![[title]](https://i.imgur.com/UkUvbm0.jpg "[title]")
sean o'reilly: we're talking tech saturationon this tech edition of industry focus. greetings, fools! sean o'reilly here at fool headquarters in alexandria, virginia. it is friday, january 15th, 2016. joining me to chat global technology saturation, as always, is the only editor i know who can throw a baseball at 85 mph. dylan lewis: i like that, a throwback to myhigh school days. i appreciate that. o'reilly: yeah, you bet. i actually was goingto ask you, dylan. do you have a specialty? a curve ball? fastball? lewis: i was a curveball guy. o'reilly: you're kidding me!
lewis: yeah, i was crafty. lewis: i was a paint-the-corners kind of guy,yeah. o'reilly: really!? i was going to make a meanfastball guess. lewis: yeah, no. o'reilly: you didn't spit on your palm oranything sneaky, did you? lewis: no. i could throw a pretty decent mess-aroundknuckleball. i wouldn't throw it in a game, but-- o'reilly: oh my gosh! lewis: --hanging out in the-- o'reilly: you're throwing the crazy pitches!
lewis: hanging out in the bullpen, you know,during practice and stuff like that. yeah. o'reilly: cool. well, starting off today withsmartphones, and what's going on there. a bit of a lead-in: best buy reported holidaysales, and they were not pretty. this is for smartphones. lewis: yes. well, they reported holiday salesin general, but the particularly ugly part of the report was smart phones. o'reilly: because lots of people buy -- yeah.domestic sales over the nine weeks ended january 2nd fell 1.2%, excluding new stores and closuresyear-over-year, and according to a press release, the domestic decline was primarily drivenby the mobile phone category. so, they're
actually calling out mobile phone sales. doyou think they're being a little week there? or what? lewis: they go on to say, "excluding mobilephones, domestic revenue increased year-over-year due to our strong performance in health wearables,home theater, and appliances." o'reilly: so, maybe they're warranted. lewis: yeah. and they actually do a segmentby segment breakout here, and they look at some of the numbers, and domestically, thecomputing and mobile phone segment, which is actually what we're going to spend quitea bit of the show talking about, was down 7% from last year, and that's lapping a 2%decrease the year before.
o'reilly: everybody i know -- christine andjames upstairs were talking about buying new phones. people are buying phones. what's goingon here? lewis: that's the weird thing about it. everyoneyou see has a smartphone. everyone you know has a laptop or a tablet or something likethat. you don't think of these as struggling businesses. o'reilly: when did the iphone 6 come out?earlier this year, so that's not it ... lewis: so, the 6s came out in the fall, andthe 6 came out-- o'reilly: spring, right? lewis: yeah. another piece of news -- theway best buy was stating this was "domestic."
but this is not just a domestic issue withthese slowing growth rates. taiwan semiconductor manufacturing company, they are a componentcompany that makes chips that power the iphones, said that it expects q1 revenue to be down11% year-over-year, and that is due to soft demand for high-end smartphones. and justto give you an idea of their relationship with apple as it relates to their larger financials,roughly 20% of their revenue comes from sales to apple. o'reilly: wow. lewis: two other apple providers, largan precision,a company that makes camera modules and catcher technology co., a company that specializesin metal casings, both have issued similar
guidance about what they expect for 2016. o'reilly: so, what best buy said was clearlythe tip of the iceberg. what do you think is going on here? lewis: it's kind of crazy, right? o'reilly: this seems like something out ofthe onion. there's no way. lewis: yeah. when you look at best buy, thereare a whole bunch of competitive issues at play there, where someone like amazon creepsin or something like that-- o'reilly: that was a bad example … lewis: but, to be clear, these are still growingmarkets. the growth rates just aren't what
they were. idc estimates that the global smartphonemarket in 2015 grew 9.8%. growth was over 20% in 2014 year-over-year. so, this is actuallythe first year of single-digit percentage growth year-over-year for the smartphone marketglobally. o'reilly: ever. lewis: so, i think there's a couple thingsyou can look at here as reasons for why this is happening. one of the big things, as youalluded to in our intro here is saturation with the market. like we talked about, everyoneyou know has a smartphone at this point, for the most part. o'reilly: yeah. i've had one since ... whendid you get your first one?
