First numbers of the first quarter in Bloodbath year 2: Apple reports stunning quarter

So its that time, the quarterly results are coming in. We have actually heard from HTC and RIM already (their quarter ended in February and reported in March) and SonyEricsson also posted results. But I have been very rushed, exceptional travel, and those were not that sensational results one way or another, I will cover them in compendium blog article next week. The first massive news, and a true salvo fired by a big gun of smartphones came when Apple reported two days ago.

The stories in the press are on par with Apple's overall success - not only celebrating the biggest profits in tech (by a mile) but now they've passed Nokia in revenues for the quarter, becoming legitimately considered the biggest telecoms equipment vendor/handset maker in the world. The pundits are falling over themselves to note every point - even where that point is not strictly merited (that Apple managed to double iPhone sales in just one year would be astonishing in almost any other 100 Billion dollar industry - except that the smartphone market almost doubled itself, just last year. And Apple was nowhere near the strongest growing company over the past 12 months). And then on Bloomberg I saw two pundits blabber on the completely predictable but utterly false claims that 'Apple invented the smartphone' and 'Apple invented the app store' etc. Well, who told you first (back in 2007) when I wrote my essay of the two eras in mobile telecoms, the era Before the iPhone, and the era After the iPhone. I warned you that the history books would end up crediting Apple for much that actually went before it...

So, on this blog we focus, as we always do, on the real facts and the real numbers. The relevant numbers. We are not a blog about investing or financial analysis, so we totally ignore share prices and market evaluations. We only note whether some rivals are profitable or not - an unprofitable competitor is soon a dead competitor witness Palm last year haha - as on this blog we look at the market shares especially on the major platforms. That is of interest to primary readers of this blog, those who want to make money in mobile as a service provider, application developer, etc.

And with that, a bit of context. I am modelling Q1 to have grown about 5% from Q4, so am estimating the January-March quarter sold 104 million smartphones globally. A year ago the same period the growth rate was 6%, so that is roughly reasonable. We have also heard from some major players that their numbers have grown from Q4 (Android, Apple, RIM) while others report flat sales (SonyEricsson) or decline (HTC and just now Nokia yesterday). And thus, until we have more data to recalibrate that number, if you are in the smartphones races in Q1 of 2011 and you grew by 5% you actually weren't doing anything 'good' - you were simply keeping up with the industry growth rate.

APPLE SETS THE BAR, VERY VERY HIGH

And onto Apple. What a quarter! The numbers: from 16.2 Million iPhones in the Christmas quarter, they now sold 18.65 Million. That is a growth rate of 15% in one quarter (equivalent to 75% annual growth rate, when compounded). Even with the smartphone market growing at 5%, Apple boosted that with another 10%. Very very strong growth! In terms of market share, this is a new peak for Apple, they are now at 18% market share for the quarter.

And immediately the earned added accolades. The iPhone is the most expensive mass market smartphone. As a 'line' of smartphones (with only one model) vs any of its Top 10 rivals, Apple's average price is by far the highest, almost twice that of most rivals and over three times that of the biggest smartphone maker, Nokia. So if a market expands - and one would expect that means the more wealthy potential customers have already bought one, and it is ever less wealthy buyers who join the market - you would expect low-cost devices to run away with the market shares. The guy making the most expensive device should not be able to grow the fastest...

VZ FX

And while yes, there was some budding price war steps by say AT&T to protect its customers from departing to Verizon etc, then overall, Apple has held a very strong line on its pricing. This astonishing growth rate - yes three times the rate of the industry growth - was done 'fair and square' without gimmicks of any kind. Not even the 'White iPhone'..  (can you imagine how many millions more iPhones Apple could sell if it really wanted to, if it spread its product line, or at least did a couple of colors haha)

Where was it? Well, we know 2.2 million were new customers activated over at Verizon. And against most pundits who predicted AT&T would suffer devastatingly because of the VZ iPhone, the numbers are in from both carriers. AT&T activated 3.6 million new iPhones. (who told you? Remember my projection of full year 2011 unit sales split AT&T vs Verizon was 15M vs 10M - and these Q1 numbers are almost dead-on for that result haha..)

