Needham’s Wolf: Apple’s premium-priced Macs ‘defy the laws of economics,’ but iPhone does not

“Mac sales have continued to grow in the face of a recession and declining overall PC market, but Apple’s iPhone could not escape shifting trends in the smartphone space, analyst Charlie Wolf of Needham said on Tuesday,” Neil Hughes reports for AppleInsider.

“Wolf’s take was detailed in his latest note to investors, a copy of which was provided to AppleInsider. In it, the analyst said that while the Mac ‘seems to defy the laws of economics,’ Apple’s iPhone ‘is not so fortunate,'” Hughes reports. “‘Our analysis indicates that the Mac is the exception, not the rule,’ Wolf wrote. ‘Against a background of progressively rising prices compared to the prices of PCs, the Mac has consistently gained share in the personal computer industry as a result of an outward shift in its demand curve. The only explanation that we see for the shifting demand curve is the now-mythical halo effect.'”

“‘The iPhone’s loss of worldwide market share, then, is largely a composition effect, with smartphone sales migrating from developed markets, where the iPhone holds meaningful share, to emerging markets, where its share is far lower,’ he said,” Hughes reports. “While some have pointed to these market share losses as a major concern for Apple, Wolf isn’t that bothered by the trend. He believes the migration of smartphone sales to emerging markets has been driven by what he called ‘imploding smartphone prices,’ not changes in consumer behavior.”

Read more in the full article here.

41 Comments

    1. I’m also not sure what he means by a “now-mythical halo effect”, unless he’s rubbishing the expression. I’ve just updated my 6 year old iMac to a new 27” model, and from switch-on, it’s obvious that it’s an extraordinarily well-crafted piece of technology. That’s why it’s selling well; nothing to do with “halos”.

      1. There is some very fast and loose syntax in the article. (I say this as an expert at bad syntax). This makes it hard to figure out his actual point of view. For all we know this is intentional side-swiping at Apple gear through the use of intangible concepts, faking out the sucker reader.

        On the other hand, the article uses facts and accurately describes them.

        My guess is that he’s no professional writer, and that is expressed in his writing style. It would be useful to read more of his work for a better understanding of his POV.

  1. Smartphones are quickly becoming commoditised. One smartphone can pretty much do everything another smartphone can. The distinguishing feature is increasingly the software running the phone and the ecosystem surrounding the platform. The ecosystem is what makes it sticky.

    Having said that, the gap between Android KitKat and iOS 7 is extremely thin; so thin in fact that most consumers will not feel the difference using either of the two in real life situations which means that the deciding factor comes down to price.

    In countries on the European continent and large parts of Asia and South America where phone contracts are on a pay as you go basis, the price of the phone becomes an even more important deciding factor which is why the proportion of users on Android is rising there whereas iPhone has managed to buttress itself against change in the U.S. mainly because the cost of phone contracts outweigh the cost of buying the phone outright. Once this changes, Apple will see a drop in numbers even in the U.S., it’s last bastion against the rising tide of Android.

    1. Having used both KitKat and iOS7, I have to say that KitKat is clunky and unintuitive in comparison. Try editing the URL in the address bar of the browser in both as an example.

        1. I agree with you and Trevor. Personally I have no interest in Android phones at all, but Apple is intentionally only competing in the high end / subsidized marketplace.

          Even if Android were not that capable Apple is intentionally leaving a vacuum to be filled, but Android is good enough for many people (by their own judgement, not mine).

          The leader in the computing market has never done that. IBM didn’t. Microsoft didn’t. They followed high end but also the low end. Apple’s choice to only take the high end makes for completely different dynamics. It means that Android can’t fail even if it “loses” the high end market completely to Apple.

          I don’t recall any other market that has had this dynamic, so what will happen? It will be interesting.

    2. Smartphones are quickly becoming commoditised. One smartphone can pretty much do everything another smartphone can.

      NO. What I’d say instead is that the ‘good enough’ consumer standard for smartphones is low enough that they don’t perceive the need to have anything better than a cheap model. Thus the sales of smartphones with mere 32-bit processors, mere 8 GB of memory space and mere cruddy, insecure Android.

      With time, the ‘good enough’ standard rises. The challenge at the low end is to adequately keep up with that rising standard. Obviously, Microsoft FAILed to do so, as did Blackberry, Nokia, Motorola, ad nauseam.

      The ‘tide of Android’, as this article points out, is the tide of cheap goods in emerging markets that meet their particular standard for ‘good enough’.

