WSJ backpedals on iPhone 5c supply chain cuts story

Posted:
in iPhone edited January 2014
After first ignoring advice from Apple's chief executive Tim Cook not to speculate on rumors related to the company's supply chain, the Wall Street Journal has subsequently toned down its alarmist story of iPhone 5c cuts and retailer discounting.



Bloomberg

Apple executives Craig Federighi, Tim Cook, and Jony Ive; Cook with iPhone 5c. Source: Bloomberg Businessweek.


Yesterday, the Journal joined Reuters and other major media outlets in targeting Apple's iPhone 5c with speculative, worrisome concerns based on assumptions and guesswork built on top of poorly conceived interpretations of unverified data.

Little knowledge a dangerous thing

Under the initial headline "Apple Cuts iPhone 5C Orders," a report by Lorraine Luk, Eva Dou and Ian Sherr for the Wall Street Journal outlined supplier cuts it defined as less than 20 percent at Pegatron and "one-third" at Foxconn.

The article didn't outline how many iPhone 5c models Apple had been building, or how many it planned to build at launch or throughout the quarter, or if the changes were planned in advance or in response to production yields.

Instead, the financial journal simply speculated that the undefined "reduced orders" could be "fueling concerns about weaker-than-expected consumer demand and the company's pricing strategy."

Five paragraphs into the article, the report noted, "Apple meanwhile has increased this quarter's orders for the iPhone 5S," but again it did not report how many of those models Apple was said to be building or whether rumors of production issues had played a factor in the orders changing.

A shifting story

By the end of the day, the paper changed its headline to "Apple's Dual iPhone Strategy in Doubt," shifting the narrative to focus on the idea that Apple's plan to "broaden its appeal with a cheaper version of the iPhone [...] appears to be faltering after a few weeks."

The revised story cited an executive from Orange as saying that the new iPhone 5c "isn't selling as well as expected because it is too expensive, and the older iPhone 4S remains an attractive, cheaper option," an apparent contradiction of the report's core suggestion that a cheaper version of the iPhone isn't actually broadening its appeal.

Orange didn't detail of how many units it was selling of each iPhone model, and the Wall Street Journal didn't explain how it might be better for Apple to be selling more iPhone 5c models, which would either come at the expense of the high end iPhone 5s or the lower end iPhone 4s.

iPhone 5c


As it is, available data estimates from CIRP indicate that Apple's best, most expensive model makes up the majority of sales (64 percent), while iPhone 5c is second at 27 percent and lower end models are a distant third, making up less than ten percent.

Despite identifying a problem to worry about, the Wall Street Journal didn't articulate a potential solution outside of backing certain analysts who have claimed Apple should somehow be selling an even cheaper 5c, an idea contradicted by the concentration of demand at the higher end of Apple's product mix.

Indeed, as the Journal observed in its second edition, "the fact that the 5C appears to have missed Apple's expectations may not be all bad, especially if it means consumers are buying more of the 5S, the higher-end iPhone that came out at the same time last month and sells for $100 more."

The revised version of the story also now mentions by its third paragraph that Apple is said to have increased production orders for its high end iPhone 5s.

The danger of supply chain speculation

A parallel report by Clare Jim and Paul Carsten for Reuters similarly speculated about changes in supply chain orders, while also also hedging its bets by noting that "analysts and Apple executives have cautioned against reading too much into supply chain adjustments, which are common in the fast-moving electronics industry."

One year ago, Citi analysts Glen Yeung, Walter Pritchard and Jim Suva issued a pessimistic report on iPhone 5 demand based on "near-term supply chain orders."

Not only was that information subsequently found to have inappropriately leaked to hedge fund SAC Capital, allowing that firm advanced opportunity to profit from the stock selloff Citi's predictions triggered, but the information itself was not correct. Apple's iPhone 5 was the world's top selling smartphone and continued to enjoy rapid sales even as investors began dumping Apple's stock on the "news" that its phone wasn't selling.

Such "supply chain orders" weren't just scandalously used to fuel insider trading (Citi was subsequently slapped with a $30 million fine for this), but they were false information that had a very material, negative impact on Apple's business.

That false information was subsequently picked up by journalists and spread around throughout 2013, creating the impression that Apple was faltering and poised to lose its leadership position to Samsung, a preposterous charade some journalists still continue to repeat, despite a preponderance of evidence against such a conclusion.