But note, 2.2 million won't cover the growth for Apple. And regular readers of this blog know well where the big Apple bonanza for iPhones is nowadays in Q1. Like I said in my Bloodbath 2 Preview, expect Apple to do well in Q1 because of the Chinese New Year and its gift-giving. Now we have heard Apple's Tim Cook say in public that yes, China was exceptionally strong in Q1.. (I am once again finally vindicated, even after all those who came here to post angry comments at me, haha - and to my loyal readers, you guys know, most of the stuff I write here is 'reporting' stuff that others do, others say, others invent. It is rare for me to have the privilege of honestly 'scooping' a story. While often I have the honor of celebrating innovations and inventions you may not have heard of, those are never my discoveries. They were already in the news by the time I heard of them, or at least talked about at conferences, etc. This was a rare honest 'scoop' where I was literally the world's first to discover that phenomenon. If you read this blog in April 2010, you were among the first thousand or two thousand people in the world to discover the real reason why Apple's Q1 of 2010 was so astonishingly above all estimates. And with that, you would also not have been surprised by this 'amazingly' strong Q1 now in 2011 - like most 'analysts' and pundits clearly were, who expected far worse iPhone sales in Q1. It is cool to discover something like that, and now with blogging (and Twitter), it is possible for me to share when I occasionally make one such discovery..)

And to belabor that USA point further, lets be very clear with the math.. Verizon iPhones did sell 2.2 million units. AT&T did sell 3.6 million units. Add them together, we're at 5.8 million for total USA sales of iPhones. Now lets go back to last year, same time. AT&T alone sold 2.7 million iPhones in Q1 - and that was 31% of all iPhones sold worldwide. Now out of this year Q1, Apple's 18.65 million iPhones. Have a guess what percentage is 5.8 million total USA sales? YES. 31% !!!!!

What Verizon iPhones did, for the most part, were simply to fulfill the natural US market demand for iPhones, not grow it. AT&T was totally on track to sell about 5.8 million iPhones, based on Q3 2010 projections (until the Verizon iPhone was confirmed). Apple did not grow the US market with the CDMA version. They allocated the market more evenly between AT&T and VZ. But that level of sales - 5.8 million - is very close to what AT&T would have done all by itself if there was no Verizon iPhone. The math is crystal-clear on this.

So yes, the real growth was the China New Year's gift-giving, as articulated by Tim Cook in the Apple quarterly results call.

Now, with all that happy back-slapping of my previous blog postings, haha.. I obviously have gotten it also wrong with Apple, time and again. I keep saying 'the iPhone is too expensive' and keep forecasting that Apple sales have to suffer in comparison to rivals (and keep arguing also for cheaper iPhone models, like they do with the iPods, Macs etc) but Apple keeps making a fool of me with this point. Their appeal is far far stronger than what my 20 year career in tech and an MBA/econometric training would allow to believe. Apple seems to deliberately set out to destroy the price theory of marketing (from economics theory of supply and demand) by which if you lower your price, you sell more, and if you raise your price, you sell less. Most economic thinking and most businesses are founded on this principle. Apple is consistently proving it need not be true (if your brand is gold plated latinum, to borrow a Ferengi measure of wealth)

So in addition to stellar Mac sales and fantastic revenues and profits and the unmet demand of iPads - I am not a tablet PC expert but can you imagine how demoralizing that is to the 100 or so makers of announced tablets this year.. Apple could not satisfy iPad demand, haha.. I'd hate to be a competitor to Apple. Please Apple don't ever get into mobile industry consulting and punditry, ok? And yes that if including not just Mac and iPads but smartphones as 'real computers' - as all major PC makers now accept (and adding the Touch), Apple is now the world's biggest computer maker too - this was a perfect 10 out of 10 quarter for Apple's iconic 'jesusphone' (ok, now I have officially used that term, for the first time ever, haha)

If Apple manages to average growing 15% for the remaining 3 quarters (likely to be far less in the next quarter but then to have a monster 3rd quarter if the new iPhone is out around June/July) - Apple would end the year selling ..exactly 28 million iPhones in a quarter. And would you know it.. (I love it when the math comes so elegantly together) ... that is exaftly what Nokia sold smartphones in Q4 of 2010. Apple are certain to pass Nokia this year and take the mantle for the worlds' biggest smartphone maker. This year! In barely more than 4 years from launch! Who knew? Not me! I was vehemently against that ever being conceivable, not plausible, far less likely for Apple iPhones to ever outsell Nokia smartphones (as long as the iPhone did only one model, and had such a high price)... I have said countless times here on this blog, that was utter hogwash. Never in a million years. Haha, so what do I know.

