By Paulo Santos From Seeking Alpha

Recent reports indicate Apple is throttling old devices.

There is a reasonable reason for Apple doing this.

However, Apple will still have a large liability from it.

This idea was discussed in more depth with members of my private investing community, Idea Generator.

As many have probably noticed, in the last few days, reports are emerging that Apple (AAPL) throttles the iPhone’s CPU performance after a while.

Conspiracy theorists have long claimed that this was the case, with Apple gunning for “planned obsolescence” and forcing new device sales.

The conspiracy theories are wrong. Instead Apple’s rationale is very logical, simple and honest:

All Li-Ion batteries degrade over time.

As Li-Ion batteries degrade, they can no longer provide the same capacity or current.

When not enough current can be provided by the battery and yet it is demanded by the CPU when working at its maximum frequency, shutdowns occur. That is, the phones switch off on their own when the tasks they’re performing require the full CPU frequency, even though they still supposedly have battery life left.

The above is made even more problematic in a cold environment. When cold, Li-Ion batteries provide both lower capacity and lower current. As a result, they can more easily reach the scenario where the phones shut down.

Acknowledging this, Apple made changes to iOS which, depending on a battery’s age/state, will throttle the CPU’s maximum frequency so as not to reach the threshold where the phone shuts down.

Now:

Users were not informed of this when sold the device, or when the device suffered the crippling updates.

The throttling can be severe. For instance, from an original 2,500 single threaded Geekbench 4 scores, iPhone 6s have been shown to be throttled as low as 1,000 depending on age.

Ultimately, the whole thing is happening because of a design flaw.

Design Flaw

Why do I say design flaw? It’s very simple:

In spite of the Li-Ion degradation being a fact, this problem shows the iPhone’s batteries were not designed so that they’d be able to deliver enough current to reach its advertised specs (in this case, CPU performance) over a reasonable product life. That is, the degradation should have been taken into account so that the products could deliver their specs over a reasonable product life, but wasn’t. Hence the need to then retroactively throttle the devices (this is actually somewhat similar to the Tesla (NASDAQ:TSLA) Countergate scandal).

This is itself a consequence of Apple’s usage of much smaller batteries than what’s usual in less-efficient Android devices.

Apple can provide competitive battery life due to the overall efficiency of its phones. But unfortunately, this design decision neglected another dimension – the ability of the phones to run to spec during their entire lives!

Most Android phones, by luck or design, will not share the problem. This is so since their batteries were made larger to provide enough battery life and thus can also sustain peak current for a longer service life.

It can also be shown that this was an actual design flaw because of another reason: there’s evidence that even the iPhone 7 is being throttled after just a single year in use. Two things here:

One is that nobody buys a smartphone expecting it to just offer its peak announced performance for a single year.

Two is that there are many places – including most of Europe – where smartphones are sold with mandatory two-year warranties. And, obviously, a phone no longer providing its advertised CPU performance is a faulty phone, requiring fixing.

As a result of this, it’s likely that Apple’s iPhone installed base, numbering more than 550 million devices, is a fertile ground for a large battery-related liability. Sure, for now it seems only the iPhone 6, 6s, 7 and 8 will be prone to this problem and the others will be too old to claim it. And the Plus models are likely not affected given their larger batteries. But still, the potential liability covers hundreds of millions of devices for at least one battery replacement.

Of note: contrary to the Tesla Countergate scandal, where Tesla could back off and just eat the additional warranty claims, here the same avenue isn’t really available. This isn’t about the devices coming in broken – this is about the devices either being throttled or shutting down unexpectedly. Both outcomes are unacceptable, and both outcomes generate liability.

Conclusion

In a way, this can be a larger problem than the Samsung (OTC:SSNLF) Note was for that company. Samsung ultimately skipped that problem altogether due to the DRAM rally (which some say might have been engineered by Samsung itself). Apple has no such comfort.

A prediction here: this development will lead to a large class action lawsuit against Apple, and Apple will ultimately settle for $10-30 per device involved (a reasonable cost to Apple for replacing the batteries on claimant devices). Thus this will present a $1-9 billion liability for Apple.

Apple is so large that $1-9 billion needn’t move the stock, but this liability is real and it will make itself felt. The case is large enough and clear-cut enough to attract lots of lawyers and customers.

Disclosure: I/we 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.

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