Can't check a channel you don't understand

In Apple's January quarterly earnings conference call, Cook warned analysts, "the supply chain is very complex, and we obviously have multiple sources for things. Even if a particular data point were factual, it would be impossible to interpret that data point as to what it meant for our business.""Even if a particular data point were factual, it would be impossible to interpret that data point as to what it meant for our business." - Tim Cook

Cook continued to recommend that analysts not base their predictions on supply chain "checks" throughout 2013. However, a series of analysts have continued to issue "supply chain check" reports that fueled headlines despite being, more often that not, completely wrong.

"Channel checks" were cited in March as evidence of a new Apple TV set top box that never materialized. Similar "checks" were also cited in June as proof iPhone production was being cut, just before the company reported unusually strong smartphone sales over the summer.

Journalists and bloggers have also jumped on the bandwagon, issuing "reports" of their own that confidently arrive at conclusions based on scraps of supply chain rumors.

As analyst Benedict Evans noted, "people really ought to have learned that supply chain production volume rumours for iPhones are worthless," adding, "the 5c could be a total flop but supply chain rumours wouldn't tell us either way. Too many variables."

After the past couple of years, people really ought to have learned that supply chain production volume rumours for iPhones are worthless

-- Benedict Evans (@BenedictEvans)


Certain analysts appeared driven to promote such "supply chain reports" by a desire to prove that their predictions of a cheap iPhone 5c were not actually wrong. By turning things upside-down, they can use "channel checks" to affirm that it was instead Apple that was wrong for not actually doing what they said the company would do.

For example, Piper Jaffray analyst Gene Munster and Jefferies' Peter Misek both made unflattering predictions about iPhone 5 sales and this year's iPhone 5c/5s launch based on "supply chain checks," then punished the company with downgrades after they were proven wrong in both cases.

They're slashing the price!

In addition to supply chain checks, media reports have also fixated on iPhone 5c price cuts, both in the U.S. and in China. The Wall Street Journal wrote that such discounting by retailers "signals that interest in the 5C has been weak."

That's an incredible conclusion to draw given that iPhone 5c is within the top three smartphone models across all four major U.S. carriers, and is outselling Samsung's Galaxy S4 flagship on half of them.


Canaccord Genuity September 2013 survey results
Source: Canaccord Genuity monthly wireless store surveys


The Journal backtracked slightly in its revised story, stating that "reduced orders could indicate weak demand, or could signal that Apple wanted to ensure adequate supply of the 5C so that potential buyers, who were more likely to be switching from competing phones, didn't have to walk out of a store empty-handed."

It noted that the "the choice of colors, and a need for retailers to have supplies of each," would have required a faster initial inventory build, and added that Apple may have built more models up front in preparation for its China Mobile launch, which hasn't yet solidified in a deal. By the end of the second story, it appears that the story is that there isn't any real story to tell at this point, just three weeks after the launch of the newest iPhones.

Apple doesn't slash prices of slow sellers

On top of lacking a verifiable demand problem, there's also the fact that Apple itself has historically never discounted products, even ones that were not selling well.

Initial editions of Apple TV (which the company's executives later euphemistically described as a "hobby") were never discounted just to move boxes, nor was the Mac mini, which also appeared to gain less traction in the market than the company had initially expected.

G4 Cube


Sales of Apple's Power Mac G4 Cube (above), an expensive machine released with unfortunate timing just as the 2000 dotcom bubble was bursting, were very disappointing to the company, but the model wasn't rapidly discounted.

Similarly, while Apple doesn't detail iPod sales by individual model, certain models have been much more popular than others but none were discounted to "move" slower selling devices, and certainly not just weeks after launch.

In fact, the only major product where Apple slashed the price shortly after its launch was the original 2007 iPhone, and that repricing was done after initial sales established that there was major demand for the new device, enough to warrant lowering its price to grab even more volume.

"The surveys are in and iPhone customer satisfaction scores are higher than we've ever seen for any Apple product," Steve Jobs announced at the time. "We've clearly got a breakthrough product and we want to make it affordable for even more customers as we enter this holiday season."

The very idea that Apple would discount its iPhone 5c shortly after launch in order to "move inventory" is bewildering to anyone who has watched the company over even just the past few years. Apple does not discount products. Also, Apple hasn't discounted its own iPhone 5c pricing, online or in its retail stores.

