Can sales of $400 MP3 players be a good measure of economic trouble? A research note from FBR Capital Markets, concerning a precipitous drop in iPod and iPhone component orders, could be a sign of broader worries about the economy.
The report from FBR’s Craig Berger, centered around the cut in build rates of iPods and iPhones and the impact on component suppliers like Broadcom and Marvell, which supply some of key parts for the devices.
Berger reported that build rates for the iPhone and iPod had been cut again, first by 50 percent from Q4 2007 to Q1 2008, and then to 60 percent. He also reported that iPod Touch had seen the largest negative revision against its original order checks last month, suggesting the Touch wasn’t selling well.
Apple did not respond to requests for comment on the report.
[cob:Related_Articles]The iPod, particularly the Touch, and iPhone are expensive luxury items aimed at consumers, making them an ideal barometer for economic trouble. If we are indeed headed for an economic slowdown, what better measure than $400 phones and MP3 players?
“We are in recession,” Berger, a senior vice president with FBR, told InternetNews.com. “Best Buy’s same stores sales grew two percent in December year over year, and inflation was more than two percent, so in real dollars, we’re shrinking.”
As for the fall off, it’s not just an after Christmas slow down. “My research showed a 50 percent fall off in iPod builds, then a 60 percent fall off. That’s an apples to apples comparison,” said Berger. “That suggests demand was weak in Q4, demand was weak in Q1, or Apple overestimated its demand and is canceling orders they don’t need.”
While there are also real problems with the economy and it’s not just Christmas demand falling off, Berger also agreed with Cisco CEO John Chambers’ sentiment that people are talking themselves into a recession with all the economic slowdown talk.
“Part of the problem is clearly how much money people have to spend and inflationary pressures. The other part of the problem is the ‘CNBC Effect’, where they see a plunging stock market, and everyone starts talking about how bad the economy is, and all of a sudden companies that were going to spend 10 percent more on IT dial that back to 3 percent, and to some degree that turns into a self-fulfilling prophecy,” he said.
A number of market analysts contacted by InternetNews.com felt the drop in production was more due to seasonality than the economy. “Keep in mind that this is the slowest quarter for any of these types of devices,” said Tim Bajarin, president of Creative Strategies. “The bigger issue is if that number continues, with those kinds of cutbacks, then it would be significant news.
The decline in Apple orders is primarily seasonality, said Van Baker, senior analyst with Gartner. “They’ve also had a little flattening of demand in terms of unit sales reported by Apple, but that’s to be expected. When a market matures it slows down.”
Rob Enderle, principal analyst for The Enderle Group, thinks the real measure is the 10 percent change, when Apple cut the parts orders from 50 percent to 60 percent. “They were expecting a more aggressive market, I would think. They aren’t off by 50 percent, it’s 10 percent that’s the delta. They might be down 10 percent on what was probably some pretty aggressive projections,” he said.
Whether it’s seasonality, over-projection or recession, they all agreed that Apple’s expensive gadgets make a pretty good canary in the economic coal mine. “They sell premium products to a general audience,” said Enderle. “What you are seeing is a slowdown on luxury goods and that’s Apple’s sweet spot. So they could be a real bellwether for a recession.”
Berger added “I don’t think the world is falling off a cliff. I still think people will buy PCs and handsets this year. The world will consume 1.3 billion handsets, up 10 percent.
“We haven’t seen the enterprise refreshing with Vista, which could be a second half ’08 positive tailwind as enterprises upgrade to Vista. Right now everyone is waiting to see if things are getting worse,” continued Berger, “or if everyone takes it on the chin now and grow off this lower base again.”
