Applesauce: All Things Apple
May 12, 2013

Applesauce: All Things Apple – May 12, 2013

This episode of Applesauce is brought to you by the Alleged Cheap iPhone, now in five vibrant colors! Runs iOS 7! Damn near affordable for everyone in the entire family!

The Cheap iPhone and iPad mini seemed to dominate the conversation this week, thanks to some really stellar reporting by one Bloomberg journalist, an investor’s meeting, and some large-scale hiring.

Tell me if you’ve heard this before: demand for an Apple product, which had been selling well, has suddenly dried up like a Texas creek in the summer time. Some headlines were written, some mistakes were made, subsequently pointed out, and in the end we all learn a thing or two about ourselves. It’s a tale as old as time, really…and it’s happened once again.

And just when you look away, one company starts hiring a massive amount of people, signaling what the entire tech blogosphere hopes could be the onslaught of cheap iPhones.

Be still my beating heart.

The good news is some analysts, and even journalists, are starting to re-think this whole “Cheap iPhone” bull matter and look towards Apple’s past to predict their future.

It’s a saucy game, but someone’s got to play it.

Pegatron Sad

On Wednesday, Bloomberg posted a story about the falling sales numbers of Pegatron Electronics, the company that makes the iPad mini, iPhone 4S, Microsoft Surface tablets and many other consumer electronic devices. Bloomberg claims Pegatron’s sales will see their biggest drop in six quarters, thanks to a slip in demand for the iPad mini.

Sure, because it’s always the little guy’s fault.

But wait, they have precedent!

Bloomberg also trots out the fact that Hon Hai (better known to you as Foxconn) has also seen a decline in orders from Apple. They also casually mention that Apple reported their first profit drop in a decade and saw their margins get a little less, how do I say, fat.

To be fair, Apple appears to be a very large client of Pegatron, and if their sales slip a little, they’re sure to feel it. Bloomberg claims the iPad mini makes up more than half of their consumer electronic business, while the iPhone 4S (remember those things?) makes up a large part of the communications business.

Pegatron’s CEO Jason Cheng told Bloomberg that the lost revenue from the iPad mini is all about the demand on the thing. The price Apple is paying for these small tablets remains the same, but it’s not just tablets that are trending down.

“Also e-books and games consoles, almost every item is moving in a negative direction,” said Cheng.

One analyst told Bloomberg that they expected a slump in iPad mini demand, but not as much as they’re seeing, which is somewhere near the 20 to 30 percent range. This is significant for a section of Pegatron’s business which makes up about 36 percent, claims Bloomberg.

There’s a reason analysts are expecting a decrease in iPad mini demand, and if I may be so bold, the lack of Retina display is to blame.

Rumors have been flying for nearly as long as the iPad mini has been a real thing that the next iPad mini will come with a Retina Display. Now that so many people have played with one, seen one, and bought one (at least that wanted to buy one) it could easily be assumed that we’ve fallen into the typical product launch slump.

Who among us would feel comfortable today, right now, walking into an Apple store and buying an iPad mini?

There are some of us who get a sick kind of thrill out of buying ANYTHING at the Apple store, but in the back of your mind, you’d know that as soon as that money clears your account, you’ll see a rumor pop up on the blogosphere about an impending Retina’d iPad mini. Just as it often happens, its likely people are waiting for the next iteration.


It seems like we may have heard this kind of thing before about specific Apple products slipping in demand .

In fact, it wasn’t all that long ago.

One intrepid reporter read the most recent Bloomberg piece and was curious about this one little issue.

Here is the troublesome statement as it appears in the story:

“A decline in revenue from the iPad Mini “is more on demand, while price has been stable,” Pegatron Chief Executive Officer Jason Cheng said. “Not just tablets, also e-books and games consoles, almost every item is moving in a negative direction.””

Phillip Elmer-DeWitt wondered why Cheng’s quote had been broken apart and interjected with the Bloomberg reporter’s own words, so he decided to email Cheng himself.

According to the CEO, one Bloomberg reporter approached him following their Institutional Investors Conference looking for some dirt on specific products.

“I clearly refused to comment on specific products, nor customers, even though he continued with other questions,” wrote Cheng in an email to Elmer-DeWitt, reporter to the stars.

“I did say those words that he quotes me in the article “more on demand, while price has been stable”…, “almost every item is moving in a negative direction”…; “Not just tablets, also e-books and games consoles”. But I did not say anything associated with any specific products.”

Cheng goes on to say that it’s company policy to never call out specific customers or products in any public event like an investor’s conference.

Here’s the kicker…

Elmer-DeWitt claims that following the Pegatron Investor’s Conference, most Asian journalists were busy writing headlines about first quarter profits being up 80 percent year-over-year. Many American journalists (as we’ll see in a second) were focused on another bit of good news from the Pegatron offices. Yet, it appears this one Bloomberg reporter felt it necessary to get a little sensational with his headline.