lewis: probably four years ago. o'reilly: i think i got mine about five, andi actually got it because of my co-workers at ... yeah, i kind of had to because everybodyelse had it. lewis: and the market is much more developedhere in the u.s., but part of the reason why we saw such explosive growth in 2014, 2013,was some of that developing parts of the world, china in particular, there were a lot of first-timebuyers that were getting these devices. so, you think about the typical refresh cycle,the particular upgrade cycle for a lot of these devices, it's usually 2.5, 3 years. and so, knowing that 2014 was a particularlybig year for sales, it's not surprising that
2015's a little weak. so, that's one of thethings. i think one of the other big trends is, obviously, we're in the mid-upgrade wavefor apple products. like you said, the most recent product release was in the fall with6s. we will be expecting the iphone 7 to be coming out this year in the fall. so, that'skeeping with the typical calendar that apple releases a new major upgrade to its line every2 years. o'reilly: isn't it funny, that that's wherei immediately went when you were talking about lackluster sales in smartphones? it was like,"wait a minute, when did the iphone ... " lewis: yeah, it's the major barometer. granted,the 6s had some cool new features: 3d touch, live photo, stuff like that. but, consumersknow that the big changes come when the number
changes on the device. so, i think maybe thesecond half of 2016 will bode a little better for this market. o'reilly: my mother just got the 6s, and therewas some debate. she really wanted the newer one, but there was some, "okay, should wewait for the 7?" lewis: i couldn't wait. o'reilly: i know you couldn't. you were sohappy that day, too. lewis: i was giddy, yeah. and lastly, theseare tough comps to be going up against. like i talked about. the iphone 6 and the iphone6 plus, which was apple's first foray into the phablet market, did remarkably well. just,awesome products, they sold tons of devices.
and so, you're going up against really toughyear-over-year comparisons in 2016. so, that's particularly difficult. all that said, i thinkthere are a few things to watch here. most of the pessimism that i've seen, particularlythat coming from apple suppliers, is really confined to the first half of 2016, whichisn't surprising, because like i said, the iphone update will be coming out in the secondhalf of 2016. so, the second half should be much stronger. we'll get some insight fromapple as to what they expect for the year in terms of guidance at the end of this monthwhen they report earnings. so, we'll get some color there in addition to what they've donein the past with the holiday season and everything like that.
but, i think one of the most interesting things,apple trying to get ahead of some of these trends and trying to push the upgrade cyclefaster than the 2.5-3 years that some consumers seem to be on is the apple iphone upgradeprogram, where you pay the monthly $30 or so and you can upgrade yearly. o'reilly: do you think that's a good deal? lewis: we did the math on it. if you're someonewho actively wants the best model, and you are divorced from a carrier subsidy model,then it's not bad. and that's one other thing that also comes into play with a lot of thesenumbers, you look at some of the major carriers. you know this space a little bit better thani do. but most of them are moving away from
allowing new customers to sign up for subsidyplans. o'reilly: it was a big deal when verizon didit. i knew that big things were happening, because a little over a year ago, when i wasdoing this same show with nathan hamilton, he started talking to me about what t-mobile,and i was like, "i should switch to t-mobile." i switched to t-mobile from verizon becauseof the show. and then, i didn't realize how big of a deal or how quickly it had happened,because now they're all like that. sprint's begging for my mother-in-law to stay withthem, all kinds of stuff. lewis: yeah. before we started doing the show,before we came in the studio, talking with kristine harjes, the healthcare editor--
o'reilly: that's right, folks. we do talkto each other. lewis: she'd said, "you guys are talking aboutiphone update rates, i've had the same--" she has an iphone 5, "--iphone for 3 years."and i was like, "do you not have subsidies through your carrier?" she was like, "no.so, i don't really want to pay the $650 or so it would cost to get a new phone." and i think that's one of the issues withall the carriers moving away from the subsidy is, a lot of people are so ingrained intothat thought of, "okay, this new phone will cost me $150 through my plan." and then yousee the actual retail sticker price that phone is worth, and without a subsidy model, you'repaying $650. you're like, "man, that's a lot
of money!" o'reilly: that was the thing that happenedwhen i went in and did the t-mobile switch, because the one way they can mitigate thatis just, no interest, two years, you pay off the phone. so it's $650/24 months. so i'mpaying like $28 or so a month. the second that ends, my cell phone bill gets reallycheap, and it's going to be awesome. but then i'm going to want the new iphone, agh! lewis: yeah, then they're going to drop somenew features ... o'reilly: they're going to give me some wirelessheadphones and all this stuff, and game over. before we move on, and this is completelyoff the cuff, do you think there's any possibility
that the lack of growth -- we're talking abouthigh-end smartphones. lewis: yeah, samsung and apple. o'reilly: you and i both know apple's profitmargins on the iphones are ... lewis: gaudy. o'reilly: they're beautiful. lewis: yes. o'reilly: is it possible that the cheapersmartphones are starting to affect people's buying decisions with that? is it possiblethat might be rolling over a little bit? lewis: i think so. you're talking about xiaomiand some of the cheaper chinese manufacturers?
