Apple iPhone Lull: Screw-up or growing pains?

Henry Blodget at BusinessInsider.com wrote “Okay, Can We All Now Please Agree That Apple Screwed Up With The iPhone?” in response to Apple’s unusually lackluster quarterly earnings report for Q3 FY12. He makes some good points, but he’s missing a huge factor regarding iPhone’s release schedule and how it’s changed over time: the Verizon iPhone.

He cites two contributing factors that hurt iPhone sales this year. I’ll just quote him:

First, Apple switched (or delayed, depending on who you listen to) the launch of that year’s new iPhone to the fall instead of the June releases it had had in prior years. This “delay” took many people by surprise, and it also kept the then-current version of the iPhone, the iPhone 4, on the shelves for three months longer than people had expected. This contributed to a sharp fall-off in iPhone sales in the summer months, as the “4” began to feel stale and customers waited for the new version of the iPhone, which almost everyone assumed would be the “iPhone 5.”

Second, when Apple finally released the new version of the iPhone, it was not the iPhone 5–it was the iPhone 4S, which didn’t look or feel much different than the iPhone 4. Although the iPhone 4S was a great phone and sold very well initially, it was soon leap-frogged in some respects by new, bigger phones from Samsung and others. And now, with Samsung’s very-well received Galaxy S3 out there, the current iPhone looks decidedly small and old. So much so that the “air pocket” in iPhone sales appears to have started one full quarter early this year and will therefore wallop both the June quarter and September quarter, while customers wait for the iPhone 5.

Summary

It’s possible that Apple screwed up with the iPhone, but probably not in the ways Blodget describes. At the very least, there are some factors he left out of his analysis. If Apple did screw up, it was by making a calculated decision to introduce the iPhone to a new US market on Verizon’s network. It’s obvious that Apple saw Verizon as an opportunity to open up the iPhone market in the US, and they took the opportunity. We don’t know the details of either the AT&T or Verizon contract, so it’s tough to know for sure what Apple was working with when they decided to release the Verizon iPhone 4 in February 2011, four months before the next “standard” iPhone release date.

I’ve already written about why the 4S release was expected and appropriate. I won’t spend any more time on that. ¹

Apple delayed the 4S release until the fall instead of the summer

Here are the iPhone release dates so far ²³:

iPhone – June 29, 2007
iPhone 3G – July 11, 2008
iPhone 3GS – June 19, 2009
iPhone 4 – June 24, 2010
iPhone 4S – October 14, 2011

Apple was remarkably consistent with release dates until the 4S. What happened? I actually kind of cheated above – there’s a release I didn’t include:

iPhone 4 – June 24, 2010
Verizon iPhone 4 – February 10, 2011
iPhone 4S – October 14, 2011

Apple needed to move out from under the exclusive AT&T contract, and open up the iPhone market in the US. This “How Apple’s Revenue Stacks Up” chart shows pretty flat-looking iPhone revenue from late-2010 into mid-2011. I couldn’t find numbers Verizon vs. AT&T iPhone unit sales, but my guess is that AT&T iPhone sales tailed off in early 2011, and were overtaken by Verizon iPhone sales through the first half of 2011.

It seems like Apple’s exclusive AT&T contract was still in place when the original iPhone 4 launched in 2010, delaying Apple’s move to Verizon until February 2011. Then they could start selling on Verizon immediately or wait for the iPhone 4S later in the year. They chose to sell on Verizon immediately rather than wait.

The downside to this decision was it left Apple in a bit of a pickle: their normal release cycle would put the iPhone 4S release around June 20, 2011 – only four months after the Verizon iPhone 4 was released. That would probably make the Verizon iPhone 4 adopters pretty angry, so they delayed the 4S until October ⁴.

In this context, it’s obvious to me that Apple made a calculated business decision: in order to expand its US footprint by adding new carriers, they released the Verizon iPhone 4 in February 2011 – only a few months before the typical iPhone release window. Then they bumped the 4S release until October in order to avoid angering customers who just bought a shiny new Verizon iPhone 4. Apple knows first-hand how angry people get if they release a new gadget, and then immediately undercut themselves (either on price, or by releasing another new gadget).