HOW SUSTAINABLE FOR 2011

Now, a little bit of realism still into all this Apple-hysteria. Any brand can have a hit quarter, a hit product and it can go sour real fast (anyone recall a hit phone called the Razr by some company called Motorola who was recently broken up because it was so badly loss-making?). There are rumors of the iPhone 5 or whatever should be the 'summer of 2011' iPhone model, of possibly being delayed. That would be a bad sign, and represent a huge loss to Apple's rivals in this year of the Nokia-Microsoft 50 million smartphone customer give-away bonanza. Apple has to be in that race, as more than with any other brand, Apple relies on its loyalty, and Apple cannot stumble this year, not in 2011. That kind of utter strategic market share give-away blunder by a market leader (I am talking of Nokia blunder, not Apple obviously) doesn't happen in most executives' lifetimes in most industries. This is the once-in-a-century moment for Apple (and RIM, Samsung, HTC etc)

Of those gains. The CDMA iPhone (Verizon iPhone) is obviously now in the normal mix of phones for Apple. What Apple needs is to quickly roll out deals with other major CDMA carriers in the world, KDDI Japan, China Telecom, Reliance India, etc. But this was, as I explained, a marginal play for Apple and I argued that for all the effort it took, it would have been close to as much R&D effort as to do the 'Nano' iPhone that I have often advocated here - which would have grown iPhone sales by at least 50%, possivbly as much as 100% (while commanding a similar, if not better, profit margin as the current iPhone). So Apple's "Verizon" effect is not sustainable iPhone growth on a global market. Most of the world is on GSM and even in those countries where CDMA still exists (most countries that had it, have already extinguished CDMA completely) it is not with the biggest carrier.

The China effect comes once per year, ie in Q1. That came and went. It will not sustain Apple in Q2. We will now see an even more pronounced drop in iPhone 4 sales in Q2, and Apple desperately needs the next iPhone 5 launched by late June, to rescue some respectable Q2 sales numbers. It is most likely going to mean a sequential decline in unit sales from Q1 to Q2, modest if we have the new iPhone by the last week of June, but dramatic crash of unit sales (down from 18.6 million to perhaps 10-12 million even) if the iPhone 5 is delayed into July.

The 'White iPhone' has been confirmed by some Apple sources. I think if it is now the iPhone 4 model (the one-year-old model) then I think it is a slap in the face of loyal Apple customers, it is almost a sign of being stupid, for making the ultimate dumb purchase, buying the white iPhone only weeks before the next iPhone is released, haha. I don't mean it would be stupid for Apple fans to buy it, I do think that many Apple fans and loyalists who know the new iPhone 5 is due, if the White iPhone is the last gasp for the dying iPhone 4 model, it could well be thus tainted, as the "moron's iPhone". It should have been released for Christmas or latest when the Verizon iPhone came out. Now is a bad time to launch it. I am afraid, that it could even gain a reputation of a 'mark of stupidity' where future white iPhones could carry the same stigma. This is not the best time to do color-tinkering, and definitely not in lieu (or seen to be in lieu) of a new June iPhone 5 model.

HERE TOMI GOES AGAIN..

But much as I know how many times I have been found to have been wrong saying so, I will keep saying it, until I am proven right. The time will come, when one iPhone model, costing (without subsidy of 2 year contract) about 600 dollars - is FAR too expensive for a mass market phone. Come on, about a quarter of the planet's population lives on less than that as their total income - per year!

Soon half of all mobile phones sold (1.4B market size) will be smartphones. At that time it will be 700 million smartphones sold per year (probably next year by the way). There is no way, no F'ing way, that 700 million people annually, can afford a premium smartphone costing more than a DVD player, more than most flat screen TVs and about on par with the cost of a new PC. We will hit a point, and that will come withing months, not years, where the 600 dollar market for super-premium smartphones will be saturated, and Apple will find it sells remarkably well in that part of the market which has stopped growing. This will mean iPhone sales growth will stall.