o'reilly: yes. without calling out any particularnames, which you just did ... lewis: particularly in developing markets,where they're very popular. i think there's something to that. i think that it is somethingthat manages to ... o'reilly: i love how seamless the iphone isas much as the next person. i try to get away from it, and i can't. but economics eventuallysets in, you know what i mean? lewis: i think what you get with xiaomi andsome of those products, if you don't want to spend a lot of money on a smartphone, youget the minimum viable product that is also a smartphone and stylistically looks similarto an iphone, so i get that. i do think that, in china in particular, it's a very luxury-orientedmarket. so, there's going to always be that
huge divide between low-end and high-end. o'reilly: there's a reason the world's biggestcoach store is in beijing. lewis: yeah. so, i think it definitely hurts,but maybe to counter that, it also gets people using smartphones as an intro device-- o'reilly: and then, when they get a littlemore money, maybe they want the iphone. lewis: yeah. so, maybe it's a negligible netresult for the high-value smartphone manufacturers. o'reilly: we shall see. before we move on,i want to point our listeners to the newly-redesigned focus.fool.com. there, you'll discover a specialoffer to join the motley fool's stock advisor newsletter to start your year off foolishly.all loyal if listeners have access to a special
discount on stock advisor that works out to$129 for a full two-year subscription, just go to focus.fool.com to take advantage ofthis offer. once again, that’s focus.fool.com. pivoting over to the pc market … boy, we'rejust womping on hardware today, aren't we? lewis: yeah. o'reilly: do you feel bad about it? lewis: little bit. but i mean, we're justpainting a picture. o'reilly: yeah. actually, i tried to go macwhen i got my computer choice here at the fool, and i couldn't because unfortunately,windows owns me. anyways. lewis: full disclosure, i use a mac at home,i use a thinkpad here at work.
o'reilly: so you're a bigamist? lewis: i like having something that trulyruns office. not a version of office, and not having to run on parallels to be ableto run the true version of office. o'reilly: this is when i was on your -- doyou remember the day i was trying the macbook? o'reilly: and it was really funny it happened,because that was the day the queue was huge. ladies and gentlemen, one of dylan and i'sother jobs is, we edit articles that go out on fool.com, and i had a bunch of articlesi needed to get through, and i wasn't quick enough on the mac. and i was like, "dangit,i could be doing this if i was on the pc!" lewis: it definitely takes a little gettingused to.
o'reilly: yeah. lewis: especially if you're so ingrained inthe windows interface. o'reilly: before that, i think the last timethat i'd used the mac was in the third grade. lewis: yeah. it's funny to think-- o'reilly: we all had it. lewis: you're talking about the translucent,cut-out box-y ones that they used to put in classrooms? o'reilly: yeah. they used to play oregon trailand get dysentery on macs. lewis: you have died of dysentery.
o'reilly: so, switching over to the pc market.what's going on? lewis: pc sales have fallen to levels notseen since 2007, incidentally the year the iphone was introduced. o'reilly: coincidence, dylan? lewis: according to international data corp.so, grand total was 276m shipments in 2015, versus 308m shipments in 2014. we can look,specifically, at some of the shipment leaders here to give you an idea of what the marketlooks like: lenovo in first place, roughly 57m shipments in 2015; hp in second with justunder 54m; dell in third with 40m; apple coming in fourth at 21m; and acer bringing up thebottom of the top five with 20m shipments.
so, i think those shipment volume numbersare great to give you a sense of market share. but, i think the 2015-2014 growth is whereone of the more interesting stories plays out. out of those five, sean, how many ofthem do you think experienced year-over-year growth? o'reilly: one. o'reilly: oh! i didn't look, i swear! lewis: did you cheat? o'reilly: no! lewis: you know who it is, right?
