What has rocked the Apple cart?

27 Apr 2016

Apple CEO Tim Cook. Apple may be licking its wounds from the inevitable stall in iPhone sales, but do not write it off just yet

For anyone watching Apple long enough, the day the iPhone’s meteoric sales would stall was inevitable and, in overnight trading, the Californian tech giant was punished in the form of $40bn being wiped off its share value. So, what’s next for Apple?

I’ve been watching Apple for a long time and knew that the day would come when the stellar growth driven by the iPhone would stall. I’ve been watching Apple long enough to know that it has been in tighter spots and has come out shining.

There is no guarantee that Apple will come out shining this time, but it has the means to. The big question is what tricks has Apple up its sleeve and whether or not it will allow itself to fall into the similar malaise that struck Samsung and HTC in recent years.

Last night, Apple reported the first decline in iPhone sales – down 16pc – and Q2 revenues of $50.6bn, down from $58bn a year ago.

The market reacted as expected with shares in Apple down 8pc – or $40bn in value – as the news sunk in.

What goes up

Apple has been in tighter spots and has risen from the ashes. Most people who have followed Apple over the last 20 years remember when Apple was just a computer maker. They remember where they were when the unthinkable happened in 1996 and Apple was bailed out by Microsoft to the tune of $150m.

I was visiting the Harvard library in Boston and logged into a web browser at the time and nearly fell out of my seat when I read the news. Even then Apple had mythical status among industry watchers. But a failed experiment to make Apple the next IBM resulted in Apple nearly imploding.

What followed is Silicon Valley legend: founding CEO Steve Jobs’ company NeXT was acquired by Apple, Jobs sprang back into action like a ruthless, avenging angel and the company embarked on its most innovative phase yet.

First, there was the iMac, a totally re-imagined candy-coloured personal computer. The iPod followed, so too did iTunes. Then came the iPhone in 2007 and the iPad in 2010.

Apple’s market cap between 1997 and 2016 rocketed 21,000pc and Apple was on the verge of becoming the first $1 trillion tech giant and the most valuable company in the world.

Unlike 1996, when Apple had pretty much run out of innovative steam and cash before Jobs’ return to reignite everything, Apple is a much different company.

For one thing, it has a war chest of around $200bn and sales of over 50m smartphones each quarter. Sales of 10.3m iPads and 4m Mac machines still makes Apple the most formidable, cash-rich and profitable tech giant on the planet.

Apple, which marked its 40th anniversary on 1 April, has a global workforce of more than 115,000 people and some 475 Apple Stores in 17 countries.

The Rubicon that Apple must cross now depends on whether it succumbs to this reversal or comes out fighting. Infographic: The iPhone Growth Story May Be Coming to an End | Statista
You will find more statistics at Statista

A wounded tiger can still fight

The reality that the iPhone faces is that it operates in a saturated market where most smartphones look and feel the same. An investment in one of these smart devices is now a bigger consideration than most PCs, with the average new phone costing anything between $500 and $900. It’s a big investment for ordinary people.

Unlike Samsung, which was as much a victim of its inventory and poor marketing globally as it was impacted by slowing consumer demand for smartphones, Apple has a very tight rein on its supply chain and sets the industry standard for clever marketing.

The key to Apple’s future lies in its innovation engine. Aside from the Apple Watch – already estimated to be a $6bn business a year after launch – what tricks does Apple have up its sleeve?

Analysts had been expecting iPhone sales to come in at around 51m units, which would be a 17pc decline compared to last year’s March quarter. Instead, it came in under that at 16pc. For the rest of the year, Apple analyst Ming-Chi Kuo at KGI Securities anticipates a decline of similar dimensions. He expects Apple to sell between 190 and 205 million iPhones this year, which would translate to a decline of between 12 and 18pc.

Interestingly, Kuo expects iPhone sales to bounce back strongly in 2017, when, according to his predictions, Apple will release a significantly redesigned version of the popular smartphone.

Apple has made a significant stab at the lower-end, entry-level market with the iPhone SE, a device with the guts of its high-end iPhone 6s but in the chassis of an iPhone 5s, in a bid to bring in new users.

But if Apple can breathe life into the flagging smartphone market by giving people a reason to upgrade or ditch Android devices, then it will return to growth.

TVs, cars, VR – it’s up to Apple really

The thing is, aside from the Apple Watch last year, Apple hasn’t really created a new form factor since the iPad in 2010.

Rumours of an actual Apple TV set have dogged the company for several years now and, of course, hardly a day goes by without some new rumour about an Apple car.

Apple has a healthy M&A engine and has steadily filed new patents for products, including its own VR headsets.

It has also got to be remembered that, since Steve Jobs’ passing in 2011, CEO Tim Cook has steadily stewarded the tech giant with dignity and aplomb.

It has to be remembered that Cook joined Apple in 1996 when Apple was at its lowest ebb and stayed the course, applying operational genius to guide the company’s growth.

Some would say Apple needs to reveal some new trick, a fantastic new machine like a car or a TV. Or it just needs to keep the ship steady.

I think the answer lies somewhere in between – there is a magic formula to what Apple does and it hinges on quality, experience and expectation.

When the iPhone came along in 2007, it came after failed experiments with things like the Newton or who remembers the Motorola ROKR in 2005?

But when the iPhone came along, it was fully realised and perfect and everything changed.

Someone I know who used to work at Apple told me that when Steve Jobs passed away everything stopped at Apple for a while; all innovation, all product development. The whole organisation waited until it caught its breath.

I suspect that is what is happening now. But only Apple really knows.

Tim Cook image via Shutterstock

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years