On Tuesday, Apple Inc. (NASDAQ:AAPL) reported its latest quarterly results. There were plenty of nuggets in there for both the bears and the bulls. Here were the three quotes from Tim Cook that I found most illuminating.
Peak smartphone
“I don’t subscribe to the common view that the higher end if you will of the smartphone market is at its peak.” -Tim Cook
To an extent, Mr. Cook is talking his book here. He’s not going to come out and say point blank that the top-end of the handset market is saturated.
But there was a lot of evidence in the press release to say otherwise. While Apple Inc. (NASDAQ:AAPL) sold 31.2 million iPhones – crushing the Street’s expectations – the average selling price per phone declined $32 to $581 from the previous quarter. Customers are increasingly gravitating to the company’s older iPhone 4 line rather than the flagship iPhone 5.
This is classic late adopter behavior – they’re willing to sacrifice quality and features for price. This signals the beginning of a new phase in the product lifecycle. For Apple marketing to the next smartphone buyer will become increasingly challenging. Hardware profitability will continue to decline. The company’s report just confirms those fears.
Platform stickiness
While Apple Inc. (NASDAQ:AAPL)’s hardware business is slowing, the company is translating those iPhone 4 sales into new revenue streams through its ecosystem.
“It’s [iPhone 4] a great way for a buyer to get into the iOS ecosystem and the customer set ratings that we have with iOS 6 and the stickiness of the platform is huge. And so it’s great for customers and we are very glad to offer it.” -Tim Cook
Everything else in Apple’s quarter backs up this statement, leading me to believe that the company’s ecosystem is even stronger than analysts previously thought.
Apple Inc. (NASDAQ:AAPL)’s iTunes numbers were exceptional with the division generating $3.9 billion in revenue up 25% year-over-year. Since its launch, over one billion television episodes have been downloaded. During the month of June, 800,000 shows and 350,000 movies were downloaded every day.
iOS device owners have made a significant financial investment into the Apple ecosystem, enough to make them think twice before switching to a rival platform. Based on estimates provided by Deutsche Bank AG (USA) (NYSE:DB), the average iOS owner has spent $130 on apps as well as significant time learning and configuring those apps. Switching costs are remarkably high.
And this theory is confirmed by other statistics. According to a report by COMSCORE, Inc. (NASDAQ:SCOR), 55% of iPad users own an iPhone. These reports show that consumers are likely to stick to the platform even if there’s a better handset or device available.
All of this means it’s going to become increasingly difficult (dare I say impossible) for second-tier platforms to ever catch up. Last week Nokia Corporation (ADR) (NYSE:NOK) reported that device sales declined 27% year-over-year. BlackBerry Ltd (NASDAQ:BBRY) shipped only 2.7 million BB10 devices, less than expectations. Without a solid ecosystem of products behind them, these companies will never regain their positions in the handset market.
The next battlefront
There has been a lot of buzz lately about the coming technological revolution in the automotive industry.
“Having something in the automobile is very, very important, it’s something that people want and I think that Apple can do this in a unique way better than anyone else. So it’s a key focus for us.” -Tim Cook
Apple has already taken steps in this area through ‘iOS in Car’ which is expected to be released in the fall. The application will provide enhanced integration between your phone and your vehicle. Through the program’s hand-free controls the driver can access maps, get directions, and control music while displaying content on the navigation screen of the car.
Other tech players are entering the space as well. In June BlackBerry Ltd (NASDAQ:BBRY) unveiled the QNX enabled Bentley Continental GT as well as a recently modified Jeep Wrangler Sahara. The system is designed to handle everything from monitoring an automobile’s diagnostics, playing movies and music to presenting emails and text messages through the dashboard. QNX is already installed in 30 million vehicles worldwide.
So my question is, has Apple already won this battle? iOS will be rolled out by a number of manufacturers by 2014 including Honda Motor Co Ltd (ADR) (NYSE:HMC), Acura, Mercedes-Benz, Nissan, Infiniti, Ferrari, Chevrolet, Hyundai, Kia, Volvo, Opel, and Jaguar.
If I were a manufacturer, who would I rather partner with? BlackBerry, which has a shaky future in mobile phones? Or Apple, who is a proven winner?
Foolish bottom line
Apple’s third quarter is what the market feared six months ago – the profitability of almost every segment in which the company currently operates is declining. To reignite the stock Apple needs a new drool-inducing product. It doesn’t look like we’ll get that this quarter. Maybe in the fall.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.
The article 3 Can’t Miss Quotes From Apple’s Earnings Report originally appeared on Fool.com and is written by Robert Baillieul.
Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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