March 26, 2014

Apple IWatch: What Will It Cost?

26 March, 2014

© 2014 J. M. Manness

The beauty of Apple’s (AAPL), from an investor’s point of view, is that they have, over the last fourteen years created new gadgets that have each become almost a necessity in our lives. For over a year now we have been hearing rumors of a forthcoming iWatch. We hear rumors of sapphire displays, curved displays, biometrics, health sensors, and more. While evidence mounts for some of these rumors, we are all unsure as to what it will bring, if it comes at all. For the investor, however, the specific features are less important than what this new product will contribute to the bottom line. In this article I will analyze what we can expect from price points. In a companion article I will see if we can come up with some idea as to the market for such a device. Samsung (OTC:SSNLF) has recently released its smartwatch, the Galaxy Gear that runs the Android operating system by Google (GOOG). It has a price of $299, which seems like a reasonable price to expect from Apple. Apple is famous for their high margins so let’s see if Apple can match that price given the margins they want. To do so, I have used the build of materials costs as estimated by IHS. The table shows the IHS figures for the iPhone 5s, and my estimates for correlating costs for the new iWatch. iWatch-cost-analysis

 A line by line discussion of the cost structure is given in a separate post.

Processor – A8w

One thing that should be discussed is the processor. I believe that a new processor is being developed to going to this product. I am calling it the A8w. The reason for this processor is that they need a processor which is powerful yet small and has very low power consumption. So this will be produced on the new 28 nm chip processing technology. The regular A8 will be for larger products so the A8w will be a much smaller cousin. In particular, the smaller chip Will have greatly reduced graphics processing systems built in. Additionally, it will be beneficial to have the chip running a 16-bit architecture so that Apple will need only one iOS code-base. (it will, of course, be only a subset of the full iOS.) To my mind, this is one very important reason that the iWatch is not yet out. It is waiting for a processor that is capable and power efficient and small enough for the application. This is one thing Apple does well (at least most of the time): note release things before the proper technology is available.

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Bottom line

As you can see, the total projected cost Will be quite a bit less than the iPhone. Figure I come up with is a total BOM cost of just $71. If we want the same gross margin for the iWatch as for the iPhone 5s (16 GB), then it can sell for as little as $249, fifty dollars less than the Galaxy Gear. Of course, this does not including the development costs which must be exorbitant. So perhaps they will stay with $299 anyway. Of course it maybe possible that there are other expenses that I have not anticipated. Still, this seems a reasonable estimate of what it will cost to build the new iWatch.

Conclusion

Apple’s stock price is stalled. Revenue growth has slowed significantly from earlier years, and many investors do not see Apple as a growth stock any longer. While many argue that Apple is undervalued even for current revenues and income, others see a danger of the iCompany losing even more ground to competition, if not in unit sales, then to decreasing margins. New devices are critical to the stock price. Outside of the leadership, no one knows for sure if an iWatch is in the works or not, and if so then what features or price structure it will have. Here I have shown at least that Apple could produce an iWatch at a competitive price and keep its high margins. A follow up post will cover just how many iWatches we could expect to see sold, and how much that would add to revenue. ===== Related Articles: Detailed line item description of iWatch costs Apple’s A8 — What It Will Be And Why It Matters ==== Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

March 25, 2014

Cost Analysis for iWatch – Details

There has been much speculation on the release of an iWatch. Here I show my analysis of possible costs. I start with data from iHS breakdown of the iPhone 5s costs, and go from there.

This section covers details of the costs, while a complete discussion is in the main article.

iWatch-cost-analysis We should start with the cost drivers going through them by number.

9 – NAND

The Gear has 4 GB memory, I see no reason why Apple’s watch should have anymore.

10 – DRAM

Apple can save here. The watch will not be performing large calculations not rendering large images or videos, so large amounts of DRAM would be superfluous.

11 – Display

Much smaller screen will be a lot cheaper.

12 – Processor

I am calling the processor for the iWatch the A8w. The reason for this, is that I believe the I watch will need the newer 28nm process.

13 – Cameras

A 2 MP camera should be sufficient for the iWatch. There is no need for any greater resolution since the user will have his iPhone with him.

14 – Wireless

The watch will not need to have cellular connectivity.

15 – Sensors

I am not sure if the watch will have touch ID fingerprint sensor or not. It is rumored to have several health sensors, But that remains to be seen.

16 – Communications

The iWatch needs to communicate with me iPhone to which is paired. Therefore it will need at least Bluetooth but neither GPS nor Wi-Fi etc. As in the iPhone.