o'reilly: is it acer? lewis: no. o'reilly: is it apple? lewis: yeah. all of the other ones experienceddeclines. o'reilly: i went with my gut. cool. yeah,lenovo's down, hp's down, dell's down, and acer. cool. good job, tim cook! lewis: we'll talk a little bit about, broadly,what's going on here in the market, and then maybe get into some of the granularity ofwhy some of these companies are better off. similar to some of the issues that are plaguingthe smartphone market right now, pcs seem
to be suffering from slower upgrade cycles.that's being a victim of your own success, in a lot of ways. creating products that peoplewant to continue to use that aren't breaking every four years, and are lasting longer.so, that's one of the struggles. do you have a personal computer? o'reilly: actually, i use the work computer,and then my wife and i share a computer at home. and that thing ... i've replaced thehard drive. it's old. but it works. it's like, "i don't care, whatever." lewis: exactly. i got a macbook air two summersago. that's well within what the pc industry wants in terms of an upgrade cycle, year anda half or so. but before that, i think i had
a dell that i'd owned for five years. o'reilly: a little indicative of this, i literallyjust found this out the other day about microsoft, and it blew my mind. this is kind of indicativebecause microsoft basically is pcs. in the year-ended june 30th, 2000, microsoft's revenueswere just under $23b. guess what their net income was after paying taxes and everything? lewis: $4b? o'reilly: $9.4b net income. lewis: that's actually a pretty good margin. o'reilly: that is insane. guess what it istoday?
lewis: on similar revenue? o'reilly: nooo. their revenues for the 12-months-endedseptember 30th 2015, so the last 12 months, not year end june 30 -- actually, let's justdo the year. is that fair? o'reilly: yeah-ended-june 30th 2015, $94bin revenue. growing just under fourfold on revenue. there's a one-year charge there,but guess what their net income was for that year? lewis: i'm going to stick with the same marginprofile from before. that was $4b on $23b, roughly 1/6, so 1/6 of $90-something, $15b? o'reilly: $22b.
lewis: so, better than i thought, but that'sa huge contraction. o'reilly: that is a huge margin contraction.microsoft is having to work way harder to make money. and i did not know that untila couple days ago, and my jaw hit the floor, because i assumed microsoft would be ... because,their stock finally recovered in the last couple years to where it was in 2000, if youremember. anyways, that's just indicative of what's happened to pcs in the last 15 years.microsoft's having to work harder and harder and harder to make money. lewis: one of the interesting things thati read in idc's coverage of the shipment data, they usually have some nice research notesto parse out the data and read between the
lines a little bit, when after analysts talkeda little bit about how microsoft giving away windows 10 as a free upgrade-- o'reilly: need you say more? lewis: --also might have been a detrimentto the pc upgrade cycle. o'reilly: just think, in 2000, what were theygetting per edition of windows? $200, $300? lewis: yeah. so, the thought with that analyst'snote is that the new operating system refreshed the computer and gave people a sense of anew computer, even if it was the same hardware, so they weren't as willing to upgrade. so,that's another reason explaining what's going on. also, some people always fall back onthe strong dollar hurting some of these tech
companies, which is valid, but i always feellike that's a bit of a cop-out, because it's something that affects multi-national. but i think more than anything else, it'sstaggering to me that only one of the top five in terms of shipments has been able tobuck the trend, and that's apple. and i think that just goes to show how strong and stickytheir ecosystem is, that people are going to continue to buy iproducts because theylove the integration of-- o'reilly: what's the marketshare now? didyou catch that? lewis: as of 2015, it's 7.5%. and that's upfrom 6.3% in 2014. o'reilly: very respectable.
lewis: yeah. they have a solid little carved-outniche there. and just for context, lenovo, the market leader, is at just under 21%. so,they have a solid foothold there. but like i said, it is crazy to me to see only onecompany being able to buck such a huge industry trend. o'reilly: yeah. cool. just a side note forthe microsoft stuff, that year last year did have a bunch of one-time charges, but throwingthat back in, it was $22b. i think gap basis, it was like $12b. they get sued all the timefor anti-trust reasons. lewis: your margin contraction point was stillmade. o'reilly: isn't that crazy?
