This week Apple (AAPL) smashed through $700 despite what many commentators described as a disappointing iphone 5 launch. Why? And why is the new phone, supposedly only incrementally better than the 4S launched last year, selling so well?
The reaction of technorati has been pretty overwhelmingly lukewarm to Apple’s new product. There seems to have been a collective ‘whatever…’ from those tasked to compare its specs with its nearest rivals, such as Samsung’s Galaxy SIII and Nokia’s (NOK) Lumia range.
But that hasn’t stopped customers queuing up to buy it. Preorders topped 2 million within 24 hours, double the amount of 4S orders in the same timescale. No one seems to have told buyers that it’s simply playing catch up to Samsung, or not very different to their existing phone (a slightly bigger screen, Siri telling you the score at the ball game etc).
This has mystified the ‘experts’; what are people thinking? Can’t they see the [insert phone name] has more GBs, tons more Hz, dozens more pixels, [add more techie measurements here] etc. Why don’t people see? Have people gone completely nuts? Or is something else going on?
A different model
Well, it won’t surprise you to hear that I think there is an explanation for all this. Partly of course it’s the hype and groupie-like devotion of a small band of hardcore Apple fanboys (and girls). If I ever get sick of writing I plan to post one final article entitled “SELL APPLE NOW” and run off into the hills leaving others to clear up the turmoil left behind. Those devotees are nothing if not, well, devoted and any criticism, however minor, is likely to cause the perpetrator severe grief as the fury of the Apple mob descends upon them.
But this is only a small group; it can’t account for all those sales. I reckon the easiest explanation lies close to my, and many fellow Seeking Alpha contributors’, heart(s): the subscription model. We know the subscription model well; sites such as Epsilon Options are membership/subscription based and so we know a little about what makes it tick. And many of those things remind me a lot of Apple.
By the subscription model I mean any service requiring payment, or sign up at the least, to be part of some sort of club, however loosely defined. This could indeed be an options trading service or gym membership or social club or whatever. It doesn’t matter. What they all share is that the successful ones engender one characteristic: subscriber loyalty.
‘Club’ members have usually invested financially, and more crucially, emotionally in their membership. Therefore their default position is to retain that membership unless proven otherwise. Sometimes the burden of proof is quite low – my gym membership for example – but there is an attachment there that needs to be broken before moving to a competing ‘club’.
Notice how this model is different to how electronic hardware decisions are usually characterized. Each technology purchase is done on a case by case basis. Is the Lexmark printer better value than that HP one? How many mega pixels do those cameras have: I’ll choose the 8MP one rather than the 6MP one thanks. Or the 6 MP one because it’s cheaper for minimal loss in functionality
I believe Apple has managed to move much closer to the club membership model than any other IT provider before. Apple hardware owners pay an annual ‘fee’ (the purchase of a new piece of hardware) to be part of the ‘club’. Benefits include being up to date with the cool technology – yes, of course – but what now seems to be ingrained in many customers is a “It’s September/October, it must be time to buy the latest Apple product” mentality. And the same default membership attachment also exists: unless proven otherwise we are Apple users ready to upgrade regularly to continue to be part of the club.
It is this type of behavior being displayed by all those iphone5 buyers, not the dispassionate assessment of GHz or mega pixels. They’re all members of the club turning up to pay the year’s dues.
What does this mean for Apple’s share price?
So it will not come as a surprise for me to say that I am a long term Apple bull. I don’t see anything that will cause mass resignations, or non-renewals, from Apple ‘members’.
At some stage that burden of proof will be met by a competing club. As many have pointed out product innovation has not been great since Steve Jobs’ death and so at some stage in the future someone – whether it be Samsung, Microsoft (MSFT) or RIMM (only kidding on that last one) – will come out with a game changing solution that will be the next coolest club in town. But not for quite a while; over three years at least. Which means Apple has a good run left in it yet.
How to play it
Well, of course, the easiest way is to buy Apple shares. However at $700+ each they are not cheap and large amounts of capital are required to gain any significant exposure.
Which is where, yet again, options are useful. A long term deep in the money call could be bought; this would act (mainly) like the stock but at a much lower capital requirement. For example a $650 Apr13 call can be bought for around $90, significantly less than the (almost) equivalent share purchase (margin of $350).
These are the two easiest methods. However, options provide many different ways to provide long term exposure whilst managing both risk and capital requirements.