Apple's Solid Earnings Hide Creeping Loss of Luster

      July 25, 2013 11:30

      Apple posted better-than-expected earnings during the second quarter of this year but the market response has been lukewarm. Analysts point out that Apple managed to protect its bottom line but made a major mistake by toning down the high-class luster of the iPhone, its flagship product.

      Apple on Tuesday announced US$35 billion in sales and $6.9 billion in net profit during the second quarter. Sales were up 1 percent compared to the same period a year ago, but net profit dropped 22 percent.

      However, Apple shares soared from $419 to $435 after the earnings announcement, as the drop in net profit was smaller than analysts had expected. iPhone sales also reached a record 31.2 million units, beating analysts' projections of 26 million.

      But the results are less than satisfactory from Apple's perspective. First of all, the unit sales price of the iPhone has fallen 5 percent for the first time since the product was unveiled six years ago. iPhone sales also vary sharply from country to country.

      Apple's Chief Financial Officer Peter Oppenheimer said iPhone sales in the U.S. rose 51 percent on-year and in Japan 66 percent. But in all other parts of the world they shrank.

      A closer look at iPhone sales in U.S. and Japan reveals an interesting fact. Japanese mobile communications service providers Softbank and KDDI are handing out iPhones for free to customers who sign up for two-year contracts. As a result, Apple has managed to account for the highest share of the Japanese smartphone market with a 35.9 percent stake. And in the U.S., the old iPhone 4 and iPhone 4S continue to be popular because they are being passed out for free to subscribers or sold for less than $100.

      That means the iPhone has now joined the ranks of mass market smartphones. The popularity of older iPhone models can be seen around the world. Market researcher CIRP said the iPhone 5 accounted for only 52 percent of total iPhone sales from April to June and the iPhone 4 and 4S for the remainder.

      The continued demand for the iPhone 4 series shows that the iPhone 5 is not terribly appealing to consumers because consumers do not see a vast difference between the devices.

      The situation could change if Apple unveils a startling new product. When asked about Apple's next product, Oppenheimer said the company is "on track to have a busy fall" and added he expects to "go into more detail in October."

      Archrival Samsung Electronics is experiencing the same phenomenon. Although Galaxy S4 sales are soaring with more than 20 million sold just two months after its release, Samsung's second-quarter earnings did not improve that much compared to the first quarter.

      Also, Japan's No. 1 mobile communications service provider NTT DoCoMo this month started selling the Galaxy S4 virtually for free.

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