o'reilly: cool, thanks for your thoughts,dylan. lewis: always a pleasure. o'reilly: i will see you later. that is itfor us, folks. if you're interested in business development companies, also known as bdcs,be sure to tune into gaby lapera's financial industry focus episode on monday. as always,if you're a loyal listener and have questions or comments, we would love to hear from you.just email us at industryfocus@fool.com. again, that’s industryfocus@fool.com. as always,people on this program may have interests in the stocks they talk about, and the motleyfool may have formal recommendations for or against those stocks, so don't buy or sellanything based solely on what you hear on
this program. for dylan lewis, i am sean o'reilly.thanks for listening and fool on! https://goo.gl/hLJVLR
lewis: yeah, i was crafty. lewis: i was a paint-the-corners kind of guy,yeah. o'reilly: really!? i was going to make a meanfastball guess. lewis: yeah, no. o'reilly: you didn't spit on your palm oranything sneaky, did you? lewis: no. i could throw a pretty decent mess-aroundknuckleball. i wouldn't throw it in a game, but-- o'reilly: oh my gosh! lewis: --hanging out in the-- o'reilly: you're throwing the crazy pitches!
lewis: hanging out in the bullpen, you know,during practice and stuff like that. yeah. o'reilly: cool. well, starting off today withsmartphones, and what's going on there. a bit of a lead-in: best buy reported holidaysales, and they were not pretty. this is for smartphones. lewis: yes. well, they reported holiday salesin general, but the particularly ugly part of the report was smart phones. o'reilly: because lots of people buy -- yeah.domestic sales over the nine weeks ended january 2nd fell 1.2%, excluding new stores and closuresyear-over-year, and according to a press release, the domestic decline was primarily drivenby the mobile phone category. so, they're
actually calling out mobile phone sales. doyou think they're being a little week there? or what? lewis: they go on to say, "excluding mobilephones, domestic revenue increased year-over-year due to our strong performance in health wearables,home theater, and appliances." o'reilly: so, maybe they're warranted. lewis: yeah. and they actually do a segmentby segment breakout here, and they look at some of the numbers, and domestically, thecomputing and mobile phone segment, which is actually what we're going to spend quitea bit of the show talking about, was down 7% from last year, and that's lapping a 2%decrease the year before.
o'reilly: everybody i know -- christine andjames upstairs were talking about buying new phones. people are buying phones. what's goingon here? lewis: that's the weird thing about it. everyoneyou see has a smartphone. everyone you know has a laptop or a tablet or something likethat. you don't think of these as struggling businesses. o'reilly: when did the iphone 6 come out?earlier this year, so that's not it ... lewis: so, the 6s came out in the fall, andthe 6 came out-- o'reilly: spring, right? lewis: yeah. another piece of news -- theway best buy was stating this was "domestic."
but this is not just a domestic issue withthese slowing growth rates. taiwan semiconductor manufacturing company, they are a componentcompany that makes chips that power the iphones, said that it expects q1 revenue to be down11% year-over-year, and that is due to soft demand for high-end smartphones. and justto give you an idea of their relationship with apple as it relates to their larger financials,roughly 20% of their revenue comes from sales to apple. o'reilly: wow. lewis: two other apple providers, largan precision,a company that makes camera modules and catcher technology co., a company that specializesin metal casings, both have issued similar
guidance about what they expect for 2016. o'reilly: so, what best buy said was clearlythe tip of the iceberg. what do you think is going on here? lewis: it's kind of crazy, right? o'reilly: this seems like something out ofthe onion. there's no way. lewis: yeah. when you look at best buy, thereare a whole bunch of competitive issues at play there, where someone like amazon creepsin or something like that-- o'reilly: that was a bad example … lewis: but, to be clear, these are still growingmarkets. the growth rates just aren't what
they were. idc estimates that the global smartphonemarket in 2015 grew 9.8%. growth was over 20% in 2014 year-over-year. so, this is actuallythe first year of single-digit percentage growth year-over-year for the smartphone marketglobally. o'reilly: ever. lewis: so, i think there's a couple thingsyou can look at here as reasons for why this is happening. one of the big things, as youalluded to in our intro here is saturation with the market. like we talked about, everyoneyou know has a smartphone at this point, for the most part. o'reilly: yeah. i've had one since ... whendid you get your first one?