The rest

The rest of the items pretty much speak for themselves smaller battery fewer electromechanical sensors and there will be no need for charger in the box contents.

A complete analysis of the price structure and more details of the processor are here.

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March 13, 2014

Apple – Absurd Report Attacks Tim Cook

Preliminary post

In my article for Seeking Alpha, I outline all the fallacies of a recent report by Global Equities that called for the firing of Apple CEO Tim Cook. Virtually every point they made was at best forced, and at worst totally false.

One point that I make is that is is extremely contrived for them to take Apple’s Sept. 2012 high of $702 as the starting point for all analysis. Here I present several charts that illustrate my point. (I feel that these would encumber the SA article that had several other points to make.)

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This is Global Equity’s chart showing 23% fall from 2012 high. But there are several other starting points that make just as much sense. It is very contrived to insist on this as the only one from which to calculate Cook’s “destruction of shareholder value.” According to the report, Cook and Oppenheimer solely responsible responsible for the decline. (I address other issues in my SA article.)

Screen Shot 2014-03-09 at 11.06.50 PM

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Cook’s first day

One very reasonable date to select as a starting point would be the day Cook officially took office as CEO. From Sept. 12, 2011, Apple’s performance shows a different picture. While it still lags the NASDAQ and the S&P, a 40% rise is not so bad. One could make a good argument that this is indeed a much better judge of his performance.

Screen Shot 2014-03-09 at 10.55.29 AM

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Or how about the last twelve months? This is a common time frame.

Here, up 23%, Apple has not performed that badly at all. It still lags the NASDAQ, but beats the S&P.

Screen Shot 2014-03-09 at 11.31.35 AM

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Competitors

Here we see it against some competitors over past 12 months. Not particularly good, but should an investor complain about a 23% rise, especially with a large dividend?

Screen Shot 2014-03-09 at 11.41.36 AM

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Recent low

In this final chart we look at performance from the low point on June 27, 2013. Since then, Apple has actually led the whole pack, beating even Google with about 38% rise in value!

And why not pick the low point? You may argue that this price is contrived, but is it any more contrived than Global Equity’s picking the high point?

Screen Shot 2014-03-09 at 11.43.56 AM

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Caveat Emptor!

My point is simply this.

Charts are very helpful to illustrate a point, and there is nothing inherently wrong in selecting a particular chart to illustrate your point. That is what they are for.

The reader, however, needs to look at a chart and decide for him- or herself 

    • if that chart is a valid representation of reality, or
    • if it is selected solely on the basis of fitting the argument.

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October 15, 2013

Apple’s Missed Opportunity

The pundits will go on about the initial weekend sales for the new iPhones, but one thing is clear:Apple (NASDAQ: AAPL  ) has missed an opportunity here.

It’s no news that the iPhone 5s is the new flagship model, with a blazingly fast processor, and breakthrough fingerprint sensor. The colorful 5c models have replaced the previous flagship iPhone 5, with only small changes aside from the plastic bodies.

So what’s been missed? Apple stock dropped after the September 9 announcement that the 5c would be priced just $100 below the 5s. Investors had been looking for a drop into the lower price range. Personally, I agree with Apple that the 5c should be priced exactly where it is.

What is missing, however, is the iPhone 4c.

There should have been another model added that would relate to the 4s just as the 5c does to the 5s, priced $100 bellow the 4s, unsubsidized at $350.

Model Unsubsidized Price
 iPhone 5s $650
 iPhone 5c $550
 iPhone 4s $450
 iPhone 4c $350

Source: Apple.com and author’s estimates.

Rationale 
Apple iOS’s main competitor is Android, built by Google. Recently they have pushed their global smartphone market share to almost 80%,  largely by dominating the low end market, a segment that Apple does not care to enter – and rightfully so. However, to drop below 14% looks bad. It makes them appear marginalized. A 4c entry would allow Apple to enter a lower tier, and regain significant share.

Features
The theoretical iPhone 4c would sport these feature changes:

  1. Case: colorful plastic
  2. CPU: A5 chip of 4s
  3. Screen: Revert to pre-retina display resolution (163 ppi)
  4. Memory: Revert to 8 GB
  5. Camera: 6 Megapixel

It’s quite possible that Apple could produce such a device for under $150 in hardware and component costs, which suggests that a $350 iPhone 4c could fetch hardware margins of over 57%. In contrast, IHS iSuppli estimates that the new iPhone 5s costs $199 to build after including manufacturing costs, while the iPhone 5c total is around $173.

