BREAKINGVIEWS-Apple's creative destruction claims another scalp
3:22 pm ET 01/31/2012 - Reuters
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Robert Cyran
NEW YORK, Jan 31 (Reuters Breakingviews) - Apple's creative destruction machine has claimed another scalp: RadioShack. Shares of the U.S. electronics retailer lost nearly a third of their value after it slashed its earnings projections. RadioShack is largely a bet on Android - and lesser mobile operator Sprint. With Apple grabbing more share, and keeping more of the spoils, that bet has gone bad.
RadioShack made its name selling capacitors, cables and components for electronic items like ham radios. For a while it had few rivals, so margins were high. The shift toward ready-made gadgets and the growth of superstore rivals like Best Buy nearly doomed the firm. But cell phone sales saved RadioShack's bacon - they now account for about half of revenue.
Unfortunately, the competition in that arena has gotten fierce. Everyone from Best Buy to Wal-Mart to Verizon stores now sells handsets. That's one reason gross margins at RadioShack fell to 35 percent in the quarter. The company's suspension of share buybacks indicates its own executives expect business to get a whole lot tougher.
It's easy to see why. Apple's iPhone sales more than doubled in the fourth quarter and are now neck and neck with Android, on which RadioShack has staked its fortunes. Though plenty of companies make phones powered by Google's operating system, the differences between these handsets are often relatively minor.
That forces Android manufacturers to compete on price. Operators like Sprint offer limited subsidies to buyers, allowing retailers to capture profits by persuading customers to walk out with specific handsets. But there's only one iPhone maker. Apple can barely keep up with demand and already sells the device through its own stores.
The upshot is that Apple has little incentive to cut prices or offer competing retailers favorable terms. Apple offers a Hobson's choice. Pay up, or don't get iPhones and lose customers. That's why struggling Sprint agreed last year to heavily subsidize Apple purchases. Apple's success leaves operators and retailers scrabbling over the scraps.
As one of the weaker retailers in the business, it's not surprising RadioShack has become collateral damage. But it's also unlikely to be the only victim.
CONTEXT NEWS
-- RadioShack, the U.S. electronics retailer, warned on Jan. 30 that profits for the fourth quarter would disappoint. The electronics retailer said it expects earnings per share of $0.11 to $0.13, compared to $0.51 per diluted share reported in the 2010 fourth quarter.
-- The company blamed a shift in sales toward lower-margin phones as well as poor results from cellular carrier partner Sprint.
-- RadioShack will suspend repurchases of stock. The firm's shares fell some 30 percent in early morning trading. |
