Why Apple Inc.'s Shift to Sapphire In the iPhone 6 Will Be Brilliant -- and Perfectly Timed

Source: GT Advanced. 

At this point, there should be little doubt left that Apple (NASDAQ: AAPL  ) will transition from Corning Gorilla Glass to sapphire in both upcoming iPhone 6 models. Despite Apple's desire for secrecy, some of its bigger moves of late simply can't be hidden from the public.

Apple couldn't hide the acquisition of a publicly traded company. When Apple bought AuthenTec in 2012, fingerprint sensors were clearly in the pipeline for the iPhone. GT Advanced Technology (NASDAQOTH: GTATQ  ) had to disclose its partnership with Apple last November, since the deal had major financial implications for the smaller company and entailed a significant transition in GT's business model. Given the magnitude of this deal, Apple obviously had lofty ambitions for sapphire material.

The latest possible leak of an iPhone 6 sapphire front panel. Source: YouTube.

Talk of sapphire hit the mainstream more than six months before the GT deal, after MIT Technology Review discussed the possibility. It's now been eight months since the deal was announced. In that time, rivals have had ample time to evaluate sapphire for use in their own smartphones with the hopes of keeping up with Apple. They can't.

A tale of two Apple competitors
Two of Apple's largest rivals are Samsung (NASDAQOTH: SSNLF  )  and LG Electronics. Both have reportedly sampled sapphire and explored using the material in future phones but abandoned the efforts because of cost considerations.

Just this week, LG exec Ken Hong told Engadget: "The cost and supply aren't where we'd like them to be for sapphire to be practical just yet. Sapphire's durability and scratch-resistance are certainly attractive, but Gorilla Glass isn't going to be displaced anytime soon."

At the time of the MIT Technology Review article last year, the cost differential was estimated to be tenfold. A sapphire cover would cost $30, compared with Gorilla Glass at $3. Most smartphones cost between $200 and $230 to build. Even if the cost difference has narrowed from $27 to something like $20, that's still approximately a 10% increase in component costs.

Furthermore, this is all before operating expenses come into play. Last quarter, LG's mobile division had an operating margin of negative-0.3%, which was after shipping 12.3 million smartphones.

Source: LG Electronics.

For a company like LG, such a cost increase simply isn't an option.

What about Samsung?
After Apple, Samsung is the second most-profitable smartphone OEM. However, Samsung is currently facing a slowdown in smartphone sales, across nearly all market segments. That's putting pressure on Samsung's own component businesses. Unlike LG, Samsung's phone operations are solidly profitable, generating a 20.5% operating margin last quarter.

That means that Samsung could theoretically bite the bullet and pay up to copy Apple (as usual). Sapphire would only be included in Samsung's high-end models, so the bulk of its product lineup would be unaffected. Samsung's earnings guidance implies that Apple is faring quite well in the high end, though, which is why the timing of shifting to sapphire would be perfect for the Mac maker.

Just when Samsung is getting squeezed from the low end and the high end, Apple is putting it to a decision on whether it wants to absorb a cost increase with the hopes of reinvigorating unit sales in the high end. Even if Samsung sees success, margins will then be the ones getting squeezed.

What about everyone else?
As far as other OEMs go, almost no other smartphone vendor has positive operating margins. Even if they do, they're razor-thin. Apple and Samsung have long gobbled up all of the industry's operating profits, with Apple taking home the lion's share. Not many companies can afford to put down $578 million prepayments to secure unparalleled supply.

Another anonymous smartphone representative told Engadget that the cost wouldn't be worth it unless there was "some perceived marketing advantage." Well, it turns out that marketing advantages are precisely what Apple is made of. Don't be surprised if Apple spends 30 minutes touting sapphire's advantages when it unveils the iPhone 6, as the world watches and consumers begin lining up around the block.

I'd like to call the shift to sapphire "revolutionary," but revolutions imply that everyone gets onboard. But in this case, virtually no one can follow in Apple's footsteps. Eventually, as sapphire costs come down in the long run, broader adoption may occur. But by then, Apple will already have a grand plan in motion for its next trend-setting innovation. Let's just call the move to sapphire brilliant.

How to profit on the iWatch
The iWatch may also be covered in sapphire, but that won't be the only way to capitalize on Apple's entry into wearables. One small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Read/Post Comments (11) | Recommend This Article (12)

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 July 13, 2014, at 1:31 PM, TMFTypeoh wrote:

    Excellent coverage Evan!

  • Report this Comment On July 13, 2014, at 10:07 PM, TMFAeassa wrote:

    Great article, Evan!

  • Report this Comment On July 13, 2014, at 10:17 PM, Nathillien wrote:

    But, will it blend?

  • Report this Comment On July 14, 2014, at 2:21 AM, Godchild wrote:

    not so old article from appleinsider about "blending sapphire cover".

    http://appleinsider.com/articles/14/07/10/trio-of-apple-sapp...

