Apple: Higher Margins Mean Reduced Exposure in Emerging Markets
This is not, however, a complaint that has been voiced only by companies in China. Apple generally requires wireless providers to contribute large subsidies when each handheld device is sold. This significantly reduces the costs paid by the consumer, and locks that consumer into a long-term agreement with both companies. The only problem is that this is not a common arrangement in many areas of the world, where phones are purchased outright by the consumer and those purchase costs are not directly tied to a monthly service plan.
In these cases, Apple's contractual requirements fail to match the prevailing tendencies seen in the local market, and those businesses are the ones that have shown the most reluctance in committing to partnerships with the iPhone maker. Further limitations are seen when Apple requires even small companies to commit to high volume sales orders. In emerging markets, it can be difficult to persuade smaller businesses to take on the added risk for a product that is generally thought to be out of the financial reach of many local customers.
As Apple continues to lose its hold on the central market position it had at the height of the iPhone frenzy, some difficult decisions will need to be made. As with any business choice, profits are king, but in order to maximize Apple's potential in this area, the company might need to change its approach from what might have worked in the past. Allowing margins to fall would mean that sales figures would rise and that the company would gain new exposure in emerging markets.
Whether or not this will result in improved profits, however, will be the main question. Either way, it is clear that Apple is in a position where new strategies must be considered, and, at this stage, margin cutbacks look like the best place to start.At the time of publication the author held no positions in any of the stocks mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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