lewis: probably four years ago. o'reilly: i think i got mine about five, andi actually got it because of my co-workers at ... yeah, i kind of had to because everybodyelse had it. lewis: and the market is much more developedhere in the u.s., but part of the reason why we saw such explosive growth in 2014, 2013,was some of that developing parts of the world, china in particular, there were a lot of first-timebuyers that were getting these devices. so, you think about the typical refresh cycle,the particular upgrade cycle for a lot of these devices, it's usually 2.5, 3 years. and so, knowing that 2014 was a particularlybig year for sales, it's not surprising that
2015's a little weak. so, that's one of thethings. i think one of the other big trends is, obviously, we're in the mid-upgrade wavefor apple products. like you said, the most recent product release was in the fall with6s. we will be expecting the iphone 7 to be coming out this year in the fall. so, that'skeeping with the typical calendar that apple releases a new major upgrade to its line every2 years. o'reilly: isn't it funny, that that's wherei immediately went when you were talking about lackluster sales in smartphones? it was like,"wait a minute, when did the iphone ... " lewis: yeah, it's the major barometer. granted,the 6s had some cool new features: 3d touch, live photo, stuff like that. but, consumersknow that the big changes come when the number
changes on the device. so, i think maybe thesecond half of 2016 will bode a little better for this market. o'reilly: my mother just got the 6s, and therewas some debate. she really wanted the newer one, but there was some, "okay, should wewait for the 7?" lewis: i couldn't wait. o'reilly: i know you couldn't. you were sohappy that day, too. lewis: i was giddy, yeah. and lastly, theseare tough comps to be going up against. like i talked about. the iphone 6 and the iphone6 plus, which was apple's first foray into the phablet market, did remarkably well. just,awesome products, they sold tons of devices.
and so, you're going up against really toughyear-over-year comparisons in 2016. so, that's particularly difficult. all that said, i thinkthere are a few things to watch here. most of the pessimism that i've seen, particularlythat coming from apple suppliers, is really confined to the first half of 2016, whichisn't surprising, because like i said, the iphone update will be coming out in the secondhalf of 2016. so, the second half should be much stronger. we'll get some insight fromapple as to what they expect for the year in terms of guidance at the end of this monthwhen they report earnings. so, we'll get some color there in addition to what they've donein the past with the holiday season and everything like that.
but, i think one of the most interesting things,apple trying to get ahead of some of these trends and trying to push the upgrade cyclefaster than the 2.5-3 years that some consumers seem to be on is the apple iphone upgradeprogram, where you pay the monthly $30 or so and you can upgrade yearly. o'reilly: do you think that's a good deal? lewis: we did the math on it. if you're someonewho actively wants the best model, and you are divorced from a carrier subsidy model,then it's not bad. and that's one other thing that also comes into play with a lot of thesenumbers, you look at some of the major carriers. you know this space a little bit better thani do. but most of them are moving away from
allowing new customers to sign up for subsidyplans. o'reilly: it was a big deal when verizon didit. i knew that big things were happening, because a little over a year ago, when i wasdoing this same show with nathan hamilton, he started talking to me about what t-mobile,and i was like, "i should switch to t-mobile." i switched to t-mobile from verizon becauseof the show. and then, i didn't realize how big of a deal or how quickly it had happened,because now they're all like that. sprint's begging for my mother-in-law to stay withthem, all kinds of stuff. lewis: yeah. before we started doing the show,before we came in the studio, talking with kristine harjes, the healthcare editor--
o'reilly: that's right, folks. we do talkto each other. lewis: she'd said, "you guys are talking aboutiphone update rates, i've had the same--" she has an iphone 5, "--iphone for 3 years."and i was like, "do you not have subsidies through your carrier?" she was like, "no.so, i don't really want to pay the $650 or so it would cost to get a new phone." and i think that's one of the issues withall the carriers moving away from the subsidy is, a lot of people are so ingrained intothat thought of, "okay, this new phone will cost me $150 through my plan." and then yousee the actual retail sticker price that phone is worth, and without a subsidy model, you'repaying $650. you're like, "man, that's a lot
of money!" o'reilly: that was the thing that happenedwhen i went in and did the t-mobile switch, because the one way they can mitigate thatis just, no interest, two years, you pay off the phone. so it's $650/24 months. so i'mpaying like $28 or so a month. the second that ends, my cell phone bill gets reallycheap, and it's going to be awesome. but then i'm going to want the new iphone, agh! lewis: yeah, then they're going to drop somenew features ... o'reilly: they're going to give me some wirelessheadphones and all this stuff, and game over. before we move on, and this is completelyoff the cuff, do you think there's any possibility
that the lack of growth -- we're talking abouthigh-end smartphones. lewis: yeah, samsung and apple. o'reilly: you and i both know apple's profitmargins on the iphones are ... lewis: gaudy. o'reilly: they're beautiful. lewis: yes. o'reilly: is it possible that the cheapersmartphones are starting to affect people's buying decisions with that? is it possiblethat might be rolling over a little bit? lewis: i think so. you're talking about xiaomiand some of the cheaper chinese manufacturers?
