Apple's chorus of critics: How wrong can they be?

The Apple-is-doomed crowd's arguments are sound, but they're also simply not true

crowd of business executives disapprove thumbs down
Credit: Thinkstock

Your daughter comes home from school with a report card studded with A's. You (1) give her a hug and raise her allowance or (2) ground her and tell her you know she'll never do this well again.

Perversely enough, too many pundits and academics have chosen option No. 2 since Apple CEO Tim Cook presented investors the company's most recent financial report card -- a fourth-quarter earnings story that featured record sales at Apple, rapid growth, and (most important) a quarterly profit that is the largest ever recorded by a publicly traded company.

My favorite headline since the fourth-quarter report: "We shouldn't be dazzled by Apple's earnings report," published in the Harvard Business Review. My favorite sentence in the article by Juan Pablo Vazquez Sampere was this: "Announcing boatloads of money, as if that were point, makes us think Apple no longer has the vision to keep on revolutionizing."

Foolish me. I thought that making money was the point for a corporation. I'm shocked that Vazquez Sampere, a professor of business administration at IE Business School in Spain, would think otherwise. (Thanks to Jean-Louis Gassée for pointing out the article in his Monday Note blog.)

By any rational standard, Apple is simply killing it. It sucks up more than nine out of every 10 dollars of profit earned by smartphone makers, is on the verge of passing its only credible rival in phone sales, has built a leading position in the huge Chinese market, and is returning boatloads of cash to investors.

Less obvious, but critical, is the end of the subsidized-device model in the cellular market. According to the critics, this would sink Apple's margins because it raised device costs to users, but has done nothing of the kind.

Oh, the shame of it all.

The carriers' new device pricing hasn't hurt Apple one bit

Any number of poorly considered articles tend to make one point that's undeniably true: No company can continue to grow as fast as Apple has. At some point, the Law of Large Numbers kicks in and growth on a percentage basis slows. Duh! As I pointed out last month, Apple's stock will take a hit when its earnings go from amazing to plain ol' darned good. That's because the market expectation is unrealistic, not because Apple is doomed.

The Apple-is-doomed crowd has a fixation on another theory as well: As cellular carriers move away from subsidized smartphone sales, customers will freak out when they learn that their new iPhone will cost more than $600. That shock will force Apple to cut prices and slash its astonishingly high margins, pummeling its profitability.

That's not a stupid argument. But it's not true. Dropping the subsidy and killing mandatory contracts was good for the carriers -- but it also has been embraced by a public that was sick to death of being locked into two-year contracts.

Remember, the shift away from subsidized devices happened well before the launch of the iPhone 6. Yet Apple sold 34,000 iPhone 6 and iPhone 6 Plus every hour for the entirety of the final quarter of 2014, a total of 75.4 million. Its average selling prices (ASPs) have not fallen -- meaning Apple hasn't had to lower prices to get those sales.

The carriers, led by T-Mobile CEO John Legere, have very cleverly taken some of the sting out of the new pricing model by introducing interest-free financing, reducing data plan costs for customers who opt to buy smartphones outright, and offering more liberal upgrade policies. You could argue that people may actually be paying more for the total package of phones and service, but they're not really feeling it, and the result is that sales haven't been hurt a bit.

Apple gobbles even more of the smartphone profits

Not only is Apple selling record numbers of iPhones, it is also earning a ridiculous share of the industry's profits.

Apple earned about $19.4 billion in pretax profits from selling its lineup of iPhones in the holiday quarter, estimated Michael Walkley, a financial analyst who covers Apple for Canaccord Genuity. That represented about 93 percent (an all-time high for Apple) of the total operating profits generated by the entire smartphone industry, Walkley wrote.

A year ago, when critics were grumbling that Apple had forgotten how to innovate, it still gobbled up 75 percent of the industry's smartphone profits, Walkey said.

Samsung, meanwhile, picked by critics as the company most likely to beat Apple into the ground, is losing ground. Samsung overtook Apple as the biggest smartphone maker globally in the third quarter of 2011, but Apple is rapidly closing the gap, according to IDC. In the fourth quarter of 2013, Samsung sold 33 million more smartphones than Apple; a year later that lead had shriveled to 600,000, and it may well evaporate entirely in 2015, IDC predicts.

As to other mobile platforms, once you get past iOS and Android, there's no there there. Windows Phone, for example, has a global market share of 2.7 percent, reports IDC. I'd be much more concerned about Apple's future if there were another significant mobile platform, but there isn't.

Worries about market saturation in the United States are sensible, but Apple has a great response: China. Apple sold more smartphones in China last quarter than any of its rivals. "This is an amazing result, given that the average selling price of Apple's handsets is nearly double those of its nearest competitor," according to a report from Canalys, a market researcher.

Apple can't grow this fast forever, it may be too dependent on a single product (the iPhone), and it appears to be cannibalizing sales of the iPad. Those are reasonable concerns.

But Apple brought home a straight-A report card last month -- so give Tim Cook a well-deserved hug the next time you see him.

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