      Meanwhile, Apple will continue to set the QUALITY standard while the riff-raff-rats set the mere QUANTITY standard. This is nothing new for Apple.

      What is fairly new for Apple is the PC ‘good enough’ standard rising well above average Windows boxes. The result is the shift of PC sales from mere Windows boxes up the quality curve to Apple Macs. This is what happens when the ‘competitor’ runs off the rails and crashes into the barn. Catastrophes are fun to watch, but you don’t want to buy one. That’s not ‘good enough’.

    3. “most consumers will not feel the difference using either of the two in real life situations ”

      really?

      android smartphone share gains is mostly in Asia where it is mainly loaded into junk phones with little processing power or ram so there is a vast difference in performance of those Android phones and the iPhone. Many of those phones don’t have wifi, can’t even run stock Android apps (millions of ‘O’ phones in China originally ran only a handful of their own apps). They are basically converted flip or ‘music phones’ which run Android now instead of something like Symbian as besides being ‘free’ Android is supported by advertising by Google. WORSE many of these phones are running forked or very old versions of Android (versions which are not covered by Google’s user agreements to install google services ).

      Only a handful of the top of the line phones like the Galaxy series even approaches the stratosphere performance of the iPhone and in real world tests by Ars Technica etc, Apple’s 64 bit chip and OS can run 2-4 times faster than the Snapdragons in Samsung’s phones. The superiority of the processor and OS means that things like the Fingerprint sensor (which requires huge processing power) runs smoothly on iPhone and is barely functional in even the newest Android phones like the S5. There is hardly any price difference from top of the line android phones and the iPhone that’s why in USA etc iPhone is gaining market share. Apple controls the top tier market that’s why it takes 60-80% of all phone profits in the world.

      There are also inherent system level flaws in the Android OS due to the fact that it was originally designed as a Blackberry Clone with a keyboard and then had had a ‘touch’ system layered over it in a rushed desperate move that causes Android to be sluggish (thus requiring multicore battery draining chips to run even half decently. The ‘Blackberry’ clone thing has been admitted by Google engineers themselves). Apps run better on iOS also due to this.

      Developers stick with iOs because this is where the money is. The vast hordes of Android market share don’t buy apps (either their phones can’t run them or pirates destroy all incentive for developers). Even Google makes Twice as much money off running services like search on iOS than it makes off services for Android (android users don’t even use the web much).

      space precludes me from even discussing things like flaming plague of Malware etc prevalent on Android. Millions of copies of infected apps have even been released via Google’s app marketplace. Or the lousy service from Android OEMS e.g no OS updates, passing the buck for issues back to google and vice versa etc.

      So without the best apps, slower response OS, poor quality cheap phones, no OS updates , malware etc it’s hardly “”most consumers will not feel the difference using either of the two in real life situations “

    4. You start of by saying that “the distinguishing feature is” and then provide two features. Would you please fill out the second feature (ecosystem) and why you (apparently – can’t know for sure until you write about this) feel Apple is at risk with losing to another ecosystem?

  2. The only mythical Halo affect I know of is the one that states, Apple will sell a bunch of Macs based on the fact the Halo (The Game) will come out first for the Mac. This is only became Smith because it scared Microsoft so bad the they bought Bungie to prevent it.

  3. There is still a large part of the “tech” population that believes a computer is a computer. This is the crowd that probably still buys Computer Shopper and builds their own PC. So for them it is hardware features for the buck logic. If we were talking about cars these would be the hot rod-ers and the restoration crowd. They enjoy tweaking their PC and playing with the OS. It is a hobby. There is a very large part of the population that prefer their microcomputer to do work FOR them. They do not want to become an OS expert to keep their machine running. This is why Apple Mac sales are rising. It does not defy economics. They do not understand what a common person wants from their personal computer.

    1. OH SO TRUE.

      Economics is so strange. You can gather data out the ears. But you always have to face that wall of HUMAN BEHAVIOR. Good luck understanding all the nuances of how we behave and why. None of our current human cultures is willing to dive into the deep end of human thought and swim there. The KISS Principle still rules and still FAILs.

        1. You were correct the first time. ‘None’ = ‘Not one’. Remember, plural for two or more, singular for the rest. The confusion arises naturally from the proximity of the verb to the prepositional phrase’s plural noun.

