Apple Screwed Up Big Time

Readers of my writings know that as far as technology goes, I'm probably one of the biggest Apple (AAPL) fans out there today. There's no denying how slick, efficient, and user-friendly iOS is, nor is there denying just how gorgeous Apple's industrial designs are. There is absolutely no doubt that the company builds stunning products. As a proud owner of an iPhone 5s (and a drawer full of unloved Android devices), the quality of Apple's products is not lost on me.

That being said, I think Apple screwed up something that may not seem like a big deal to many investors but is actually a major problem. Just what is it that I'm talking about? Now, before you go ahead and throw tomatoes (or, if you're a Lord of the Rings fan, potatoes), I want to say upfront that Apple didn't screw this up because it couldn't do a better job, but because it simply couldn't spare the gross margin hit to do a better job.

So, what is it that I'm talking about? What am I keeping you in such suspense over? Well, it's quite simple really. Apple screwed up the displays on both its iPad Air and iPad mini and allowed a competitor - Amazon.com (AMZN) - completely out-gun it on this very important, very key aspect of the user experience.

The Kindle Fire HDX Has A Better Display Than The iPad Air and iPad mini

According to DisplayMate Technologies (comparison here), the Kindle Fire HDX from Amazon.com - remember, Amazon.com is an online retailer that does tablets as a hobby - has a better screen than the much-vaunted iPad Air. Indeed, they had this to say,

Most impressive of all is the Kindle Fire HDX 8.9, which has leapfrogged into the best performing Tablet display that we have ever tested, significantly out-performing the iPad Air in Brightness, Screen Reflectance, and high ambient light contrast, plus a first place finish in the very challenging category of Absolute Color Accuracy.

Any Apple bull should be absolutely shocked that Apple, the company that has been well known for its obsessive focus on display quality (and the pioneer of fun marketing terms like "Retina Display"), had its latest-and-greatest iPad Air outdone by a tablet from Amazon.com in this key user experience metric. By the way, did you know that Amazon will sell you the Kindle Fire HDX for $379 while Apple wants to extract a cool $499 for its iPad Air?

But Wait, There's More

While the Air has a great display (but again, Amazon offers a better one), the iPad mini with Retina Display apparently falls significantly short when it comes to display quality (in particular color gamut). Indeed, according to third party tests, the iPad Mini with Retina Display loses pretty significantly to the Kindle Fire HDX and the Google/ASUS Nexus 7.

So, an online retailer and a PC OEM known for making motherboards were both able to develop devices that managed to beat Apple at its own "retina display" game? Again, I must remind readers that the iPad mini with Retina Display is more expensive than its competitors by a fairly wide margin. This is embarrassing.

Why Did Apple Screw Up?

Notice how the two players that outgunned Apple - ASUS under the direction of Google and Amazon.com - don't actually need to sell their tablets for a profit? These are simply "gateway" devices to get users into the Android and "FireOS" (still Android...) ecosystems, respectively. The business models that spawned the technologically (at least on the display side of things) Kindle Fire HDX and Nexus 7 don't require high gross margins per device at all - they're basically sold at cost.

This means that while Apple has to cut corners as it did with the iPad mini and even the Air (and hope that nobody notices) in order to keep its nice, fat gross margins, its fiercest competitors (companies that don't need to make money from the hardware sale) can afford to leap-frog Apple in these ways that really do matter to the user experience. No company should know better the value of a top-notch display than Apple. But, of course, if Apple lets its gross margin profile deteriorate any further, investors would have Tim Cook's head.

That being said, gross margins be damned, there is absolutely no reason why Apple should not have had unequivocally the best displays on their iPad products. In a highly competitive market, and one in which Apple needs to fight tooth and nail to maintain share, it can't afford to be #2 in any way that matters to the user experience.

Conclusion

Amazon.com and Google are absolutely deadly to Apple's business model and despite all of the wonderful things that Apple does, it's going to be increasingly difficult for Apple to really compete with the hordes of device makers looking for an edge in this market. This is just one reason why, despite being a fan of Apple's products (and its chips!), I wouldn't feel comfortable owning the stock.

With that said, let me know your thoughts in the comments!

Source: Apple Screwed Up Big Time

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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