o'reilly: yes. without calling out any particularnames, which you just did ... lewis: particularly in developing markets,where they're very popular. i think there's something to that. i think that it is somethingthat manages to ... o'reilly: i love how seamless the iphone isas much as the next person. i try to get away from it, and i can't. but economics eventuallysets in, you know what i mean? lewis: i think what you get with xiaomi andsome of those products, if you don't want to spend a lot of money on a smartphone, youget the minimum viable product that is also a smartphone and stylistically looks similarto an iphone, so i get that. i do think that, in china in particular, it's a very luxury-orientedmarket. so, there's going to always be that
huge divide between low-end and high-end. o'reilly: there's a reason the world's biggestcoach store is in beijing. lewis: yeah. so, i think it definitely hurts,but maybe to counter that, it also gets people using smartphones as an intro device-- o'reilly: and then, when they get a littlemore money, maybe they want the iphone. lewis: yeah. so, maybe it's a negligible netresult for the high-value smartphone manufacturers. o'reilly: we shall see. before we move on,i want to point our listeners to the newly-redesigned focus.fool.com. there, you'll discover a specialoffer to join the motley fool's stock advisor newsletter to start your year off foolishly.all loyal if listeners have access to a special
discount on stock advisor that works out to$129 for a full two-year subscription, just go to focus.fool.com to take advantage ofthis offer. once again, that’s focus.fool.com. pivoting over to the pc market … boy, we'rejust womping on hardware today, aren't we? lewis: yeah. o'reilly: do you feel bad about it? lewis: little bit. but i mean, we're justpainting a picture. o'reilly: yeah. actually, i tried to go macwhen i got my computer choice here at the fool, and i couldn't because unfortunately,windows owns me. anyways. lewis: full disclosure, i use a mac at home,i use a thinkpad here at work.
o'reilly: so you're a bigamist? lewis: i like having something that trulyruns office. not a version of office, and not having to run on parallels to be ableto run the true version of office. o'reilly: this is when i was on your -- doyou remember the day i was trying the macbook? o'reilly: and it was really funny it happened,because that was the day the queue was huge. ladies and gentlemen, one of dylan and i'sother jobs is, we edit articles that go out on fool.com, and i had a bunch of articlesi needed to get through, and i wasn't quick enough on the mac. and i was like, "dangit,i could be doing this if i was on the pc!" lewis: it definitely takes a little gettingused to.
o'reilly: yeah. lewis: especially if you're so ingrained inthe windows interface. o'reilly: before that, i think the last timethat i'd used the mac was in the third grade. lewis: yeah. it's funny to think-- o'reilly: we all had it. lewis: you're talking about the translucent,cut-out box-y ones that they used to put in classrooms? o'reilly: yeah. they used to play oregon trailand get dysentery on macs. lewis: you have died of dysentery.
o'reilly: so, switching over to the pc market.what's going on? lewis: pc sales have fallen to levels notseen since 2007, incidentally the year the iphone was introduced. o'reilly: coincidence, dylan? lewis: according to international data corp.so, grand total was 276m shipments in 2015, versus 308m shipments in 2014. we can look,specifically, at some of the shipment leaders here to give you an idea of what the marketlooks like: lenovo in first place, roughly 57m shipments in 2015; hp in second with justunder 54m; dell in third with 40m; apple coming in fourth at 21m; and acer bringing up thebottom of the top five with 20m shipments.
so, i think those shipment volume numbersare great to give you a sense of market share. but, i think the 2015-2014 growth is whereone of the more interesting stories plays out. out of those five, sean, how many ofthem do you think experienced year-over-year growth? o'reilly: one. o'reilly: oh! i didn't look, i swear! lewis: did you cheat? o'reilly: no! lewis: you know who it is, right?
