Apple (AAPL) has a problem.
Shares of the fallen tech darling tumbled after posting disappointing quarterly results, hitting lows on Thursday that were last seen in January 2012.
Yes, Apple's still selling a ton of iPhones and iPads, but it's not making as much on them as it used to. The push to introduce a cheaper iPad mini and keeping older iPhone models around at discounted prices are keeping Apple relevant -- but those moves are also crushing the company's product markups.
Apple is bragging about selling 75 million iOS devices during the holiday quarter -- but what it isn't so quick to gush about was that it turned out a larger profit a year earlier by selling fewer.
Apple's Chances are Running Out
This is the third consecutive quarterly disappointment out of the company. Tim Cook may have done an admirable job of leading the company in the absence of Steve Jobs initially, but his reign as CEO will now come under fire from angry shareholders that have seen one of the greatest stocks over the past decade surrender the past year's worth of gains.
Yes, Apple's still selling a ton of stuff: A record 47.8 million iPhones and 22.9 million iPads were sold, and Apple points to triple-digit growth in China. And Apple's revenue numbers are doing better than the numbers suggest. Revenue soared 18 percent to $54.5 billion during a fiscal quarter that had one fewer week than last year's comparable period.
You could say that it's not a big deal that iPod sales are still falling. Who needs an iPod touch after buying an iPhone or even an iPad? Apple also sold just 4.1 million Macs during the period -- well below what it sold a year earlier. That's also okay. Global PC shipments are falling, and it's largely a matter of Apple's iPad cannibalizing those sales.
What's problematic, though, is Apple's margins.
Are Cheaper iPhones the Answer?
Apple's gross margins have slipped from 44.7 percent to 38.6 percent over the past year. And that's not going to change.
Google's (GOOG) Android is gaining market share in the smartphone and tablet markets, and the global allure of Android is that its open-source ways make it cheap for anyone to put out a product knowing that there are hundreds of thousands of apps there for support.
There's plenty of chatter of Apple putting out cheaper iPhones. Yes, buyers can get an iPhone 4 for free in this country with a two-year contract, but most overseas wireless carriers aren't as kind. They're not making enough on their monthly data plans to offset the more than $300 that Verizon (VZ) and AT&T (T) pay Apple to bring retail prices down to as low as $199 for a new iPhone 5, $99 for an iPhone 4S, or free iPhone 4 smartphones.
However, even that mindset may be changing. Verizon was taken to task for its own shrinking wireless margins in its latest quarter, primarily because it sold so many iPhones. Verizon has promised that wireless margins will improve in 2013, and that can only mean that it will negotiate lower subsidies for Apple devices or actively steer customers to higher margin Android devices.
It's Time to Innovate
Cook isn't the type to stand still. He broke from Jobs' tradition by initiating a dividend last year, and Apple's $137 billion in cash and marketable securities is more than enough to commit to a substantial hike to its current 2.3 percent yield. Apple could also spend more of its available funds on buying back more stock.
However, the real way that Apple will get out of this rut is by raising the bar again.
There's been plenty of chatter about Apple introducing a wristwatch or a full-blown HDTV. It can update its products with new features that no one else is doing, though these days the competition has a funny way of catching up quickly when something's trending.
Apple sells its products at a premium because they are special, and it's time for Apple to stand out again.
Wow us, Cupertino.
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