iPhone 5C: Deepening the conversion

Earlier this month, a report from AllThingsD compared first-time smart phone buyers versus seasoned buyers, across phone makers including Apple and Samsung.

This picture is the key result:

It shows that iPhone is attracting close to 50% buyers among those who have owned a smart phone previously, a comfortable leading position. But among the first-time smart phone buyers, not so much. The reporter put it in a rather negative light. We think it's not so bad.

Today, a CIRP report shows that 20% of iPhone users switched from Android phone users, whereas only 7% of Samsung phone buyers switched from iPhone. This helps to explain the picture above: Apple is very good at converting experienced smart phone users who want and can afford a better phone.

Given the proliferation of Android phones, which has been pushed by makers from Samsung to HTC to LG to Huawei to Lenovo to Xiaomi and others at cost or below cost, what would be the best strategy for Apple to deepen its conversion?

Is it better to use the older versions of iPhone, or is it at the point that Apple can do better with a new lower-cost iPhone? The answer is probably the latter.

Ever since AllThingD broke the "news" on August 10 that Apple is going to announce both iPhone 5S and iPhone 5C on Sept. 10, 2013, the rumor has been widely repeated and the expectation has set in. Today, Wall Street Journal claimed to have confirm it. If this is true, Apple has clearly decided that a lower-cost new iPhone is the way to deepen the conversion. This is both timely and an important strategic departure. We can see the following advantages of launching a new and lower-cost iPhone.

1. iPhone 5C would work hand-in-hand with the strategy of partnering with China Mobile.

2. It creates a high-end destination point for the group of low-budget users who cannot afford iPhone 5 or iPhone 5S, but would like to have the iOS experience. This is probably based on the recognition that there emerges two broad group of smart phone users: those at the high end and those who are more cost sensitive. Apple wants to be the high-end destination for both groups.

3. iPhone 5C is using the iPhone 5 spec, and newer technologies than iPhone 4. This helps to compete with other cheap phones that have newer form factors and technologies.

4. Apple can better control the costs with a new design. And possibly more importantly the new design allows a substantial differentiation from the flag-ship design, so that it serves to extend the iPhone brand but not cheapen it.

5. With this, Apple can continue to enjoy saving part of the education costs for first-time users and keep a healthy margin for its iconic device, extending the brand as well as the iOS ecosystem.

The media are too focused on market shares and seldom ask if a bigger market share makes sense at all if all it does is making sales but not profits. With the iPhone 5C out soon, it seems what competitors have done at the low-end is little more than preparing an educated customer base for Apple to convert.

Could it be that simple? We'll just have to wait and see.

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Here are some survey results since the new iPhones were launched.

More iPhone buyers switching from Android this year than in 2012

Obama may not get Dual Mandate

Obama's appointment for the next Fed chair has important implications for the market and the economy. Looks like it's now down to between Larry Summers and Janet Yellen. I hope he is wise enough to pick Yellen, but he may not. And that could be because he doesn't get what the "dual mandate" is.

The Fed's dual mandate is maximum employment and stable prices. Note it's "stable prices", not "no inflation." If you listen to what Obama said in the NYT interview:

 MR. OBAMA: And what I’m looking for is somebody who understands the Fed has a dual mandate, that that’s not just lip service; that it is very important to keep inflation in check, to keep our dollar sound, and to ensure stability in the markets. But the idea is not just to promote those things in the abstract. The idea is to promote those things in service of the lives of ordinary Americans getting better.

And when unemployment is still too high, and long-term unemployment is still too high, and there’s still weak demand in a lot of industries, I want a Fed chairman that can step back and look at that objectively and say, let’s make sure that we’re growing the economy, but let’s also keep an eye on inflation, and if it starts heating up, if the markets start frothing up, let’s make sure that we’re not creating new bubbles.

New bubbles? Right now the risk is dis-inflation or even deflation, and he is focusing on high inflation. Does he know that deflation is a much bigger threat than inflation? Does he know price stability means fighting against both high inflation and low inflation to maintain a stable inflation target?

Mr.Summers doesn't have a very good record in terms of forecasting the economy and in terms of economic policies. He is in the same camp as Alan Greenspan and Robert Rubin. He was too weak in advocating for a large enough stimulus to fight economy slump from the financial crisis. His credential is on the fiscal side. Why does the White House think he can do a good job in conducting monetary policy?

This is based on analyzing the words, published words. I'm glad to read NYT's take:

That is nonsense. Nothing that has occurred in the past week changes the fact that no one else can match Janet Yellen’s combination of academic credentials and policy-making experience. And no one ever confirmed to the job has come to it with as deep a grounding in both the theory and practice of monetary and regulatory policy as Ms. Yellen would bring.

......

In 1998, Mr. Rubin and Mr. Summers opposed Brooksley Born, then the chairwoman of the Commodity Futures Trading Commission, for correctly calling for the regulation of derivatives; in 2009, Mr. Summers squelched the sound recommendation of Christina Romer, then an economic adviser to Mr. Obama, for a larger stimulus. In the first Obama term, Mr. Geithner clashed unhelpfully with Sheila Bair, then the chairwoman of the Federal Deposit Insurance Corporation, and with Elizabeth Warren, then the chairwoman of the Congressional panel overseeing the bailouts.