Sales
With the strongly reduced feature set, I do not think that the 4c would significantly cannibalize higher priced models. This is seen in the new 5s. Reports have sales of 5s outnumbering 5c by 2.4 to one. It shows that the existence of a lower priced model does not necessarily cannibalize the higher priced one when there is significant differentiation.

Fortune’s Philip Elmer-DeWitt wrote a few weeks ago of Apple’s low end opportunity:

In a note to clients Thursday, RBC’s Amit Daryanani used Strategy Analytics’ market research to estimate what a $300 iPhone 5C might do to Apple’s bottom line…

And he quotes Daryanani:

“From an EPS perspective we believe the Company can add $4.00+ in EPS to our CY14E estimate of $39.74, with a successful launch of an affordable iPhone. On a 12x multiple, this would add roughly $50 to Apple’s stock-price. We believe our ~56M unit estimate is conservative given that it represents 12% of the total low-end Smartphone market.”

Granted, he is talking of a sub $300 price point, so let’s round his 56 million units down to 50 million. Even if there was some cannibalization from the 4s, this would bring in more than $17.5 billion new revenue. . This could potentially add over $4.40 in earnings per share.

Margins

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Some would argue that this would only increase Apple’s woes by further compressing margins. But there are two points to make here. First, the gross margin is significantly lower for the 5, but not horrendously lower. More importantly, $17.5 billion is a large number for incremental revenue, and would go a long way to reducing overhead and operations as a percentage of overall revenue, so it is likely that this would counteract the slightly lower gross margin.

Conclusion
Apple has a great game plan and will probably thrive on its new iPhone product line. Still, it seems to have thrown away a great opportunity to expand its reach into the smartphone culture and bring in millions of new customers. This would reach into the growing share of Google’s Android operating system led by Samsung, and Apple could have done this without sacrificing the quality that they prize so much.

Apple will thrive, but I believe they could have done even better.

March 6, 2012

Mac sales: Response to Asymco

In Response to Asymco’s excellent post:

When will tablets outsell traditional PCs?

One quantitative  assumption that  you make is the growth rate for Macs to continue at 25%. I believe this is a big sleeper and the rate will increase significantly.

While some of that will come from China, that growth will be partially balanced by lowering growth in the more mature USA and Western Europe consumer markets. However, what is not being factored in here is the growth in the enterprise which was recently reported at 40%. Now, since enterprise was such a small percentage of overall Mac shipments, this growth did little to effect the overall growth. But, if it continues at 40% or higher while the consumer market is leveling, then it will eventually become a significant driver of the Mac growth rate. (Note I am talking here not of sales but of the growth rate of sales.)

I think that this year will be the year in which the Mac really turns the corner in the enterprise. I can see it eventually moving to 40% market share of desktop/laptop computers sold. That would be enormous. Recent Forrester research reports had some extremely telling points. (See below)

The 40% enterprise market share  (i.e. of new sales) I see coming in about 6 years in the US in 8-10 years world wide. The ramp up will be an S curve – gradual for the next two years then much more noticeable (maybe 7%, 12%, 18%, 26%, 34%, 40% share). There really is a sea change happening.

Links:

 

March 5, 2012

New York Times on Apple Job Growth

The New York Times has published a rather silly article in which they claim that Apple has never contributed any jobs to the economy.

Well – they do not put it exactly that way – but their article practically says it outright.

I will agree with the quote:

… said Gary P. Pisano, a professor of business administration at Harvard Business School. “It’s hard to say the exact size.”

I agree as well that the methods used by the company they hired could be the subject of legitimate debate (as long as that statement is NOT interpreted as an innuendo that someone was dishonest.)

However, the following quote is a bit odd:

David Autor, an economics professor at the Massachusetts Institute of Technology, said via e-mail that the “entire business of claiming ‘direct and indirect’ job creation is disreputable” because most of the workers Apple is taking credit for would have been employed elsewhere in the company’s absence.

They go on to note:

Mr. Cappelli said. “If you say, ‘If there had been no Apple, those people would not have jobs,’ that’s not true.”

Of course it is not true that every single one of those individuals would be jobless, but if there were no Apple and engineer X took a job at HP then there would be some other engineer who would not have a job.

According to the logic provided, then no business anywhere creates any jobs at all. Everybody else would have been working somewhere else. This is – of course – utter foolishness.

