Apple Will Accept Lower Margins for Strategic Reasons

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

Henry Blodget recently appeared on CNBC and said that he believes Apple (NASDAQ: AAPL) should invest in lower margin products where the real drivers of growth are, further stating that Apple could do much much more with the $121 billion Mount Everest like stockpile of cash they have on their balance sheet, and that he believes Apple is prudent enough to do so, as demonstrated by their recent release of the iPad Mini, which Steve Jobs once stated would never take place.

Of course, this would result in lower margins, likely sending the stock price downwards in the short run, but Blodget suggests that this is the best way to keep Apple around 10-20 years from now.

Looking Back at History

Under Steve Jobs, the company was always an innovator. Microsoft (NASDAQ: MSFT) largely imitated Apple’s revolutionary Macintosh with their Windows 3.0 operating system, making it far easier to use than DOS, thus appealing to a whole new class of consumer.

A second reason that Windows based systems became the computers of choice was price. Apple computers simply appeared to cost more, though I have heard arguments that when components in the machines are taken into account, they were actually cheaper. However, the average consumer was looking to take home a computer- for a cheap price.

Parallels

The iPhone and the iPad, when introduced were also revolutionary products. They fascinated the world and quickly owning one became a status symbol. In speaking with a young girl who traded in her Blackberry for the iPhone 5 this Christmas, she smiled and said she finally felt like she, “had arrived.”

Right now iPhone users tend to be higher end consumers, and Apple has benefitted greatly entwining them in their ecosystem from selling them songs and movies on iTunes, to making it far more likely they’ll buy an iPad, or MacBook.

However, much as Microsoft pounced on the success of Macintosh, Google (NASDAQ: GOOG) with their Android system has imitated the iPhone, and made the software available for free to phone makers (OEM’s) in an effort to get consumers entwined in Google’s ecosystem. Samsung has produced beautiful phones on par with the iPhone, and the iPad also has been copied in rapid order. This is the nature of business and competition, success attracts imitation.

Apple maintains its ultra-high, nearly unheard of hardware margins because of its well-deserved brand- associated with being innovative and best. However, as the competition has caught up, I believe in fairly rapid order, the line between the perceived superiority of Apple and its copycats will begin to blur. It hasn’t happened yet, but it will.

What Should They Do

Tim Cook, as mentioned above, has shown a willingness to go this direction with iPad Mini. Also, you will remember that this holiday season, Apple, which is normally extremely protective on the prices they allow retailers to charge for their products, allowed/ teamed up with Walmart to sell the iPhone 5 at reduced prices at select stores.

I personally feel Apple doesn’t have much of a choice. While their high end products will always appeal to the hardcore Apple fanatics, of whom there are plenty in this world, Apple will likely give away a substantial chunk of the emerging markets to lower end, cheaper distributors, who will in turn immerse them in their eco-system. For Google that would be search, Google Play, etc.

The question is, can the revenue lost on the front end, be made up on the back-end? It is why Jeff Bezos of Amazon (NASDAQ: AMZN) prices the Kindle Fire at cost, he wants to sell the consumer products for the rest of their lives, and believes that is far more profitable, than making a few dollars more immediately on the hardware.

My guess, based on recent clues that Tim Cook has given us through his actions, that Apple is likely to go in this general direction. And if Apple comes out with some WOW innovation that will recapture the world’s imagination, then by all means, they can once again sell at a super-premium again. 


margiecfl has long positions in Apple, Google, and Wal-Mart. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Amazon.com, Google, and Microsoft. 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!

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