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Is Apple recession proof? The answer is “no”, but…

Jason O'Grady has a good post summing up the theory (first espoused by American Technology Research analyst Shaw Wu) that Apple is "recession proof". In fact, I think there's good reason to think that the opposite it true, but also that the bright points for Apple outweigh the bad ones.

Where the iPhone sits

The first thing to think about is to break down Apple's product lines, because the economy will affect each in different ways. Perhaps surprisingly, I think iPhone is probably the least vulnerable of the product lines. The upfront cost of the iPhone is heavily subsidised by phone companies, and that will make it a tempting upgrade when someone's phone contract runs out. In tough times, a luxury product with a low upfront cost is likely to be quite attractive.

How will the iPod perform?

For iPod, there are good and bad points. People who already own one will probably put off buying a new version, and as the market for music players reaches saturation point the upgrade market will be the most important one. However, the speed of development of technology means that someone replacing what was a top of the range iPod from two years ago can get a much lower cost replacement – and low-cost luxuries do well in downturns. So, while iPod sales will head down, they won't get hammered too hard.

Mac: from market share hero to market share loser?

The big question mark is over the Mac. Over the past couple of years, Mac sales have been nothing less than stellar, with an overall market share increase compared to the rest of the computer industry. The reasons for this have been partly due to an exceptionally well though-out product line, the failure of Windows Vista to impress virtually anyone, and improved mind-share for Apple in general thanks to the iPod and, more recently, iPhone.

But Apple's pricing remains on the high side. That's not to say that they aren't close to the prices of equivalent Windows-running hardware (sometimes they are, sometimes they aren't). If you want to spend £1000 on a laptop, Apple offers good options – and even better ones if you want to spend £1700.

In tough times, though, the number of people prepared to pay that much shrinks, and the number of people prepared only to stretch to, say, £500 increases. Even people who have money are more inclined to be careful with it. And for those people, Apple presently is not an option. Some customers might defer buying anything until they can afford a Mac, but if you have a four year old PC which barely runs Windows, or a child heading off to university, you're going to be buying something very soon.

So the question isn't "will Apple sales be hit by the recession?" – they clearly will – but whether Apple will be hit harder than the rest of the PC industry. The bare-bones analysis of pricing suggests it will, but you also have to take into account the momentum that its increasing market and mind-shares have given it. I'd expect Apple's Mac share growth to continue over the next couple of quarters, but decline after that if the recession continues. At some point, if the recession continues long enough, they will start to decline if Apple doesn't change its product line mix – but that decline could be a year away, and depends on a whole host of macroeconomic factors.

The management factor

The other factor which needs to be taken into account is the incredibly well-managed nature of today's Apple. The company, probably more than any other in Silicon Valley, has exceptional aggressive control over costs – it doesn't waste money. This, plus its supply-line management, will help it ride out the worst of the recession. When the recession is all over, the shareholders should give Tim Cook a big bonus, because as COO he's turned Apple from a management joke into one of the best-run businesses in the world.

The product mix: time for a "value" segment?

Given that the biggest potential weakness seems to be the lack of lower-cost products, should Apple introduce a new "value" section into its product matrix? Some would argue that this would be counterproductive: that part of the allure of the Mac is that it's firmly in the high price/high value segment. There's something to be said for this, and whether sticking with the strategy makes sense depends almost entirely on how long you think the recession will last. Apple could easily ride out six months to a year of slowing sales in the high-price segment, thanks to its vast cash reserves and excellent cost management.

The danger would be that if Apple starts to under-perform the rest of the market, it could lose a lot of the impetus it has gained over the past year or two. There's also the possibility that, if the recession last long enough, consumer confidence will erode to the point where its Mac sales will fall off the metaphorical cliff.

These risks are, undoubtedly, the ones which Jobs and his team have been weighing up for a while. Given the company's cash and income situation, I don't expect any rush to introduce "recession-buster" low cost products. But I'd be very surprised if Apple wasn't working on them, as a hedge against the downturn lasting.

Could Apple create low-cost products? Of course: in fact, it already has done. Both the Mac mini and the iPod demonstrate that, if it wants to, it can produce exceptional, high-value low-cost products. The mini is a bit of an unsung hero in Apple's current product line, and its easy to imagine that it could produce a laptop which fulfill the same purpose in the portable range.

So overall, it's fair to say that Apple isn't recession proof. No company is. But it's not in a disastrous position, and it's incredibly well-managed. This buys it the time to either ride out a shorter recession or readjust its product strategy if the downturn is likely to be a long-term thing. It's revenues and market share aren't going to fall off a cliff any time soon.

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  • http://blog.23x.net Jared Earle

    Recession Proof? No, but they have a shitloaf (sic) of cash in the bank so they can weather out the worst of it. The worry is at what point do bad sales actually start hurting them?
    “On a long enough timeline. The survival rate for everyone drops to zero.”