I will admit that they do conclude with the statement:

Apple is, however, an innovative company that created a market for tablets and radically increased demand for smartphones.

In reality – the smartphones existing before the iPhone are not today considered smartphone. Additionally, the app business was relatively nonexistent prior to the iPhone, so perhaps they should be credited with ALL the apps developers (snicker).

As for people buying alternative products if Apple did not exist… sure they would be buying Asus and Lenovo computer that are totally designed, engineered, and built in China in factories with absolutely NO oversight at all. And…

They would be running DOS 12.1. (What a pleasant thought.)

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October 13, 2011

Samsung loses in Australia – FRAND Explained

Samsung loses in Australia – Temporarily

Question: So Apple wins in Australia and Europe but Samsung is also suing in Europe against the new iPhone 4s, aren’t they both stealing from each other? And if so, then what is the point?

 The simple answer is NO, these are not equivalent cases. Whereas Apple is bringing suit on “unencumbered” patents,  Samsung, according  to Florian Mueller,  “largely relies on standards-essential, FRAND-pledged patents against Apple.”  HUH? What is this?

FRAND Explained

To understand the claims and counter claims of these law suits, it is imperative that you understand this one concept. It really is not difficult.  For cell phone systems to work (and other systems as well) there needs to be agreement in advance as to the technicalities of how they all will work, e.g. the electronic protocols by which the phone will communicate with the tower and back again. All these methods of electronic communications involve various inventions by many companies. In order to create one and only one methodology, the companies participate in Standards Committees, which decide on the definition of a particular communications system – the technical details of how it will work. These Standards Committees look over various proposals for a given technology (such as the new fourth generation LTE) and create a set of definitions that all agree on to make the new system work.

 This set of technological  definitions typically uses inventions or Intellectual Property (IP) from several different companies. Obviously, once the standard is implemented (towers are built, communications chips are designed and built) any user will need to license each of the patented technologies that is part of the new system. There is a potential problem here. Theoretically, any single company that has patented technologies could turn around and “hold hostage” any other company that wanted to use the new standard. This would cause chaos in the industry, which would not be good for anyone.

 Therefore, to make sure that this does not happen, the standards committees have a policy. If you own patented technology that you want incorporated into the standard, then you must agree to license that technology, that IP, according to FRAND:

 On a Fair, Reasonable And Non-Discriminatory basis.

 In other words, you cannot gouge one customer just because you do not like them. The technology needs to be licensed to all on an equal footing.

 So, Apple is saying: “You Samsung, have infringed our patents that have to do with totally independent inventions that have nothing to do with any standards agreements,” but Samsung is saying “You Apple are refusing to pay our outlandish, and illegal demands on patents that we have already agreed to license on FRAND terms.” (At least this is Apple’s contention.)

 So, basically, Apple’s contention is that Samsung is trying to use FRAND patents to extort free usage of Apple’s unencumbered patents. Or in Apple’s words:

  • “[The rules of a standard-setting organization] are designed to protect the telecommunications industry from the sort of anticompetitive ambush Samsung has perpetrated here.”

Other Issues

  1. It is important to be aware that there are both design issues and technological issues. Designs are also protected to different degrees in different countries. But these issues are quite different from core technology issues (“Utility Patents” in the U.S.).
  2. The legal technicalities differ in different countries.
  3. There are “fast-track” or preliminary injunction portions of law suits, and also more detailed, though slower to come to court “main proceedings.” Often the request for a preliminary injunction does not include all the infringement claims of the main proceedings.
October 11, 2011

AnandTech iPhone 4s Tests – What do they mean?

AnandTech (www.anandtech.com) is truly a professional blog with some of the best technical analysis you will find. They have just published a set of tests results on the iPhone 4s, titled:

iPhone 4S Preliminary Benchmarks: ~800MHz A5, Slightly Slower GPU than iPad 2, Still Very Fast 

I thought I would explain some of this to those with less technical backgrounds.

First, a few points:

  1. Apparently, these tests were not made by Anand Tech themselves, but gathered from other bloggers who seemed to have had early access to 4s units. Hence the “Preliminary” in the title. AnandTech will be running their own tests as soon as they get their own units.

Some Tech Basics

  1. CPU = Central Processing Unit: This is the “Brains” of a computer that reads instructions from programs, and makes everything happen in the computer. (Smartphones are miniature computers with phones incorporated.)
  2. GPU = Graphics Processing Unit: This is a special kind of processor, similar to a CPU, but designed to process image data. They are designed to perform certain mathematical operations repeatedly on millions of graphical data points. (They can also be used to process certain types of mathematical problems and are seeing new uses in this area.)

