Can Apple Compete Outside North America?

Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple's (NASDAQ: AAPL) revenues have come to a stand-still, as the company is finding it much harder to sell higher unit volumes in certain geographies. The company has been selling its lower-end phones relatively well, but the profit margins are trickling down. The company has dropped hints at some new products and is still selling a number of its older products to first-time smartphone buyers.  However, the company still faces headwinds outside North America. 

Different Dynamics

Even if Apple comes out with a newer generation of products that consumers love, the company is unlikely to see the very high revenue growth rates of 50%-60% Y/Y that it enjoyed in the last few years. The smartphone market and mobile devices market have matured a lot, and a lot more consumers use smartphones now than previously.

Apple already has a big revenue base, and the company will require some major new products to really grow and maintain its high revenue levels. The smartphone market is increasingly becoming more saturated, at least on the high-end, in North America and Europe. As a result, growth for higher priced phones will be hard for all the device manufacturers, not just Apple. 

In order for Apple to really grow its sales, the company will have to come up with new products that really move the needle, and not just a product refresh. The company's tendency to introduce products that are slight variations of older products, will keep its addressable customer base on the sidelines. 

Surging Competition

In addition, competition in the global consumer electronics place is rampant with Google's (NASDAQ: GOOG) Android OS a major success with consumers across the globe. Google disclosed in its 2Q13 earnings call that it activated more than 900 million Android devices worldwide, and on a daily basis is activating 1.5 million devices. As a result, OEMs including Samsung and HTC are appealing a lot more to consumers in China and Asia.

And also, Google is making a stronger push to earn more revenues from its own hardware devices business including the Nexus line and Motorola. And in 2Q13, Google's Play store exceeded app downloads of Apple's App store by 10% for the first time but the iOS App store still generates 2.3x more revenue, according to App Annie. And going forward, Google will likely close the revenue gap with Apple.

U.S. and Japan are Robust; Headwinds in Asia and Europe

The company’s iPhone sales are doing very well in the Americas. In particular the company's unit sales increased 51% Y/Y in the U.S., and it holds the top spot in the U.S. smartphone market with 39% share, according to data from comScore. And the iPhone is also the leading smartphone in the Japanese market with revenues from iPhone units growing 66% Y/Y, according to IDC. The loyalty rate among iPhone users remains excellent and was measured at 93%, which is substantially higher than competing phones, according to Kantar Media.

Apple’s sales from its European business declined 8% Y/Y to $7.6 billion. A number of firms, including Apple, have cited that weak and uncertain economic conditions in Europe have contributed to softness in sales from the region. The decline in sales was largely driven by lower unit sales of its products.

Perhaps a bigger headwind for Apple remains the Asia Pacific region, where revenues declined 18% Y/Y to $2.0 billion. The relatively lower purchasing power of consumers in numerous countries in the region will be difficult to address for Apple. The ASPs of Apple products will have to go down further to appeal to more first-time buyers of Apple products.

Roughly 14% of Apple’s total revenues are coming in from China, and revenues from the segment are down about 14% Y/Y to $4.6 billion. The major contributor to this decline was softness in Hong Kong sales of Apple products, and very likely, consumer preferences for lower priced devices from Apple’s main competitors including Samsung and HTC. And Apple now has half a million developers in China that are working to develop apps for iOS consumers as well. A stronger, local-centric ecosystem serves as an added value proposition for Apple consumers.

Lower-end devices, customer preferences and carrier subsidies

Apple will have to address more customers with lower disposable incomes in some of its key regional markets including China, India and other parts of Asia and Europe. The company will have come up with lower priced devices and/or larger screen devices to keep up with consumer preferences and purchasing power.

Apple did cut down the prices of the iPhone driven by more unit sales of the iPhone 4 and 4S. In the last quarter, Apple’s ASPs came down roughly $32 sequentially from the previous quarter, and going forward iPhone ASPs will decline further. The iPhone 4 has been very good at attracting first-time smartphone buyers, and going forward, the company will continue to lower the price points of select phones to appeal to more first-time smartphone buyers in emerging countries. 

However, one of the main challenges Apple continues to face is in striking deals with carriers in some of the growing markets. Unlike big carriers like AT&T and Verizon, a large portion of carriers are unwilling to subsidies phones for consumers in a number of countries. As a result, the initial cash outlay by consumers is much higher, as the customer doesn't pay the price of the phone in monthly installments as in the U.S. and many European countries. And also, the relatively lower Internet speeds in a number of emerging markets, prevents the consumer adoption of a data plan, which discourages a carrier subsidy even more. 

Going Forward

Apple has been growing at a healthy pace in America, Japan and a few other regions. But the company's ability to grow in the emerging markets especially the BRIC countries will be very important for fueling the company's future growth. Apple has to keep up with consumer preferences and come up with lower-end phones and wider-screen phones to tap and grow its fortunes outside North America and developed markets.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus