Why The WSJ Got The 'iPhone Demand Is Crashing' Story All Wrong
A decade ago, MTV debuted a show called Punk’d in which Ashton Kutcher would play elaborate practical jokes on celebrities before the big reveal at the end of each episode. While the setup isn’t quite the same, it’s possible that Japan’s Nikkei played the role of Kutcher this Sunday and the Wall Street Journal acted as the duped celebrity with a breathless report suggesting iPhone orders are about to fall off a cliff. Apple’s stock has been under a ton of pressure lately, falling about 30 percent from its all-time high and this latest bit of apparent bad news has helped drive it down more, to below $500 a share today.
It started when the Journal reported: “Apple’s orders for iPhone 5 screens for the first quarter, for example, have dropped to roughly half of what the company had planned to order, the people said.” What’s missing from that quote, however, is what Nikkei originally included and can still be found on Reuters (although no longer on WSJ): “Apple has asked Japan Display, Sharp and LG Display Co Ltd to roughly halve supplies of LCD panels from an initial plan for about 65 million screens in January-March, the Nikkei cited people familiar with the situation as saying.” And that 65 million number we know is completely absurd. Just how absurd? Well, let’s break it down.
For calendar fourth quarter, the one that just ended, the iPhone forecast is for 43-63 million phones. (Not all of those are iPhone 5s, of course, given that the 4s and 4 are still available.) The median of those estimates is around 49 million and a high estimate would put the iPhone 5 at 40 million of those. Since the latest iPod Touch uses the same screen, it’s possible another 5 million screens would be used in the Christmas quarter for that. So let’s say there is a total need for 45 million screens in the quarter that just ended.
Every year since the iPhone has launched, Apple has seen some seasonal drop off from the end of the year into the first quarter (what Apple calls Q2, but what is the first calendar quarter). The iPod Touch, in particular, sees a huge drop off. So no matter how strong iPhone 5 is selling, if the company needed 45 million screens last quarter, it would need fewer this quarter. How many? Perhaps 40 million or so. Of course, if Apple had ordered more than it needed last quarter to make sure that it was ahead of the game, it would need fewer still going into winter and might only require 30-35 million. The truth is, we don’t know,, but then neither does Nikkei, or its unnamed sources.
None of this stopped a credulous WSJ from running the story as front-page news just eight days ahead of Apple’s Jan. 23 earnings announcement. It’s pile-on season for the Cupertino, Calif. consumer-electronics giant, which has apparently “lost its edge” according to most everything you read these days. It’s an interesting spin given that the company sold 37 million iPhones in the holiday quarter this year and even the lowest end of the forecast would be a 20 percent boost to that number. (At 50 million, year-over-year growth would be 35 percent.)
Nevertheless, the latest rumors about Apple slashing component orders, in fact, come on the heels of supposedly positive developments at competitors. First, we heard “good news” from Nokia, which reported shipments of 4.4 million Lumia phones in the year-end quarter. Never mind that we are talking less than 2 percent market share for Nokia or that sales were boosted by heavy discounting, often down to $99 at retail — less than half what competing phones sell for. This is good news in the land of Nokia. It might not be repeatable as the Windows Phone platform has yet to prove especially popular, but was unequivocally spun as a positive pretty much everywhere it was reported.
Similarly, Cnet was very excited about Samsung’s announcement that the Galaxy S phone line had crossed the 100 million mark in total sales. The phone is so desirable, “Sales of the flagship Galaxy S3 reached 30 million units in 5 months, and 40 million in 7 months, with average daily sales of about 190,000 units.” You’d think that it’s the hottest thing going with those numbers. Of course, as we were just discussing above, in the quarter just ended, Apple will have sold about as many iPhone 5′s as Samsung has sold Galaxy S3′s in 7 months! This is what the “experts” are already calling trouble and they haven’t seen the numbers yet.
Now, of course, Samsung is also selling the prior generation S2, which Cnet tells us, “…is described as a steady bet after recording sales of over 40 million in 20 months.” So that’s about 2 million a month for that model to go with the 17 milllion S3 phones Samsung apparently moved in Q4. In other words, if we just compare the last two generations of phones, Apple sold somewhere around 35-45 million last quarter while Samsung moved about 23 million. It’s certainly true that Samsung has a number of less-expensive entry models and will outsell Apple in raw numbers. But when one looks at “profit share” and wonders why Apple will continue to earn more of it in smartphones than Samsung, those numbers tell the story.
Certainly, if iPhone 5 demand is indeed falling off the cliff that the WSJ claims it is, things will change next quarter. And perhaps Apple’s earnings report next week will tell us more about that. Then we’ll find out who’s really getting punk’d.