Even many of Apple's competitors, when faced with slack sales and general disinterest in their products, have rarely resorted to significant discounting until it was absolutely necessary to clear out unsold inventories. Microsoft didn't immediately discount the Zune, or Zune HD, or Surface RT or Surface Pro until those products had suffered complete humiliation on the shelf, ignored by customers for an entire year.

This all happened before

Discount retailers like BestBuy, Radio Shacks and Walmart have discounted iPhone 5c, along with certain mobile carriers. Those parties have a variety of motivations for discounting Apple's phone. Even as a loss leader, an iPhone 5c sale brings customers into their stores and sells lucrative data contracts, accessory sales and other purchases.

Further, there's nothing new about Apple's retail partners, particularly discount retailers, advertising lower prices for Apple's gear, from iPods to iPhones and iPads. Amazon, Target and Walmart have all long advertised incentive price discounts for Apple's products, for example.

Perhaps most bizarrely, the iPhone 5c discounts offered by a variety of retailers and certain carriers are being cited as evidence that Apple's "pricing strategy" was wrong. If Apple had priced the iPhone 5c any lower, it would be harder for Walmart and China Telecom to offer any pricing incentives of their own. Profit margins at every retailer would be slimmer, and Apple's own profits would be lower across the board.

By setting the price it did, Apple gave itself, and its retail partners, additional flexibility on pricing. So not only are analysts and reporters confusing their audiences with blatantly incorrect predictions based on supply chain speculation, but they're also completely off base in their criticism of a pricing strategy that is working correctly by design, regardless of whether the iPhone 5c is selling well right now or not.
«1345

Comments

  • Reply 1 of 84
    It is rare in Hong Kong that we can get the 'new' 5C within 24 hours from Apple Store, we can buy it from unoffical store at around 5%-7% discount.
  • Reply 2 of 84
    I knew it!
  • Reply 3 of 84
    There is no justice on AAPL. Any bullshit that sounds logically correct can apply on Apple .

    Headlines like this may make AAPL drop :
    Check on Foxconn food supplier on food orders cut implies Apple doesn't need so many people to make iPhones so there is no need to order some much rice.
  • Reply 4 of 84

    I just have to air my own views too: http://www.coherentchaos.net/speculative-reporting/

     

    Sick of all this lazy, baseless reports.

  • Reply 5 of 84
    bickbick Posts: 7member
    Last month analysts and their conspirators in media complain the 5c isn't cheap enough. This month, the problem now is that the 5c is in fact cheaper because of competitive discounting from retailers. Apple can't win, except where counts... more money in it's coffers rather than the carriers.
  • Reply 6 of 84
    hill60hill60 Posts: 6,992member
    In a few days the 5s and 5c are launching in thirty six more countries, the market is growing.
  • Reply 7 of 84
    @DED - PLEASE do a piece debunking that "moron" over at Gigaom!!! His claims that Apple doesn't understand the Internet are downright ludicrous!
  • Reply 8 of 84
    philboogiephilboogie Posts: 7,448member
    1) Well, that's one way of getting on the news.

    2) "People who are really serious about their products should also do their own predictions"

    3)
    Sales of Apple's Power Mac G4 Cube (above), an expensive machine released with unfortunate timing just as the 2000 dotcom bubble was bursting, were very disappointing to the company, but the model wasn't rapidly discounted.

    But the cube was discontinued after 12 months; seems rapid to me.
  • Reply 9 of 84
    blackbookblackbook Posts: 1,361member
    It didn't sound like the WSJ was back pedaling to me. It was still a very negative article with an obvious anti Apple slant.

    I said this in the other thread but it's rather apparent to me that the 5C is selling below expectations.

    Retailers have been overstocked with the device since launch which means Apple probably anticipated higher demand for the 5C.

    Add in the fact that Apple has launched a massive global advertising campaign for the 5C and it can barely muster a 27% share of sales is also very telling.
  • Reply 10 of 84
    on the high note apple just reached $500 today again.
    YAY.
  • Reply 11 of 84
    WSJ, NYT, CNBC, CNN, FOX and even ABC like to make up something salacious to report about Apple on a periodic basis. A disappointing thing about these news reporting outlets is they get away with willfully spreading false information nearly every day. They bring analysts into the false reporting and the analysts willingly corroborate the false information. Even when all involved know they are wrong they do it.
  • Reply 12 of 84
    jd_in_sbjd_in_sb Posts: 1,485member
    What was the sales ratio of iPhone 5 and 4S during the last year? Was it also near 64% and 27% , like the iPhone 5S&C ? If so this is all smoke and no fire.
  • Reply 13 of 84
    Quote:


     But the cube was discontinued after 12 months; seems rapid to me.


