If Apple sneezes, the rest of the tech economy will catch its cold

4 Jan 2019

Apple store in Barcelona. Image: ifeelstock/Depositphotos

As Apple shares slide almost 10pc in wake of Tim Cook’s sales warning, what comes next?

The seemingly impossible growth of tech giant Apple had to slow or stop at some time after 10 or more solid years of strong iPhone sales, but even still the markets have reacted like scalded cats.

Shares in the tech giant plummeted by close to 10pc after trading, losing the company $57bn in the process.

For the tightly run ship that is Apple, some are arguing that it should have seen the warning signs about China and smartphone market saturation long ago and should have been prepared. Preparing for such an eventuality would be like turning around a battleship and, when the going is good, the mere hint of storms ahead would rock the boat or cause mutiny among shareholders. Anyway, it can’t be easy being innovative, commanding vast global supply lines, raking in tons of cash and still keeping the punters interested.

In fairness, in its Q4 earnings call two months ago, CEO Tim Cook did warn that sales might not meet Wall Street expectations. But it was the issuing of a rare and very detailed sales warning in recent days by Cook that has spooked investors and distorted Apple’s rosy turnaround narrative since it neared bankruptcy in 1997 or since the death of co-founder Steve Jobs in 2011.

In a letter to shareholders, Cook revised the company’s guidance for revenue in the first quarter. He said that the company is expecting revenue of around $84bn for the quarter, with a gross margin of 38pc and operating expenses of around $8.7bn.

This was the company’s first sales warning in 12 years, and the impact on the rest of the tech economy is palpable as shares of companies such as Cirrus Logic, Skyworks, Analog Devices, Broadcom and Micron all tumbled yesterday (3 January).

It is clear now that when Apple sneezes, the rest of the tech economy catches a cold. They used to say that about Intel and Microsoft. There are fears about the impact on the global economy if the tech influenza spreads further. Because, let’s face it, everything in 2019 will be somehow influenced or touched by tech.

A sign of this spreading sentiment of fear is that market traders are now ramping up bets that the Federal Reserve is more likely to cut interest rates than raise them this year, and the Dow Jones closed down 2.93pc yesterday. The enduring China-US trade war is likely to lead to more companies issuing lower revenues and profits. So, the malaise could spiral.

Accelerate the move to Services

If you’ve known Apple for as long as I have (although, you can never truly know a company), the one thing it is not short on is surprises.

And don’t forget, Apple is not broken, it just needs to recalibrate for a market that is saturated in many respects with similar devices and macroeconomic conditions beyond anyone’s control. That will not be as simple as it sounds.

Its flagship iPhone XS and XS Max devices are expensive for most hardworking mortals and what it deems even lower-end products, such as the iPhone XR, are still pricier than most mid-market smartphones. Apple needs to stop thinking like a western world company first, and embrace a more global, streetwise narrative.

In the same way that Samsung captured people’s moods for affordable but high-performance devices at mid-market prices, new Asian rivals such as Huawei and Xiaomi are storming into the gap. And they are not short on ambition or innovation.

Ironically, Samsung is now in the same predicament as Apple, with powerful premium devices at hard-to-reach prices. And even more ironic is that Nokia, one of the companies Apple vanquished when the iPhone launched more than a decade ago, is back and poised for growth with mid-market products such as the Nokia 7.

Do not forget that Apple is great at comebacks. A year after being saved from bankruptcy, Apple launched the iMac in 1998 and followed this up swiftly with new innovations such as the iPod in 2001, setting the stage for the future iPhone and iPad device categories.

It still sells a heck of a lot of smartphones, but the real area it needs to double down on is Services, the shining light in its results for the past two years. This is really all about cloud, storage, entertainment, apps and more. The Services category isn’t as sexy as smartphones, but it is the glue that keeps people fastened to their devices. And Apple knows it.

Apple store in Barcelona. Image: ifeelstock/Depositphotos

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