o'reilly: is it acer? lewis: no. o'reilly: is it apple? lewis: yeah. all of the other ones experienceddeclines. o'reilly: i went with my gut. cool. yeah,lenovo's down, hp's down, dell's down, and acer. cool. good job, tim cook! lewis: we'll talk a little bit about, broadly,what's going on here in the market, and then maybe get into some of the granularity ofwhy some of these companies are better off. similar to some of the issues that are plaguingthe smartphone market right now, pcs seem
to be suffering from slower upgrade cycles.that's being a victim of your own success, in a lot of ways. creating products that peoplewant to continue to use that aren't breaking every four years, and are lasting longer.so, that's one of the struggles. do you have a personal computer? o'reilly: actually, i use the work computer,and then my wife and i share a computer at home. and that thing ... i've replaced thehard drive. it's old. but it works. it's like, "i don't care, whatever." lewis: exactly. i got a macbook air two summersago. that's well within what the pc industry wants in terms of an upgrade cycle, year anda half or so. but before that, i think i had
a dell that i'd owned for five years. o'reilly: a little indicative of this, i literallyjust found this out the other day about microsoft, and it blew my mind. this is kind of indicativebecause microsoft basically is pcs. in the year-ended june 30th, 2000, microsoft's revenueswere just under $23b. guess what their net income was after paying taxes and everything? lewis: $4b? o'reilly: $9.4b net income. lewis: that's actually a pretty good margin. o'reilly: that is insane. guess what it istoday?
lewis: on similar revenue? o'reilly: nooo. their revenues for the 12-months-endedseptember 30th 2015, so the last 12 months, not year end june 30 -- actually, let's justdo the year. is that fair? o'reilly: yeah-ended-june 30th 2015, $94bin revenue. growing just under fourfold on revenue. there's a one-year charge there,but guess what their net income was for that year? lewis: i'm going to stick with the same marginprofile from before. that was $4b on $23b, roughly 1/6, so 1/6 of $90-something, $15b? o'reilly: $22b.
lewis: so, better than i thought, but that'sa huge contraction. o'reilly: that is a huge margin contraction.microsoft is having to work way harder to make money. and i did not know that untila couple days ago, and my jaw hit the floor, because i assumed microsoft would be ... because,their stock finally recovered in the last couple years to where it was in 2000, if youremember. anyways, that's just indicative of what's happened to pcs in the last 15 years.microsoft's having to work harder and harder and harder to make money. lewis: one of the interesting things thati read in idc's coverage of the shipment data, they usually have some nice research notesto parse out the data and read between the
lines a little bit, when after analysts talkeda little bit about how microsoft giving away windows 10 as a free upgrade-- o'reilly: need you say more? lewis: --also might have been a detrimentto the pc upgrade cycle. o'reilly: just think, in 2000, what were theygetting per edition of windows? $200, $300? lewis: yeah. so, the thought with that analyst'snote is that the new operating system refreshed the computer and gave people a sense of anew computer, even if it was the same hardware, so they weren't as willing to upgrade. so,that's another reason explaining what's going on. also, some people always fall back onthe strong dollar hurting some of these tech
companies, which is valid, but i always feellike that's a bit of a cop-out, because it's something that affects multi-national. but i think more than anything else, it'sstaggering to me that only one of the top five in terms of shipments has been able tobuck the trend, and that's apple. and i think that just goes to show how strong and stickytheir ecosystem is, that people are going to continue to buy iproducts because theylove the integration of-- o'reilly: what's the marketshare now? didyou catch that? lewis: as of 2015, it's 7.5%. and that's upfrom 6.3% in 2014. o'reilly: very respectable.
lewis: yeah. they have a solid little carved-outniche there. and just for context, lenovo, the market leader, is at just under 21%. so,they have a solid foothold there. but like i said, it is crazy to me to see only onecompany being able to buck such a huge industry trend. o'reilly: yeah. cool. just a side note forthe microsoft stuff, that year last year did have a bunch of one-time charges, but throwingthat back in, it was $22b. i think gap basis, it was like $12b. they get sued all the timefor anti-trust reasons. lewis: your margin contraction point was stillmade. o'reilly: isn't that crazy?
o'reilly: cool, thanks for your thoughts,dylan. lewis: always a pleasure. o'reilly: i will see you later. that is itfor us, folks. if you're interested in business development companies, also known as bdcs,be sure to tune into gaby lapera's financial industry focus episode on monday. as always,if you're a loyal listener and have questions or comments, we would love to hear from you.just email us at industryfocus@fool.com. again, that’s industryfocus@fool.com. as always,people on this program may have interests in the stocks they talk about, and the motleyfool may have formal recommendations for or against those stocks, so don't buy or sellanything based solely on what you hear on
this program. for dylan lewis, i am sean o'reilly.thanks for listening and fool on! https://goo.gl/hLJVLR
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