Apple needs a hot new product, and it can't be another iPhone
Okay, that was a bad quarter, Apple.
I know, Apple is held to a higher standard. The company makes $50 billion and there's panic in the streets. I don't think there's cause for panic, but concern — even alarm — is warranted.
The trend line that's been clear on the iPad for nearly three years has finally infected the iPhone. Apple's sure-thing product category has succumbed to a variety of headwinds, including market saturation (something Apple CEO Tim Cook seemed to admit with his comments about the smartphone market slowdown), a fickle international market and crazy currency fluctuations.
Cook never told us how many of its newest device, the iPhone SE, the company sold, but said they were "supply constrained." Apple can't sell what it doesn't have, so maybe, as supplies balance with demand we may see 10 million units or so sold in the next quarter.
However, I doubt it. Apple already warned us that next quarter wouldn't be so good, either.
This fill-in-the blanks approach to growth can only be maintained for so long
While the iPhone SE, with its 4-inch screen, was designed to fill a niche in the U.S., I think it was also priced to attract emerging markets. Right now, Apple isn't winning in any of them. It saw double-digit revenue losses year-over-year in Greater China (Cook blamed them mostly on Hong Kong), Japan, and what's known as "the rest of Asia Pacific." Europe only slid 5% and the Americas 10%.
Even as some international sales opportunities close or slow down, analysts still see other big opportunities. "There are still ways for Apple to regain growth in the smartphone space," Moor Insights & Strategy President Patrick Moorhead told me. "One is India," he continued, "and the other is the mid-tier smartphone sub-segment. India is bigger than China in terms of opportunity, and globally, Apple hasn't even attacked the midrange market yet."
But this fill-in-the blanks approach to growth can only be maintained for so long, and it may not always counter the larger macro-economic forces.
These market forces are not just impacting Apple. "Foreign currency headwinds" is an almost constant refrain in every tech company quarterly earnings call I listen to. And every company playing in the smartphone space is struggling.
In the U.S. it feels like consumers have sort of filled their tanks on smartphones and tablets. They're also upgrading less often because, for their first time in their smartphone-owning lives, they're faced with the real prices of these $400-$800 phones.
The subsidies that ably hid the cost of your phone from you are gone. In their place are very real monthly payment plans. Why did anyone think doing away with subsidies was a good idea?
The subsidies that ably hid the cost of your phone from you are gone.
But I digress.
Apple's recent attempts to turbocharge existing categories and launch new ones have not been roaring successes. They've not been failures either, but they're by no means transformative.
Take the iPad. It's still one of the most popular tablets on Earth, but excellent build quality led to people holding on to them for years. Apple tried different sizes and finally the massive iPad Pro (with optional Apple Pencil and Smart keyboard) to rejuvenate the category. It even refashioned the flagship 9.7-inch device into a smaller iPad Pro. While it's too soon to measure sales on the new device, it's clear that the 12.9-inch iPad pro did little to staunch the bleeding. iPad unit sales were down 19% year-over-year.
The new stuff
Apple, of course, has introduced a new category or two in recent years, most notably the Apple Watch. Its first wearable is among the best smartwatches on the market and, it appears, is at least a billion-dollar business. It's also grouped in with Apple's $2.1 billion "Other Products Category."
Tim Cook said the Apple Watch accounted for much of the category's year-over-year 30% revenue growth. However, the same category took a 50% tumble since last quarter. Does Apple Watch also get credit for that?
I like the Apple Watch, but it's becoming clear to me that it's simply not a must-have gadget on the order of magnitude of an iPhone.
Moorhead thinks the Apple Watch picture could improve if it allows for even more personalization and adds data capabilities (no need to ever connect to the iPhone). I agree that the Apple Watch could grow with more options, especially on the low end ($199 please), but I don't think those improvements will change the narrative.
I like the Apple Watch, but it's becoming clear to me that it's simply not a must-have gadget on the order of magnitude of an iPhone or, if we go way back, the iPod, which, by the way, is now part of the "Other Products" category as well.
