Rise of Samsung threatens Apple’s entire iPhone business model

The days of huge margins and massive sales figures for Apple’s iPhone business are drawing to a close, according to Sector & Sovereign Research analyst Paul Sagawa.

Increased competition and a constantly evolving marketplace are apparently hammering Apple’s margins. To survive, or ensure its iPhone business continues to grow, Apple needs to make some significant changes to the way it does business, says Sagawa.

Sagawa published a damning critique of Apple’s iPhone business on Sunday in a note to investors, outlining what’s happened inside the mobile space and why Apple’s traditional business model could be in trouble.

‘Seeing smartphone competitors achieving similar market scale to Apple’s flagship iPhone model and platform rivals willing to subsidize device sales to build their installed base for lucrative web applications, leaves me skeptical that the high margin status quo approach can be sustained for more than a few more years,' he said, 'and even then, I see inherent margin pressures that are not reflected in consensus estimates.'

He added: ‘The more aggressive strategy seems the better one from a long term perspective, but will entail substantial cultural change, a significant re-investment of capital, and a more certain and certainly more painful hit to profitability.’

Apple’s stock has lost a rather hefty chunk of its value over the past several months, indicating that investors across the board are now growing concerned about Apple’s strategy for prolonged growth within its iPhone business.

But it gets worse. Sagawa, like a spectre of doom, laments that most investors do not see just how bad things are getting for Apple’s iPhone business.

‘I don’t believe that this Sophie’s choice of a strategic dilemma is well appreciated by investors nor do I expect them to react well to future negative surprises, disappointing guidance, or downward estimate revisions,’ said Sagawa.

Looks like Apple’s once-infallible iPhone business has hit a crescendo and is now in the grip of what we like to call The Tony Montana Effect, which basically means, as shown in Scarface, no one, no matter how powerful, stays at the top forever.