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    History Holds Apple’s Future

    I hate to be right about such things. And I don’t want to wish ill on anyone. But I do want to say: I told you so. On Oct. 1, we posted an article I wrote about Apple Inc. (AAPL). The title was a rhetorical question: “Is This the End for Apple?

    Certainly, “the end” is a bit hyperbolic, but I think you know what I mean.

    Just 10 years ago, the stock was trading around 5. Now it’s more than 500. That’s quite a run.

    As far as I’m concerned, the man responsible for it all was Steve Jobs, the founder who at one point was banned from any corporate leadership. His vision built every major advancement the company has had — and may ever have.

    The problem is that this decade-long run is by a company that’s been around about 30 years. It’s living its salad days, but the question will be whether it can sustain some of this glory.

    Remember, when Jobs wasn’t at the helm (and even when he was), the company didn’t exactly flourish. The challenges it faces now are similar to the challenges it had before the iPod.

    On LinkedIn, I saw a piece by CNBC’s Herb Greenberg that lays out some of his concerns with Apple moving forward. I won’t go through them point by point, but his view does buttress my argument (and I beat him to press with my predictions).

    Apple is having a problem hitting homers with each release. And given its pricing premiums and the economic conditions today, consumers aren’t seeing the point in paying up.

    I have heard numerous stories of Apple fanatics who were so smitten with the company’s products that they would rush out to buy each new generation. No longer.

    Bandwidth Is The Great Leveler

    If you recall, Apple was never a big player in the old days. During the dot-com boom (when companies that didn’t even have business plans or revenue were going nuts), Apple was floundering.

    Its greatest challenges have been that it has maintained a closed system — a beautifully integrated and efficient universe, but closed all the same. And its equipment is expensive, relatively speaking.

    I know its stores (designed by Jobs) are amazing, its products will go down in history for their ability to marry form and function (again, Jobs driven), its operating systems are intuitive and customer service is great.

    But the company has a small share of the broader market and always has. Now, the iPad has dominated its niche; and, initially, apps for The iStore were pouring in. But there are far more apps available for Android devices. And now that broadband connectivity is available almost everywhere in the United States, the processing power and graphics are pretty universal. Music programs proliferate with the iTunes model as well as subscriber models.

    What’s more, as I’ve been watching the commercials for the iPhone 5, the improvements pitched on the commercials are incremental. And the cost to buy up is finally hitting increasingly price-sensitive consumers.

    As I noted in my previous article, a lot of Apple aficionados were tech-interested but not tech-savvy consumers. Apple was a brand that could get them into the new world of digital music, smart phones, laptops and tablets without their having to ask anyone how to work the damn thing every time they turned it on.

    But now, users are more discriminating consumers and more price inelastic. The most recent red flag is the fact that Apple has reduced production of the iPhone 5.

    Past As Prologue

    The underlying point is that Apple’s Achilles’ heel has always been the same: It builds great stuff for a selective audience and commands premium prices from its customers because of the entire “experience.” It’s kind of the Nordstrom Inc. (JWN) of tech, but it’s a lot more focused.

    For a while, thanks to Jobs, it built some of the coolest stuff on the planet. And each new model was cooler than the last, so no one really worried about not being able to transport their apps or music out of iTunes if they wanted to move over to Android.

    Then, competitors began to pull off some cool iterations of Apple’s products. Right now, the Samsung Galaxy S III and the Samsung Galaxy Note II are all the rage. About a month ago, I bought a Galaxy S III; the store manager told me he recommends that phone to everyone who is looking to upgrade — not the iPhone. That 20-something was not an Apple fan any longer, and he demos each new phone for a month.

    Just recently, I was in the AT&T store reworking my data plan. The regional sales manager was telling me she’s looking forward to getting the new Nokia Lumia 920 with Windows 8. She said she used her boss’ phone, and it was lightning-fast and very user friendly. Then, on CNBC the other day, one of the commentators also admitted that he was gravitating to the Lumina for his next phone. My wife, a longtime Apple fan, swapped her iPhone for a Galaxy S III.

    Speed and accessibility are no longer the province of Apple. And the Samsung devices are more affordable as well. That means more people will have less of a problem upgrading for incremental improvements.

    Apple stock is still a good value, but iPhone sales are said to make up around half of the company’s sales. Gross margins are down.

    We’ve seen other giant phone makers lose their mojo and go from the big dawgs to the big dogs: Motorola Solutions, Inc. (MSI), Ericsson (ERIC), Research in Motion Limited (RIMM) and Nokia Corporation (NOK).

    Since this whole sector has an indefinable “hip” factor and consumers are immensely fickle, this could be a very slippery and very steep slope. When this thing turns, it could go very quickly. The only way I would own Apple at this point in time is if I were on the short side of it or I bought it 10 years ago, and I’d be looking to sell if it broke 460.

    On the other hand, this may be a very good time to take a speculative position in Nokia.

    —GS Early

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