Apple shows the way
Back in the late 1990's, we all knew about MP3 files and players. It's hard to recall, though, which sucked more, the services or the hardware. It was a terrible market and one that a lot of tech journalist like myself readily dismissed. Sure, we'd all rip and download MP3s, but most of us were burning them to CDs and playing them on, yes, CD players.
Then Apple came along with first the iPod and eventually iTunes (then iTunes for Windows, the truly transformative moment). Tastes may differ, but almost everyone loves music and loves to take it with them.
Apple repeated the pattern with the iPhone and, to a lesser extent, with the iPad.
Obviously, to regain its footing and momentum, Apple desperately needs the next big thing. But if the Apple Watch isn't it, what is?
Perhaps it's the Apple Car.
Sorry, but that's ridiculous. Even if I believed that Apple was building its own car, that market is notoriously difficult to break into and, unless you're one of the big three, even harder to survive. Please, do not point to Tesla. Leaving aside Model 3 pre-orders, which you can't count until they deliver them in 2017 or 2018, the company has sold roughly 85,000 vehicles, and it struggled — thanks to an industry that doesn't want it — the whole way.
If Apple manages to build a car, it will be electric, gorgeous and incredibly expensive.
If Apple manages to build a car, it will be electric, gorgeous and incredibly expensive. The company will have to reinvent car display and distribution, borrowing from both Tesla and its own Apple store strategy, to hawk them. These considered devices will sell slowly at best. Put simply, the Apple car will not "save" Apple.
There are other, better options, ones that do not necessarily rely as heavily on hardware and exquisite design.
Apple TV for real
In the run-up to Apple's spring event, I held out hope that the company might introduce special hardware to support Siri in the home. Instead, we got a small Apple TV software update so you could use Siri to search the App store.
As a service, Siri is quite fungible and can offer utility to virtually anybody, but it lives primarily on your phone and in your pocket. It's not connected to your home in any meaningful way. An Apple device with a Siri brain and connections to your smart home (and HomeKit!) could change all that. It would also help Apple catch up to Amazon which is currently making hay with Alexa and a series of mostly good Echo devices.
The other option is Apple TV — no, not just the box, but a whole TV service. Apple has been flirting with this for years and it's just the kind of product/service Apple needs.
A new hardware and software TV service that, as Apple has done before, shows others the way.
Without a doubt the whole sector is ripe for disruption, a new hardware and software TV service that, as Apple has done before, shows others the way. It would feature the best of standalone DVR services (a terabyte of storage is a must), offer access to broadcast and cable channel apps — a la carte — work with a Wi-Fi audio system like Sonos, and even connect to a digital antenna. It would have Apple signature design, but more importantly tie into all of Apple's services, including Apple Music. There might even be a Netflix-style content Apple original programming option.
"Like Apple disrupted music, they would be a likely company to disrupt MSO [multiple cable operator] services," agreed Moorhead.
The introduction of such a product might also mark a true turning point for Apple, a real pivot toward services.
During the earnings call on Tuesday, Apple CEO Tim Cook defended his company's performance by asking people to look beneath the numbers. One area he highlighted was Services, which includes Internet-based services AppleCare, Apple Pay, and licensing. Cook called it a "large and profitable business." It does account for $6 billion of revenue and grew by 20% since last year.
Some believe services are the future of the company. A recent post by Stratechery founder Ben Thompson put it this way,
While the iPhone remains in a very strong position that I believe will return to growth next fiscal year, that growth will be far more tepid than it has been to date… the real competition for Apple are the still very-good iPhones their customers already have. To that end, making more and more money off of those preexisting customers is the natural next step in Apple's growth.
Apple has hundreds of millions of customers tied to its ecosystem of hardware, software, cloud services, content and aftermarket care. As the company continues to sell tens of millions of devices over the next few years, the size of that business is certain to grow. Thompson argues the company should be reorganized around that opportunity.
Come this fall, Apple will have a new device, the iPhone 7. It will offer a radical redesign and surely sell millions, but it won't change the larger trend. Apple's long-term future cannot be built on hardware upgrade cycles. It needs something else.
As I see it, whatever they do, Apple's next big thing may not be some gorgeously designed hardware and may actually end up being, mostly, a service.
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