  • Report this Comment On July 14, 2014, at 1:26 PM, TTES wrote:

    This may be one of the BEST articles I've seen come out of The Fool in a while.

    I think sapphire at first will be touted as a marketing ploy poo-poo-ed by the competition, just as Apple's inclusion of a 64-bit chip.

    And as that whole 64-bit stuff transitioned from "who needs 64-bit architecture for a phone" to "yeah, we'll be adding 64-bit processors in our phones soon", the sapphire deal will become more than just pure marketing.

    That material opens a massive world of design possibilities that are only possible if you have an equally massive amount of sapphire available, which (not oddly enough) Apple seems to have now.

  • Report this Comment On July 14, 2014, at 2:35 PM, p1b wrote:

    While sapphire is really cool, if iphone 6 is not waterproof then I'll still have to buy a case which pretty much mitigates the cool factor of sapphire.

  • Report this Comment On July 14, 2014, at 6:17 PM, ConstableOdo wrote:

    Well, Corning's CEO said that Apple was stupid for abandoning GG3 and their whole sapphire project was going to be a huge failure and Corning will charge Apple twice as much for the privilege of using Gorilla Glass again.

    /s

    I love it when CEOs make outrageous statements about how Apple will always fail at anything new. If Apple makes Corning's CEO eat his words he's going to look pretty foolish. It's always foolish to assume that because one company can't accomplish something then no other company can accomplish it.

    New companies certainly do accomplish things that might have baffled older companies by taking a new approach. Rival companies always seem to keep underestimating Apple and I'm not sure why. Overconfidence leaves companies too vulnerable by being caught off-guard.

  • Report this Comment On July 15, 2014, at 1:43 AM, jameskatt wrote:

    @p1b: "waterproof" and "sapphire" are two separate subjects.

    The vast majority of Apple's customers do not need a waterproof iPhone. No one is even asking for it. Even Samsung's customers are not asking for it. It certainly has not boosted Samsung's high end phone sales at all.

    On the other hand, EVERY Apple customer needs and wants and LUSTS FOR a sapphire iPhone.

    When Apple shows of the new sapphire iPhones, it will be the mother of all upgrades. There will be again long lines of people waiting days to get one.

    It will be devastating to Samsung's high end business.

  • Report this Comment On July 15, 2014, at 3:41 AM, vernr75 wrote:

    LOL. There you go again, believing Apple is some kind of innovator for switching to using Sapphire as their screens. Ignorance must really be blissful in the Apple world. The fact is that Apple's merely copying Vertu, a luxury phone maker who is the true pioneer in the use of Sapphire glass on mobile phones. They've been innovating in that area for at least 15 years. They already have a lineup of luxury Android devices with 4.7 inch Sapphire screens. So the reality is that Apple's just copying Android again.

  • Report this Comment On July 15, 2014, at 5:29 PM, twolf2919 wrote:

    @vernr75,

    ...if "innovation" is defined as throwing any half-baked idea over to manufacturing and letting the customer pay for it, then - yes - Android is more innovative.

    Case in point: Motorola Atrix had a fingerprint scanner way before Apple introduced Touch ID. While the Atrix' fingerprint scanner was nearly useless for its inconvenience and inaccuracy (it required two-handed operation because it involved a slide of the finger), Apple's implementation is actually eminently usable and, thus, is actually used!

    Who is the innovator here? - the company that put a lot of thought into it, designed new hardware to accomplish its goal of making a usable fingerprint scanner - or the company that slapped an existing PC-style fingerprint scanner onto the back of a phone and called it a day?

    You can belittle Apple all you want, but that doesn't change the reality of Apple being the real innovator for a lot of features for which the competition's version was half-baked.

    As an aside: yes, Vertu has a very nice smartphone with a Sapphire screen. How much does it cost again? Oh, yeah, thousands of dollars - so only a handful of people are stupid enough to buy one. Sometimes - as the case here - isn't in the technology (after all, pretty much anyone can manufacture a sapphire phone screen) - sometimes it's in the manufacturing process. When Apple delivers its sapphire clad iPhone 6, you can be sure it'll do so either without increasing the price at all or with minimal mark-up. Nobody has done that before, much less at the scale Apple will. And it won't be a half-baked sapphire screen - ergo, an innovation.

    Re. Apple copying Android "again": oh yeah - it's Apple, not Google and Samsung, frantically rushing to develop a 64-bit version of its chips and OS! Oh yeah - it was Apple, not Samsung, who rushed to slap yet another substandard fingerprint scanner on its flagship Galaxy S5 smartphone.

    [in response, I'm sure you're gonna trot out the "innovation" of a larger screen that Apple is now following Android on, or some minor well-aged-by-now "notification center" Apple copied from Android.]

  • Report this Comment On July 21, 2014, at 5:18 AM, McBobb wrote:

    Now girls, stop yer bickering...

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