Has Apple lost its bite?

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Apple is in the news for the wrong reasons, when it recently announced that it would not be reporting unit sales breakup of iPhones sold in future financial announcements.

But to any keen observer, this was expected, as it plays out in the lifecycle of any successful business. No business can be successful in perpetuity. And Apple is no different.

But first, the background to Apple’s Success.

Apple was the leader in mobile phone devices, ever since Steve Jobs announced “three devices all in one”, the first iPhone way back in 2007. The world grew impatient and looked forward to every successive iPhone launch, waiting with bated breath on what the technology guru had to present, ever since.

“Just one more thing” was enough to keep people awake across different time zones around the world. Everyone wanted to hear what the next rabbit Steve Jobs would pull out of his hat. And these were products which simply just worked.

Little wonder that hundreds of Apple fans stood in huge lines for hours, waiting to buy the products on the release dates.
    
It just seemed that the iPhone had become the product that would bring profits for Apple in perpetuity. And Apple took out a new version almost every year. The phone had replaced the laptop and the desktop as the new hi-tech device that was a must buy on everyone’s list. Phones being more ubiquitous than computers, attracted a larger customer base, and this was reflected in the sales numbers.

The newer versions offered newer features, in a tightly controlled environment. Since Apple made the software, the hardware and controlled the App store, it could dictate the terms. And the users did not mind. To some extent, this tight control did help enhance the user experience, but this was a monopoly which people (customers) willingly paid to buy into.

The fact that Apple made 30 percent of every app sold in the App store also helped Apple’s profits. These were some of the other benefits of having a huge customer base. Subsequent versions of the mobile phone operating system were given free. A similar case like the Wintel partnership between Microsoft and Intel in the 1990s, where every release of Windows necessitated an upgrade of the computing devices, which was possible as Intel introduced faster chips every eighteen months. (Following the Moore’s Law, which stated that the computing capabilities of the processors would double every 18 months and the costs would remain the same)

Only in this case, the hardware device and the software both came from Apple. This also must have enable Apple to get huge profits as they introduced newer phones, and new versions of software (iOS) which just hastened the replacement cycle. This also was helped by the fact that older phones and computers could not use the newer apps in the App Store, after a few years, thus forcing users to upgrade if they wanted any new apps. The older software would work fine, but newer software would make the system slow. And as press reports have stated, that Apple slowed down the processor in the newer software releases when used in older phones, to save the battery.

Apple phones were regarded as a premium product. It was perceived as being a “cool” product as compared to the competition. It was priced accordingly and enjoyed its premium exclusive status, which prompted a host of imitators, to even an imitation store in China.

Its designs, screens and phone features were immediately copied by other competitors as the world accepted everything that the House of Apple did. Changed plugs? Done. Removed ports? Sure! Removed jacks? Not an issue! This did help make phones sleeker but also pushed up the costs of upgrades and accessories with every new version. And no points for guessing who was the exclusive vendor of all these? Since Apple used proprietary connectors, sometimes even to the extent that only Apple manufactured cables would work, these resulted in another stream of huge profits for Apple. Nothing wrong with all this, in fact, I would actually cite Apple as an example of how a company can grow around its core product.

Then the first cracks in this business model started to appear. Most consumers who could not afford the high prices of Apple, started switching over to the lower cost, but similarly featured phones. And most of these were made in China.

The industry was helped by Apple’s huge success in phones, which also expedited the rate of innovation as other competitors rushed to keep pace. This started in China, and India, where the world’s largest populations had millions of consumers who aspired for, but could not afford to buy Apple products. Local Chinese and Indian players happily obliged to fulfill these needs by offering lower priced products. Including the fact that most of these were operating on some version of the Android operating system, which was offered for free by Google.

In order to get the volumes in this lower priced market, Apple started offering lower priced versions. It sought not to alienate its high-end consumers, and it did this very smartly, by introducing lower priced phones after a period of about six months, and in colours so that these could be distinguished easily. The “C” series was a result of this. It then evolved to introducing these variants simultaneously with the iPhone X series. Now, one point to be clarified, which I say with a great deal of concern, is that most people claim that Apple need not always be the innovator in the mobile phone category, as there may usually be another competitor who may have offered the same or better feature earlier, but the industry accepted these as a serious product feature, only when Apple included it in their phones.

