrote:


    What do you suggest they do then? Praise apple for its lack of innovation over the past few years? Praise them for losing market share due to the ever growing plethora of viable, cheaper and in some cases superior smart phones on the market Today? Apple needs to give them something good and exciting to write about before they can do so.

    Don't get me wrong, Apple is still a great company, I still own an iPhone (until it breaks at which point I will likely be switching to an Andriod or Windows 8 phone). My point is, if they don't come up with something new soon, they risk falling victim the same way that they did in the 80's.

    The simple fact is that the iPhone is no longer the only option for someone who wants a true smart phone. They had the advantage of being the first in line. To keep their growth trajectory, they need a new product, a revolutionary product that creates an entirely new market in which they can again be the first in line.

    I havn't given up on them yet, but without a new product line other than the iPhone or iPad, they will slowly fade away and history will again repeat itself.

  • Report this Comment On May 08, 2013, at 2:26 PM, rlcato wrote:

    "...Apple is still trying to dictate iPhone subsidy specs to wireless carriers around the world."

    Tim, you make it sound like the method that Apple uses to sell iPhones is a bad thing. Samsung would give its right (...) to have those sales number on just a couple phones. But instead, Samsung saturates the markets with phones of every description and call it "innovation" -which it's not. Apple has just 3 phones to sell and it must get it right the first time no matter what it takes for they can afford it and they know carriers/people want the iPhone. Nokia is desperate; they'll do anything to move their product. See the difference?

  • Report this Comment On May 08, 2013, at 2:46 PM, CNQFool wrote:


    So basically one could take what you just wrote as Samsung has a diversified portolio of products targeted at many different classes of people while Apple has all of its eggs in one basket?

    To many investors, this is an unexceptable risk. If Apple is successful in inovating a new trend as it has with the ipod, iPhone and iPad, then people will embrace the stock.

  • Report this Comment On May 08, 2013, at 4:50 PM, spawn44 wrote:

    Those on the back of the train are the last ones to see the train's engine has derailed,

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