     

     

     

     

    Discounted and discontinued are different words, Phil.

  • Reply 14 of 84
    rogifanrogifan Posts: 10,669member
    How is the WSJ back peddling? Doesn't sound like their story changed much to me. Doesn't mean the story is right.
  • Reply 15 of 84

    Why would anyone read a WSJ piece on Apple? Seriously, think about it: this is the Wall Street Journal ‘reporting’ on AAPL.

  • Reply 16 of 84
    jungmarkjungmark Posts: 6,709member
    blackbook wrote: »

    I said this in the other thread but it's rather apparent to me that the 5C is selling below expectations.

    Retailers have been overstocked with the device since launch which means Apple probably anticipated higher demand for the 5C.

    Add in the fact that Apple has launched a massive global advertising campaign for the 5C and it can barely muster a 27% share of sales is also very telling.

    Whose expectations? How many stores did you go visit?

    27% of 9MM is still more than most other phones.
  • Reply 17 of 84
    bigmac2bigmac2 Posts: 637member
    Quote:
    Sales of Apple's Power Mac G4 Cube (above), an expensive machine released with unfortunate timing just as the 2000 dotcom bubble was bursting, were very disappointing to the company, but the model wasn't rapidly discounted.

     

    I don't think the PowerMac G4 Cube poor sales can be attribute to the Dotcom bubble burst.  It was a strange product with fashion over functionality with a very bad price spot.  The unexpendable G4 cube without the screen was about 200$ more expensive than a iMac, and 150 less than a full PowerMac G4.

  • Reply 18 of 84
    blackbook wrote: »
    ...can barely muster a 27% share of sales is also very telling.

    I'd say this was more telling of the real situation:

    canaccord-sept13-20131004.png

    Source: Canaccord Genuity monthly wireless store surveys

    Seems like Apple's underperforming in beating Apple in sales... the mix makes little to no difference!

    In fact, they seem to have doubled their number of "flagships" by making 2 phones this year instead of 1. Incredible.

    There are some huge companies weeping over the 5C. Apple isn't one of them.
  • Reply 19 of 84
    ipilyaipilya Posts: 190member

    To put the % of 5c phones sold into perspective:

     

    If Apple sold 5 million iPhone 5s phones but the 3 million iPhone 5c phones which 85% of were sold to new customers and the remaining 1 million iPhones sold were the 4s. Now with these numbers, you have to look beyond the 1-3ish ratio of 5s to 5c and consider the possibility of how many new iPhone users were pulled from competing manufactures.

     

    I agree with most in that the "press" tries to much to spread a negative word. Negativity is as the media has know for years what sells. I just wish people were held responsible for impacting stories that are found not to be generally true in essence. 

  • Reply 20 of 84
    damonfdamonf Posts: 217member
    @ BlackBook - The 27% number you refer to comes from this:

    During September, the iPhone 5S accounted for 64 percent of all Apple smartphone sales, easily topping the iPhone 5C's 27 percent share, according to data obtained by All Things Digital from research firm Consumer Intelligence Research Partners (CIRP). Just 9 percent of customers bought the iPhone 4S last month.

    That the 5C is selling 27% compared to the 64% for the 5S is actually expected at this very early stage of the products' lifecycles. Remember that there are a whole lot of iPhone 4S first-adopters coming off their 2-year contracts from September/October 2011 who are eager to upgrade. Tell me why on earth these customers would want last year's iPhone 5 w/ plastic body (meaning the 5C), if they purposefully bought the top-of-the-line 4S two years ago? Wouldn't it make sense they'd go top-of-the-line again this round? So it makes perfect sense that the 5S is selling 64% to 27%. Now if the 5C was being outsold - or close to being outsold - by the 4S and its "free" price on contract, then there should be cause for concern about the success of the 5C. But 27% is three times the 9% share of the 4S. So I'd say the 5C is still holding its own and is attractive for the price-conscious newbies who are most likely coming over from Android, BlackBerry, or an iPhone 3GS. I think that starting in the first quarter of next year, the 5C will see higher share, as the renewals of customers' 2-year carrier contracts settle down, thus the 5S demand backing off a little bit.
Sign In or Register to comment.