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Time for Apple to Face Reality

Wednesday - 5/8/2013, 5:45am  ET

It's been a year since Verizon and AT&T went on record as fans of Nokia's then-new Lumia 920, running Microsoft's new Windows Phone OS. Why would the two undisputed leaders in mobile-phone sales, both of which had already profited handsomely from their respective relationships with Apple , go on record as rooting for the "other guy"? Because at the time, Apple could call the shots, even to wireless leaders like Verizon and AT&T -- and it did.

Now, fast-forward a year to the drastically changed mobile computing world of today. Samsung is the No. 1 mobile-phone company in the world, there are more smartphone alternatives for consumers to choose from than ever before, and Apple is still trying to dictate iPhone subsidy specs to wireless carriers around the world.

The issue
Domestically, things haven't changed much for Apple; it still rules the smartphone roost, and U.S. consumers benefit by getting iPhones for a fraction of the non-subsidized price. While iPhone sales jumped to 37.4 million units last quarter, the 6.5% increase that represented from the year-ago period was woefully shy of the 36% jump in overall smartphone sales, and it was the smallest gain since the iPhone was introduced.

Even more concerning for iFans is the lack of international smartphone growth, and it's in the overseas markets that changes need to be made in Apple's overly confident attitude. There are literally billions of potential smartphone customers worldwide who either don't have the benefit of smartphone subsidies or have wireless carriers unwilling to kowtow to Apple's demands. The most notable carrier unwilling to bend also happens to be the largest in the world: China Mobile .

China Mobile's recent partnership with Nokia should be a model for Apple of how things are supposed to work with international carriers. When Nokia introduced its Chinese market-ready Lumia, the two were able to work out a deal in which China Mobile would subsidize virtually the entire cost, along with the usual data plan contract. Why was "little" Nokia able to work out a subsidy deal with China Mobile for a phone that retails for about $740? The negotiations weren't made public, of course, but it stands to reason that Nokia needed to bend a bit to make the China Mobile deal a reality, and that's the lesson Apple needs to learn to get back on the growth path.

While it is the largest, China Mobile is hardly the only international carrier unwilling to play by Apple's rules. According to an analyst with Asymco, Apple has about 240 carriers worldwide offering its stable of iPhones, and less than a dozen of those have been added in the past three years. By comparison, Samsung has agreements with about 840 carriers around the world.

What now?
The Catch-22 for Apple is finding a way to build productive relationships with international wireless carriers unwilling to play by CEO Tim Cook's rules, as it faces rapidly declining margins. Apple's gross margin in its recently completed fiscal Q2 was 37.5%, down from a whopping 47.4% in the year-ago period. That, along with a perceived lack of innovation and delays in introducing new products, are largely to blame for Apple's recent slide in share price.

As Samsung is demonstrating, there's a lot to be said for sales volume, and there's only one way to achieve that on a global basis: increase the number of worldwide carriers. It's time Apple recognizes it can't call the shots the way it once did -- not on the international stage. The market's changed, and it's time for Apple to set the ego aside and change, too. The alternative is to continue missing out on billions of potential customers.

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This article was originally published as Time for Apple to Face Realityon Fool.com

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