And I love Apple. I do want Apple to be the beacon for this industry throughout this decade, and for that, we all know it in our bones, they have to come out with a cheaper 'nano' model of the iPhone. And again, because of the once-in-a-consultant's-career situation - of moronic Nokia-Microsoft 'lets hand all our most profitable customers to our rivals on a platter' lunacy - this chance comes only once, in the year 2011. The longer Apple waits with its Nano, the more it loses those customers to Samsung, HTC, RIM, SonyEricsson, ZTE, Huawei, Sharp, Motorola, etc etc etc.

Apple has had a magnificent Q1. Now Q2 will be less glamorous, even more so when contrasted with spectacular Q1. Remember, a drop in Q2 sales for the iPhone is 'normal' as the old model is shortly to be replaced. That is not "bad news". The new iPhone 5 (whatever it will be called iPhone 4G or whatever) will of course be the hit of the month and following quarter, whenever it is launched, and will sell far more than the current line did. What we need for Apple to turn Q1 of 2011, into a world-beating full-year 2011, is that split of the iPhone product line, and introduce two new models including their Nano iPhone, hopefully already this summer. Then Apple will be utterly unbeatable and will grow faster than 15% per quarter and end this year selling over 100 million iPhones...

So there, a bit rambling, I am sorry, I am rushing these as I have been travelling heavily, so I don't have the usual amount of time to edit it down. But I know there are readers and followers who want to see my thinking. Apple? 10 out of 10. Perfect score. As good as one can possibly imagine and perfect start for Q1 of Bloodbath Year 2, Electric Boogaloo. More analysis coming shortly, Nokia is next..

Comments

[Michael]

Tomi:
Excellent analysis as usual. Two things to consider...

1. I'm not sure I agree with your analysis of the US market. If Verizon had not come on board, I believe it's possible that a sizable percentage of the 2.2 million VZW accounts would have gone to another handset. That's why the Apple lawsuit against Samsung.

2. It now rumored that the 2011 iPhone debut will be late 3rd quarter, not early 3rd quarter. If true, Apple is taking a very big risk.

[Matt Johnston]

Great article - lots of work into it - but (aha!) I think I'd downplay the risks you describe. Remember that iphone sales are still decent in Q2 every year even though we all knew a new one comes out at the end of the quarter. Heck - there are people still buying the 3GS model now. And the reason for this is software - not hardware. Apple will likely release iOS5 to devs in June and we'll see it with the public shortly after. Software is what drives the iphone and we can only speculate what will be the new killer feature.

An advantage they have is their strong brand. Though the only Android tablet on sale locally is the Galaxy Tab, I know no-one with one. And we've got another 99 tablet makers in the wings as well? That Market will be a bloodbath. It's not going to be pretty. Android itself is already confusing the customer by making it's only differentiating feature the presence of Flash. I won't even go into the build quality of the devices.

Keep up the good work.

[khim]

When people will learn? Apple is expediencies classic "disruption from below". They have NO hope to fight for the low-end and even if they will play for the middle of of the pyramid with iPhone Nano... it'll be risky. So they concentrate on the very high-end - where the profits are.

This is good decision: if they'll try to compete on price they'll be bankrupt in a few years time. They just don't know how to play these games. If they'll keep the top of the pyramid - they'll be profitable for ten years or more (albeit with eventually shrinking market share in a few years) and will have a hope to open some new lucrative market.

[Bob]

good analysis, I expect AT&T IPhone sales to be massively hit this quarter when more people know that IPhone is on verizon

[kevin]

Tomi,

I, like Piot and Michael, don't think Apple would've had 5.8m US iPhone activations without VZW. AT&T has reported the following for iPhone activations, beginning with CY 3Q08: 2.4m, 1.9, 1.6, 2.4, 3.2, 3.1, 2.7, 3.2, 5.2, 4.1, and 3.6 (+2.2 VZW) in this last quarter. The general pattern is a big boost in launch quarter (or qtr immediately following since June launches are very late in quarter), followed by declines in Dec and Mar quarters. Without VZW, Apple may have had just 3.7-3.8m units activated in the US (due to lowered to $49 3GS). Plus, all the VZW units were higher-priced iPhone 4s (not cheaper 3GS), and that's what moved the ASP upward by ~$20.

You used percentages to defend your point but that's not valid. The US percentage of all iPhone sales has ranged from 25% to 46%.since 3Q08. Since the launch of iPhone 4, it had declined from 38% (Jun08) to 37% to 25% (Dec08), and likely would've gone down even more in this last quarter without VZW.

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