The Argument That Apple Cannot Keep Growing

On the flip side, Karl Denninger, writing for Seeking Alpha:

Apple formed its business case on single-source iron-fisted control over operating margin by having “the one” that it stirred up an iFanboi brigade to support, using that to drive bargains that were good for Apple but terrible for everyone else.

I bet a lot of you have instituted a de facto “once you pull out fanboy, I tune you out and close the browser tab” rule, and in general such a rule serves you well. But I think Denninger’s argument, though wrong, is representative of the Apple bear position. So, uh, bear with him.

This works right up until someone else analyzes your business model and costs, then figures out how to build something at least as good as what you have but 30% cheaper and gets that into the marketplace. Then the bubble-style valuation model you have built, claiming “it’s not a bubble!” through distortions in the ordinary course of business (e.g. hardware margins three times that of historically-normal levels) is exposed and suddenly your stock doesn’t look so cheap any more.

Profit margins on hardware are very difficult to sustain over 10% for long periods of time. Someone always comes after you and this is not going to be an exception to that rule.

I agree with one thing: sustaining high profit margins is difficult. But where Denninger goes wrong is in assuming that competitors can easily or quickly copy what Apple is doing. His argument is no different than the dire predictions for the iPod a decade ago. Yes, Apple’s hardware margins are extraordinary. But Apple is an extraordinary company. They have an unparalleled retail presence, a top-shelf brand, and a loyal, large, and growing customer base. They write and design their own entire software stack, have incredible third-party developer support, and, by selling very large quantities of a relatively small number of hardware products, attain astounding economies of scale.

I’m not saying Apple’s continued success is assured. But there’s no sense in an argument based on the supposition that Apple is in any way a typical hardware maker.

Thursday, 19 April 2012

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