I think Apple wants to release iPhones at the end of Q3 or beginning of Q4 (fiscal), but they had to slip the 4S to keep new Verizon adopters happy. The 4S was released in October 2011, and I expect the iPhone 5 to be released in September 2012 (or sooner). The 5S will probably come earlier (August) and so on until the iPhone is back in the late-June/early-July sweet spot that Apple has used in the past.

Apple released the 4S instead of the 5

This is pretty simple, actually, and I’ve written before about how Apple cycles hardware and software updates to remain competitive while continuing to produce the best products. ⁵ I think Apple has a pretty clear pattern of this.

iPads so far:

iPad
iPad 2 (body changed significantly, much faster processor, different look and feel, smart cover, etc.)
“New” iPad (pretty much the same form factor, added Retina, a little speedier, not much else)

And they’ve followed a similar pattern with MacBook Pros.

(First gen) Original MacBook Pro – 2006 (spec bumps followed)
(Second gen with big change) Unibody MacBook Pro – 2008
(Spec bumps throughout 2009 before…) Big spec bump on MacBook Pro – 2010
(Third major iteration) MacBook Pro with Retina, SSD, thinner form factor – 2012

My point is that there really wasn’t any reason to think the 4S would be a 5. That’s just not how Apple does things. 2011 was a year for big software updates (including Siri) and a spec bump for the iPhone 4 (to the 4S). I also think releasing the iPhone 5 right after the Verizon iPhone 4 would have been a mistake. The way Apple did it, the Verizon iPhone 4 users could think, “Well, the 4S looks pretty neat, but I’ll just wait for the 5.” rather than, “WHAT?! I just bought the iPhone 4 and now it looks obsolete?” Meanwhile, a lot of new iPhone users bought the 4S or upgraded ⁶, so 4S sales were still strong. The iPhone 5 will sell like hotcakes, and eventually Apple will get back to its normal iPhone release cycle. I don’t think they have screwed up with the iPhone, they’re just experiencing growing pains as they seek greater market penetration in the US.

AT&T-Mobile isn’t THAT scary

Karl Smith of Modeled Behavior wrote a quick post about why he isn’t afraid of the big bad AT&T and T-Mobile merger. He quotes Annie Lowery on the merger, saying that AT&T-Mobile will have a 42% market share in the US. A few of my own thoughts on this:

Market share is not a very good metric for identifying anti-competitive behavior (which is what matters when looking for anti-trust violations). Karl mentions in the post’s title that it’s not a “per se” offense, and he’s right. Simply having a large market share is not a per se Sherman violation (I am inferring that’s what he’s talking about – I could be wrong). It seems a little intimidating to have one big company with 42% market share, but that’s just one data point that doesn’t tell us much in a vacuum.
I think this may just be a normal part of the industry lifecycle as it pertains to the number of firms in an industry. As industries mature, the number of firms typically collapses as the product becomes commoditized. With about 300 million wireless customers in the US, it seems safe to say that wireless is becoming a commodity and it is logical that the number of firms competing would be shrinking. There’s simply not room for too many firms to compete and maintain profitability.

The one thing that makes me a tiny bit skiddish here is that wireless bandwidth is still somewhat scarce thanks to the wireless spectrum limitations. As long as the wireless bandwidth is even a little scarce, there’s “extra” profit to be made, and having too few players in the industry could mean higher prices. But I don’t think we’re to the “too few players” point yet, and I think the higher price already exists since resource scarcity already exists. I’m not actually sure how scarce the bandwidth is, but Martin Cooper (among others) has been calling for more bandwidth to be dedicated for internet access, so wireless access could still use fatter wireless tubes.