  • http://profile.typepad.com/ianbetteridge Ian Betteridge

    Oh yes – sooner or later, in business, everyone dies… 😉

  • http://profile.typepad.com/6p01053654245f970b Louis wheeler

    No company is safe from the depredations of its government. The Obama administration could attempt to “Nationalize” all American businesses, although that is less likely than other socialist acts it has planned.
    This “recession” would normally last a year if the government did nothing, but some things that Obama is planning could extend that. Forcibly unionizing American businesses through the “Card Check Plan” will force many marginal companies out of business.
    “The power to tax is the power to destroy.”
    “Neither life, nor liberty nor property is safe as long as Congress is in session.”
    Then, we will have double digit Price Inflation when the economy starts to recover, perhaps, in late 2009 and through out 2010. This is due to the money supply increases from the current bailouts and Obama’s payoffs to his cronies.
    All this will be very difficult for US citizens and companies to adjust to. I won’t go into the international ramifications; those are down-right scary.
    That said, the relative rankings of tech companies could change during this recession.
    Apple’s prices are currently in line with Dell’s and this is likely to remain so. If Dell lowers its price substantially, I expect Apple to do likewise. But, Dell may choose to lower its product quality as it lowers its price. That I don’t expect Apple to do. Both HP and Dell are skimping on quality now.
    The issue is not about price alone. Apple currently appeals to the top half of the consumer market.
    These people will still have secure jobs; they are less likely to change their buying habits. Unemployment is currently lower than it was during most of the Clinton administration, but the Obama administration could change that for the worse.
    President Hoover, a major interventionist in the markets, gave us 18.7% unemployment in 1932 and FDR got us up to 24.9% by 1937. How high is Obama aiming for?
    The Enterprise and Government markets are the ones which will be hit the hardest by this recession. Apple is not greatly involved in them. Polls show that the Enterprise expenditures will be half of what it was last year. Some companies will not be acquiring IT hardware this year.
    Many of the Small to Medium sized Businesses will be forced to compete by delivering better products or services, rather than lowering their price. This is especially so, because of the looming price inflation ahead.
    Companies may need to build in an extra profit now, because Price Inflation hits profit margins worse than a recession does. They may need to upgrade for lower costs to avoid higher taxes that Obama has planned.
    Apple’s Macintosh delivers a lower Total Cost of Ownership than PC’s because Mac’s have a much longer useful life. Canny SMB companies have been counting on that for years. Many PC’s will be junk before we get through this financial debacle.
    Even though Obama has said that he does not intend to end the “Bush Tax Cuts” early, they will end, unless prevented, in 2010. It seems unlikely that Obama will extend them. This will cause a massive tax increase, so I expect another recession in 2011. The correct word for this period will be a Stagflation–a stagnant economy combined with high price inflation.
    Read up on Jimmy Carter’s administration to get a clue of what that was like.
    Of course, this depends on how faithfully Obama copies FDR’s “New Deal.” Herbert Hoover and FDR kept the Great Depression going for ten years.
    Then, they blamed the consequences of their intervention in the economy on the “business cycle.”

  • Wes M

    The above post is a lot of right-wing talking points built on garbled “facts” and whatnot. Sigh, refuting everything here would take far more time than it is worth. However, the major points. The great depression did not get extended because of too much stimulus but because FDR tried to balance budgets and cut spending in 1937 when the economy was still sickly. Aminty Shales repeatedly misrepresents what happened during the depression.
    Likewise, the rap that Obama is a socialist comes from such a bizarre distortion of his record and positions (he’s was the most conservative of the three major Democratic Party candidates), it’s hard to even begin to correct. (But just think… anybody thinks that a budding socialist would appoint Larry Summers and Timothy Geithner has stretched the definition to beyond recognition.) And we shall not talk about nationalizing American business without someone explaining to me how Republican lawmakers setting wages for an industry as a condition for a loan isn’t a bigger infraction on free-enterprise.

  • http://profile.typepad.com/ianbetteridge Ian Betteridge

    Wes, for what it’s worth, I think you’re completely right.

  • http://profile.typepad.com/6p01053654245f970b Louis wheeler

    Wes M said: “The above post is a lot of right-wing talking points built on garbled “facts” and whatnot.”
    There is a great deal of Free Market Economics in my explanation. We will have a test case, coming, to prove whether I am right or not.
    I am projecting a long term economic travail, the length of which depends on how much the government interferes in the economy. Every solution which Obama has talked about will produce bad results.
    This is not necessarily a Right Wing issue, because President Bush has been following Keynesian Economics with these bailouts. It just won’t produce the results he wants. The market wants to readjust and every government intervention and bailout prevents that. Why? Because of the mal-investment caused by prior decades of government interference must be washed out of the economy. Businesses must fold, uneconomic projects must shut down, bad loans must be written off the books and government interference and institutions dissolved. Fannie Mae and Freddy Mac must close up shop; CRA must be repealed.
    President Hoover was a Republican and he wrecked the banking system in 1930 creating a Liquidity Problem. He shut down a third of the banks by 1932. FDR continued with Hoover’s interventions and adopted new wrinkles of his own such as make-work projects and a Fascist control of the economy. Both inflated the money supply to pay for them.
    The issues are a little different now, but the government is trying the same cure.
    It has been known since the Sixteenth Century that increasing the money supply eventually causes price inflation.
    John Maynard Keynes promoted a theory in the 1920s that the government could use Monetary and Fiscal policy to control the economy. That idea crashed and burned during President Carter’s administration where we had high inflation, high taxes, high unemployment and a stagnant economy. Since we are going down the same path, we can expect the same results.
    This is not a Democrat or Republican thing; both parties are adopting bad economics.
    Companies like Apple must adjust to this bad economy. Guessing wrong will have serious consequences.
    I am guessing that you know nothing about Free Market Economics or history. You may have been taught Keynesian Economics in College, but so was I. It took living through Carter’s Administration and seeing Reagan’s solution which cured me of my Keynesian delusions.
    I wonder if you will learn from this coming economic debacle. Or will you constantly blame the wrong parties, as you do now?