Is Apple Subject to Laws of Gravity?

01/17/2013 7:45 am EST


It seems the shine may be off the...fruit, and Apple may very well become a tech company like all others, and just as subject to the laws of physics, notes Paul McWilliams of Next Inning Technology Research.

The big buzz is a rumor that Apple (AAPL) has substantially reduced orders to iPhone 5 suppliers. By some estimates, orders have been cut back by as much as 50%.

First, this isn't new news-there were stories about order reductions in the market in early December. Second, I doubt orders have been reduced by 50%. Third, I don't think the reductions are fully attributable (or even mostly attributable) to a lack of market demand for the iPhone 5. Fourth, where are the stories about the surge in iPhone 4S demand?

As you might recall, shortly after the launch of the iPhone 5, the headlines were full of stories about production problems at AAPL's manufacturing partner, Foxconn, as well as stories about shortages of Liquid Crystal Display (LCD) screens. However, there were no material claims that more run of the mill component parts were in short supply.

However, even if only one part is short (the LCD screens in this case), it meant that AAPL was unable to keep pace with initial demand. With rollouts scheduled in China and other countries, AAPL needed to react.

What normally happens when there is a shortage in the tech industry is customers over-order (the term "double-order" is commonly used here) in hopes that they will at least get enough to keep pace with demand. The theory in tech is it's nearly always better to have too much than have too little when it comes to consumer electronics.

Consumers are fickle, and tech companies know if they don't have their products on the shelf when consumers get into the mood to buy something new, consumers will at least look more closely at a competitive option-and many will buy that competitive option that would have never received consideration otherwise.

This is a very big deal in the competitive war between AAPL, Android, and now Microsoft (MSFT) with its Windows Phone 8 (WP8)-if a customer moves into one of these ecosystem camps, the customer can be lost for a very long time. Due to this, the rational move for a company facing a potential shortage is to over-react (risk over-stocking).

This suggests there was a good reason for the across-the-board order reductions we heard about in early December, and probably for deeper reductions for subassemblies like the LCD screen where there were significant shortages early in the production cycle. Remember, the more specialized the component or subassembly, and the longer its production cycle, the more AAPL risks by ordering ahead of its build cycle.

While I think even the most ardent AAPL fan has to come to grips with the reality that Android has taken share (especially via Samsung), and that WP8 smartphones are building an impressive base of users, AAPL's detractors need to consider the fact the aggregate market for smartphones is expanding too. In other words, the smartphone market remains a target-rich environment.

Field data suggests that AAPL has not only done well with its new iPhone 5, but also that sales of the iPhone 4 and 4S remain brisk, as it is now offered as an entry-level solution by even major US carriers.

Another point that I think is being overlooked is the fact AAPL negotiated market share-based deals with a number of international carriers that require them to sell a specific minimum percentage of iPhone 5s relative to their aggregate smartphone sales. This fact will likely become a headline story later in the quarter.

Bottom line: Do I think AAPL has been making all the right decisions? No, and if rumors prove true that AAPL will introduce its own TV, or worse yet go into the semiconductor fabrication business, I'll put an exclamation mark after the no.

Do I think AAPL is failing? Not hardly.

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