John Moltz really put it best when he commented on this story.

It’s always about Apple…Well, Apple and SEO.”

We’re Hiring

Don’t feel too badly for Pegatron, though.

Not only do they have the exact kind of name you’d want your electronics manufacturer to have, they’re planning on making a little extra coin by making something else.

We don’t really know what this something else is, of course…but if there’s one thing the Internet loves, it’s a rumor about a Cheap iPhone.

Just one day after Pegatron announced their revenue would drop more than they had originally expected, the electronics maker announced they’ve decided to increase their workforce by 40 percent in the second half of the year.

According to Reuters, Pegatron’s CFO said that some 60 percent of the company’s entire revenue will come from the second half of the year.

Of course, this means Pegatron will make that damned cheap iPhone.

Reuters isn’t the first to mention it, either. (They claim “suppliers” told them Pegatron would be tasked with the cheap iPhone making)

One Barclays analyst pointed towards Pegatron for this deed back in March, noting that Foxconn will be responsible for all the other models.

That’s no way to treat a company called Pegatron, giving them the cheap iPhone while lame ol’ Foxconn gets the real attention.

How Rude.

Of course, all of this is speculation. Pegatron’s CFO refused to comment about a cheap iPhone and only casually mentioned that they expect to be rolling in the dough somewhere after July. Yet if there is such a thing as a cheap iPhone, all signs point towards Pegatron at the moment.

Not a Cheap iPhone, a CheapER iPhone

Frequent readers of the ‘sauce (Hi, Mom) are well aware of my thoughts and feelings about the alleged “cheap iPhone.” Yet, no matter how furiously I swear at my computer screen when I see another analyst discussing how this plastic abomination will save Apple’s vegan bacon, it sounds like this thing might be a reality.

Something something smoke and fire, you know…

Yet, there have been some statements made and thoughts speculated upon which keep me looking to the bright side of life. Tim Cook, for instance, briefly talked AROUND the point of the cheap iPhone, casually mentioning that there are plenty of first-time smartphone buyers in “certain countries” around the world.

This, of course, is why analysts say Apple needs this kind of phone, to attract buyers in emerging markets.

“…we’ve made the iPhone 4 even more affordable, and which has made it more attractive to first-time buyers, and we caught up on the demand toward the—late in the quarter last quarter,” saith Cook in the last earnings call.

“And we’re continuing to do that in other markets. We believe that the phone for the price point that we’re offering is an incredible value for people that allows them to get into the ecosystem with a really, really phenomenal product.”

More of this, please.

Now there’s even more talk to suggest that a “Cheap iPhone” might not be exactly what we think it would be.

A pair of articles this week from All Things D and Macworld shed some light on why Apple doesn’t need to resort to Samsung’s tactics in order to beat Galaxy maker.

Because, let’s be honest…the entire reason Apple may even be considering a smaller iPhone is to take some customers away from Samsung. Both of these articles look to the precedent set by the iPod; when the first model was released, it was notably more expensive than other MP3 players on the market. Just like any other Apple product, the iPod came with a tidy profit margin built in. The first iPod got people’s attention and soon became the tech-equivalent of a sex symbol, if that can ever be a thing.

Later down the line, Steve Jobs introduced the iPod Nano, a smaller device which started at $199, still a higher price than similarly equipped players on the market. This $100 reduction in price from the iPod Proper (now called the classic) was enough to get people to scoop up these little players. Apple’s strategy worked and they soon owned the entire digital player market.

They still do, come to think of it.

Apple tried this once again with the iPad mini, and it was also met with some success. Though many panned the mini for being priced to high at $329, the ticker tape shows that a $170 reduction in price for a smaller item was enough to get people buying.

All Things D’s John Paczkowski points out that Apple CFO Peter Oppenheimer has even admitted this tactic in their earrings call.

In summary, Oppenheimer says Apple will take a lower profit margin on a product if they believe they can benefit in the long term.

Two analysts with J.P. Morgan believe Apple could take this “just low enough” tack to really stick it to Samsung.

“Currently Samsung dominates this segment ($200-500 price range) with 35+ percent market share,” write Gokul Hariharan and Mark Moskowitz with J.P. Morgan.

“We believe Apple could take 20-25 percent of this market in the next 12 months (from almost no market share currently), if it prices a lower-priced product at $350-400 levels.”

Marco Tabini with Macworld posits that the argument of “Apple needs a cheap phone to compete with Samsung” is one that falls flat, but still believes Apple could do well to offer a great phone at a lower price point to help compete with Samsung in other parts of the world.

“What Apple should really be after is a handset with features that have been designed to cater to a specific segment of the population without compromising those offered by its higher-priced counterpart,” says Tabini.

I don’t like the idea of a cheap plastic iPhone, nor do many other hardcore Apple gluttons; yet, it is true that Apple should do something to compete with Samsung and I think a mid-range or cheap-ish phone is the way to go.

I like where everyone’s heads are.

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