In the meantime, China had moved ahead of the world. China had been a closed market for Amazon, Google, who found it difficult to operate there, and if present, then they were not as successful as local Chinese giants like Alibaba and Tencent, who built entire ecosystems around their Apps. This software was built robust, considering the many locally manufactured phones, and hence the device became less important as the software apps become more sophisticated and were able to operate on a host of phones. Thus, the software became more important than the exact configuration of the phone.  It also helped that Alibaba and Tencent had a vested interest in ensuring that their apps worked in all the phones, including the low-end versions, since that was the only way they could attract more customers. So, the physical features of the phone became less important (except for maybe taking photographs or selfies, which many competing phones started offering better options than Apple).

The game is increasingly shifting to software, away from hardware. And software is also able to compensate for any lacking in the hardware. Eg. Apple’s XR for the phone uses an algorithm to compensate for the lower quality cameras as compared to the iPhone X which has a superior camera. This increased importance of software over hardware will only increase.

Therefore, by the time the iPhone X was launched, the world had changed. And Apple seemed oblivious to this, and still launched a high-priced phone with the expectation that the market would still pay around USD 1000, a premium price for their products.

And this changed. The Chinese consumers stayed away. Huawei, Xiaomi and One plus are offering similar or better features at lower prices. This causes Apple sales to decline.

This has caused pressure on Apple. Apple is also deriving revenues from other sources. Eg. it was said that Google had paid a huge sum to be the default search engine on Apple devices. And there were other press reports stating they also got discounts for using one companies modem chips over those of the competition.

Reports are stating very clearly that the growth engine, that the iPhone was, is now slowing down. And this is the situation that Apple finds itself in. It has relied too long on a single product, the iPhone, and the slowing sales have caused it to go back to the drawing board. But the current actions are showing only incremental steps rather than any grand vision.
    
What Apple now needs to do, is to find alternative revenue streams if it needs to maintain its profits.

Innovating in the mobile phone space will become tougher as competition has increased and customers have become more discerning. People are also feeling the loss of Steve Jobs, whose vision and drive, many attribute Apple’s success to.

Apple has been making moves which earlier would have appeared sacrilegious.

We are seeing signs of this, by Apple announcing their willingness to offer the iTunes store on Samsung Televisions and then, even on Alexa! This was after Apple agreed to start directly selling Apple products on Amazon. The logic behind this move must be to get increased revenues and extend the iTunes store across as many platforms as possible so as to increase adoption.

What steps can Apple take for the future?

Besides going back to the core, that is, of using the phone as an entertainment and communication device, it will now have to take a step into a bigger orbit, that of digital services, in order for Apple not be commoditized.

Apple will have to focus on content, since that is still a space that is still not monopolized by any one key player. Acquisition of Netflix is one suggested alternative, as this step can offer a ready stepping stone into the digital entertainment space. It is a matter of time, for the battle between Netflix and Disney. But regardless, Netflix’s huge investments in content creation, (much more than the Hollywood Studios all together, as some report) would be helped by Apple’s cash pile.

Additionally, with the growth of local homegrown players like Alibaba and Tencent in China, and Jio in India, Apple will find it increasingly difficult to get new customers or even retain existing ones, as these local players try to dominate and control users in their respective countries. And these are the world’s fastest growing countries in the mobile phone space. These competitors will increasingly shift the competition to the apps and the ecosystem, rather than keep it as just phones, which is the game which Apple is playing. These players will keep on working to commoditise phones so that Apple’s profits are under threat, in the long term.

Cars would not offer a competitive advantage as the basic purpose of mobility is also under threat with autonomous cars, where other players like Google, Uber, Tesla and Toyota seem to already ahead in different parts of the value chain.

Apple’s competitive advantage has been in personal entertainment and devices, and hence these areas offer the largest potential for future profitability. Its capabilities in design, software skills in making complex simple, and trust with a huge fan base, is what offers the largest potential for a sustainable competitive advantage. The huge cash reserves also offer the possibility to acquire a company in this space, though valuations may be high.

Businesses, especially successful ones, often face this situation when they may face a slowdown in their growth. What they do next, to face this challenge, defines their sustainability. The pro-active ones survive, when they realise that they need to quickly jump on to another product since their older profit generator is no longer as effective. The others, who refuse to see the writing on the wall, or live in denial of the changed circumstances, usually fade into insignificance.

The question is then, would Apple take these steps or will it soon join the ranks of Polaroid, Kodak and Nokia, as one of the greatest companies who once ruled their industries?


By Dr.Rajiv Agarwal, Professor of Family Business and Strategy at SPJIMR and a Family Business
advisor.