Apple vs Samsung: Beware what you read from faulty reports

AppleInsider has a really interesting article exposing faulty reporting including CNBC, Forbes, WSJ,... about the profitability of Apple vs Samsung.

Samsung Electronics has not dethroned Apple, Inc. in mobile profits

What's causing this? I think it's probably that it's a new fashion to tilt to the negative side when the stock price has been falling. These reporters like to pile on... Most readers probably just stay at the headline level. 

A year from now, the tilt could very well be on the other side, that's when we should be unloading the shares.  

iPhone is going to win

I went back to China for two weeks in June. I asked everyone I met what smart phone they're using if they have one. Almost all want iPhone. Apple enjoys unsurpassed brand power in China.

This article clearly demonstrates the impression I had.

On my return, the market was hit by Bernanke concerns. First Mr Obama indicated that Mr Bernanke is no longer welcome to stay at the Fed (just bad, very bad communication); then Mr B himself made it clear that he had second thoughts about the Fed's asset purchasing program. Market went haywire.

Along went AAPL. Analyst downgrades hit the stock one after another. So we got to pick up some more shares below $400.

The rumored multi-colored budget iPhone seems to make so much sense. It'll appeal not just to users in places like China, but also to youngsters throughout the developed worlds. Every high school kid aspires to have one, what better way to entice their parents to buy them one than the colorful lower-cost iPhone?

This one thing should jack up market share for Apple.

iWatch would be another winner. It'll displace a few gadgets out there.

Larger iPhone. The new iOS 7 factor. The huge R&D budget.

New iPad, iPad mini.

New Macs, MacBook.

iTV...... the smart chips that will be getting into all sorts of places and change our lives forever.

I don't know why the stock is selling at PE below 10. Is the company not making money, and more money?

Oh, maybe I do know. It's Fidelity Contrafund, stupid!

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This is a good take. I agree.

(7/23/2013)
FQ3 earnings out: 31.2 M iPhone sold versus 26 M expected. iPhone revenue increased 15% in the quarter! The iPhone franchise is alive and well. Average price is down as the demand for 4 and 4S were high.

Remember this is a quarter without new products.

And, surprisingly, iPhone is gaining market share in June.

Is iPhone the world's defining mobile device?

Analytical and political sins of Reinhart and Rogoff

I read Reinhart and Rogoff's book "This Time is Different..." Very good piece of empirical work.

As a graduate student, I also enjoyed the now classic textbook by Obstfeld and Rogoff when it was still in manuscript form. I learned that the Keynesian ideas were alive and well even with a rigorous micro-foundation supplied to it.

But I would agree that Reinhart and Rogoff did commit an analytical sin in their 2010 paper about growth and debt, that 90% debt-to-GDP is somehow a clear marker for dramatic slower growth. It turned out there was an Excel error and an unconventional weighting scheme that caused the result.

Paul Krugman has been merciless in criticizing Reinhart and Rogoff position regarding 90% debt level, mainly because their paper had provided the wrong intellectual support for austerity policies. At times like post financial crisis of 2008, economists have the responsibility to provide sound economic advice based on sound empirical and theoretical work. When you mis-led in a critical way, you've done so much more harm than in other times. This is not the usual academic discourse, it is political with immense economic consequences.

In their latest response, it looks to me they didn't really address the analytical and political sins pointed out by Krugman many times on his blog. The way I read it, Krugman never sees it as a personal matter, it has always been about policy response to the crisis.

When you've committed a coding error like that, what should you do? They should really go back and clear up the wrong messages that have been sent by economists and politicians based on their mis-leading result. They didn't do that. So the sins remain.

Of course, Reinhart and Rogoff are not the only ones to blame for claiming that 90% debt level is the alarming threshold. Commentators and politicians bear even more responsibilities seizing on this highly debated piece of sloppy work as "proof" that austerity was the right response to the crisis.

Don't fight the Fed

Ignore the typos, get the point, and don't fight the Washington Whale.

Is it really just that simple? A lot of hedge funds aren't getting the macro picture right and losing billions? It's quite plausible.

Driven to be stupid

This is just unbelievably stupid: 

Harvard's Niall Ferguson Apologizes for Keynes Remarks.

The guy has been wrong so many times about debt, about Keynes, about austerity..., yet he is so driven by his ego that he just has to prove to the world that he is indeed very very sincerely stupid. 

Ferguson's Epic Fail.

Awesome Failure of Some Well-known Economists including Lucas, Fama, Taylor.

Why does this thing matter? Well, it's really about who you should completely ignore despite profound-sounding words and impressive credentials he may be giving you regarding macro and investment. And who you should pay close attention to.

Ignore Martin Feldstein if you can. Ignore Charles Plosser and Richard Fisher even if you cannot.