Anyway, here’s what the generic industry lifecycle looks like, and I’ve drawn the number of firms in the industry in red. Typically, the number of firms spikes and then eventually falls pretty quickly as firms consolidate in response to commoditization. How these curves look will vary by industry, but my guess is that the number of firms in wireless telecom in consolidating earlier than what I show in this graph (so the red line would scrunch to the left a bit, probably so the peak is in the mid-to-late portion of the “growth” phase). Seem like wireless telecom is into “maturity” phase* although there’s still some innovating going on (LTE, 4G, etc.).

*That’s not to say that handsets and other complementary technologies aren’t still growing. But wireless telecom seems to more or less be settled into moving data around the airwaves and is simply trying to find faster ways to do it.

Hey, I was just about to enforce that! How Arizona forced the federal government to do something about illegal immigration… sort of.

The Obama Administration is filing suit against Arizona for its new illegal immigration law. As far as I can tell from skimming the Arizona State Senate Bill, the purpose of the bill is to enforce the existing federal immigration laws. So, the “Arizona immigration law” is really just a declaration by Arizona as to how it will enforce federal immigration laws.

Ultimately, this means three things: First, the Arizona legislature does not feel that the federal government is doing an adequate job of enforcing its own immigration laws; Second, Arizona has determined that it should do its best to enforce the federal immigration laws within the state; Third, the federal government, instead of enforcing its own immigration laws, will sue Arizona for trying to enforce the federal immigration laws.

The issue has been hot and cold for many years now, but no progress has really been made in all that time. My guess was that Arizona had identified illegal immigration as a real problem, but that the problem was too expensive to fix on its own. Also, Arizona’s border is also the US border, so they figured the US should kick in to help protect it.

Here’s a summary of the bizarre pieces of this situation:

The US Constitution gives Congress the authority to make laws.
Article I, Section 8 – Powers of Congress: “To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States…”
Congress has made laws regarding immigration and naturalization.
Here is a good summary of Immigration Law from a 2006 paper from the Congressional Budget Office.
The Federal Government has even created an agency – the CBP – to enforce those laws.
CBP Wikipedia Page
Specifically, the President is tasked with taking care that the laws be faithfully executed.
Article II, Section 3 – State of the Union, Convening Congress: “…he shall take Care that the Laws be faithfully executed…”
The Laws are not being executed (either by the CBP or the President).
This is mostly anecdotal, but I think it can be implicitly confirmed by the general public consensus that something needs to be done about illegal immigration. The debates over the past several years have focused on what to do about it, not on whether it’s a problem.
The US Constitution says that the States’ judges are bound by the US Constitution and federal laws.
Article VI – Debts, Supremacy, Oaths: “This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” (If the States were NOT to enforce immigration Federal laws, I assume it would be stated in Article I, Section 10 – Power prohibited to the States. There is no such statement in Article I, Section 10.)
Arizona passed a law whose stated intent is to enforce federal immigration law as completely as possible.
Arizona HB2162: “No official or agency of this state or a county, city, town or other political subdivision of this state may limit or restrict the enforcement of federal immigration laws to less than the full extent permitted by federal law.”
The Federal Government, which is not enforcing the immigration laws as it has been tasked to do, is suing Arizona for passing a law stating that it will enforce the federal law as completely as possible.

When the story about the Arizona immigration law first hit the mainstream, I immediately suspected it was an attempt to goad the federal government into action on the illegal immigration issue:

@DanielPAnderson said: “@JoshDoody I’m curious as to what you think about what is happening in Arizona with regards to the immigration bill?”
I replied (Part 1, Part 2): “I don’t know much about it. My gut says illegal immigration is a prob. Fed isn’t dealing with it. Border states are disproportionately affected by the issue and they’re mad. I think they may be trying to goad fed into action.”

Arizona was basically saying, “Well, we tried doing everything through diplomatic channels and several consecutive presidential administrations have ignored us, so we’re going to try something a little more direct to see if we can get some action out of the federal government.” I don’t think they anticipated this kind of action, but it isn’t necessarily a bad result for them. If the federal government is going to sue Arizona for its new immigration law, it should also be willing to finally do something about the issue.