Click here for more Computer Basics Terms

One thing that is important to note is that the overall performance (speed) of a system is dependent on many things, and not simply the speed of the processor and/or the number of cores, nor on any other single factor. Additionally, the overall design of the system and subsystems may enhance certain aspects of performance will neglect other aspects. So one system may load and render multiple web pages very quickly, but be slower at certain types of graphics operations.

Finally – System performance is dependent on software as well as hardware. This applies both to the Operating System (OS) and to the particular application being run.


There are basically two types of tests. (Well I am sure you can come up with other classifications, but for our purpose this will do.) These are “real-life” tests which use real software programs, and benchmark tests which are programs designed specifically to test system performance. While the latter are more likely to test compare real limitations of a system (or some part thereof), they sometimes are not indicative of real user experience of said system. A mix of both types of tests is important to get a useful view of a system. I think one could say that benchmark tests test the hardware to the limits, while software tests give better overall system analysis. The problem with software tests is that you cannot test every aspect of even one piece of software, let alone of all software in its class.

Test Results:

Browser Tests

There were two browser benchmark tests with slightly different results. In both cases, the 4s handily beat all Android phones, pretty much tying the Galaxy Tab, which, of course, is a tablet not a phone. It should be noted here that the iPhone 4 (no ‘S’) was roughly comparable with the best Android phones when upgraded to iOS 5. So people who keep these phones should see a very significant browser improvement when they upgrade.

Graphics Tests

In the graphics tests listed, again, the 4s handily beat all Android phones, and  the Galaxy Tab as well.

A5 Clock Speed

It appears that the A5 chip in the iPhone 4s is clocked at 800MHz instead of 1GHz (1000MHz) as in the iPad. Now why would Apple want to “cripple” its CPU? Simple. Two reasons.

  1. In the fabrication of Integrated Circuit chips, each chip is tested after production. A percentage pass and a percentage fail. But some of the failures can still be used at reduced speed. Thus, lower speed means you get higher production from the fabs.
  2. More importantly, I am sure, is the reduction in electrical current consumption. As the report state:
    • Dropping a CPU’s core voltage, yields a greater-than-linear decrease in power consumption, making the marginal loss in clock speed a good choice.
What are the implications of this? Again as AT continues:
    • Apple does have to exploit its strengths in software to avoid any tangible performance penalties. Apple has traditionally done this very well in the past…

I would like to add, that this is not only software, but the A5 also has superiority over the competing Tegra 2 chip frequently used in Android phones, particularly in the GPU. Without getting too technical here, both system are based on the same design by the ARM group. The specifications for the dual-core ARM Cortex-A9  architecture allows for different GPUs, and Apple elected to implement a much faster GPU than is found in the Tegra 2. The results of tests bear this out.


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October 10, 2011

BAHH HUMBUG!

I Say Humbug!

to the following:

Now I Get It: Here’s Why Apple Launched The iPhone 4S Instead Of The iPhone 5

By Henry Blodget | Daily Ticker

Provided by the Business Insider:

When Apple launched the iPhone 4S instead of the iPhone 5 last week, I initially thought it was a disappointment and a mistake.

If Apple had launched the actual iPhone 5, I thought, they’d have sold more of them.

And that’s probably right… [etc., etc.]

via Now I Get It: Here’s Why Apple Launched The iPhone 4S Instead Of The iPhone 5 | Daily Ticker – Yahoo! Finance.


BAH HUMBUG!!

.

First, the iPhone 4s IS a big advance! (See: The big Apple (non?) Event.) But the important thing is…

If you do not understand why the 4s is here and not the 5, then you do not understand Apple – and this goes to Mr Dediu as well (for whom I have the most profound respect!). That is to say, you do not understand one of Apple’s primary MOs.

Simply this: Apple introduces technology when it is ready. Not before.

The A6 chip is not ready, the other features Apple wishes to add are not ready. The technologies are not here – yet. When they are, they will be in the very next iPhone.

(Siri is a slight exception – it is available but they have labeled it beta.)

Click: For an explanation of why Amazon is scrambling to respond to iCloud.

October 7, 2011

From Jobs’ 2005 Stanford commencement speech:

No one wants to die. Even people who want to go to heaven don’t want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life’s change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma — which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.

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