      1. Agree: a lot of issues get hidden under the “consumer tastes & preferences” rubric. Incidentally, you might enjoy reading Daniel Kahneman’s book, _Thinking, Fast and Slow_. He is a psychologist who won the Nobel Prize in Economics for his work showing how (and it what ways) the human mind is NOT rational. The book is basically a culmination of his life’s work. It is an enjoyable to read, if you like this sort of thing. Humans basically have two distinct mental processes, but they cannot work at the same time. If one process is in operation, the other cannot be. (If you have seen the video where the viewer must count the number of times a basketball is bounced, you know what I am talking about. If not, find it online and follow the instructions. You will be amazed.) The brain is also very susceptible to priming effects, which DK explains in some detail.

        1. I remember when this theory, sometimes called ‘bicameralism’, was controversial, as if it meant we were all schizophrenic. No. It just means there is more to being human than using the rational aspects of our brain. There’s a lot more going on, well beyond our comprehension at this time.

          All of this reminds me of why I laugh at efforts to create ‘artificial intelligence’ (AI), like we know what intelligence really is. We don’t. Therefore, we’re trying to make it artificially because WHY? I’d rather we just said that we are developing machine intelligence (MI), which is all we’re actually doing.

          1. Too funny. Hannah, I figured there was a good chance you knew this book based on your online persona. I actually suppressed giving you a call-out in that post. Yes, the gorilla – basketball experiment is a real eye-opener. If people have not seen it, they owe it to themselves to look it up (probably available on YouTube). And agree: Game Theory is key to all informed decision-making. von Neumann and Morgenstern’s book was difficult to follow (at least for me) due to heavy math notation. A more approachable book for lay readers was written years ago by some other Princeton folks, Avinash Dixit (and somebody else; sorry, skips my mind) on _Thinking Strategically_ …In Business, Politics, and Every Day Life_ …or something like that. Simply “looking forward and reasoning back” will do for starters for most people. But many folks — including some MDN posters and so-called analysts, too — seem to struggle with basic stuff. Hopefully they will figure it out. A mind is a terrible thing to waste. Cheers.

    2. russ, mainstream neoclassical economics knows its masters, and its market-ruling masters prefer sycophancy. But to get at human behaviour when the stakes are really high, game theory is used (as devised by von Neumann and Morgenstern and elaborated by Nash and many others since).

  4. So many people misunderstand basic economic principles, it is sad, indeed. My only advice is this: If something _seems_ to defy your perception of economics, it is is time to revise your perception, maybe take a broader view of the issue, re-examine assumptions, and perhaps modify your theory. Because economics is a constraint, like it or not. No one has proven that wrong. Rather than blubber on that Macs defy economics simply because people still buy them despite the existence of cheaper PCs (!), a reasonable person might consider the possibility that Macs and PCs are not interchangeable products, and may even represent two distinct markets, or market segments, not one. Just like anything else, including cars, clothes, houses, restaurants. We would never say nice cars, nice clothes, nice houses, or upscale restaurants defy economics, would we?

    Charlie, you need to up your game. And learn more about basic economic principles and practices.

  5. Just because you don’t understand it, it doesn’t mean it is bullshit. The science is very real, and the real scientists know what they are talking about.

    And I’m not talking about the financial analysts.

    1. When you get into economic theory, you can apply scientific processes to it. But again, you’re going to have to face understanding human behavior. If you think we humans think according to simple scientific rule, you haven’t studied human behavior. We have barely begun to establish a learning curve. That’s why economic theory consistently really is a significant amount of bullshit.

      My favorite example: Examine this history of Milton Friedman’s particular flavor of bullshit. His theory fit the desires of the neo-feudalists of his time who wanted an excuse for the rich getting richer and the poor getting poorer. *DING* He reaches celebrity status, even though his theory was bullshit. It’s still bullshit. And as you’ll no doubt see in the replies, his convenient bullshit still appeals to neo-feudalists.

      Tinkle-Down-Economics <–My name for his general concept. Pee on the peons while you rake in the cash off the backs of their labor.

      1. You’re half right. Economics is indeed based on human behavior and that is why it is so unscientific. Leading economists are constantly failing to predict major shifts in the economy.
        Regarding Milton Friedman, you are wrong. He is one of the few to recognize the reality of human behavior factor. People are going to do what is in their best interest and nobody can look out for your best interests better than you can. Nobody.

    2. What I really really know is that a product with a high gross margin is far far better than products with minimal gross margins.

      Statistics can compare many things including irrelevant or unimportant facts like “market share.”

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