If you’ve been reading any of the news and commentary about Apple the past couple of weeks then you could be mistaken for thinking that the company’s demise is imminent. The stock price is falling, orders for components are being cut, and people are offering up their thoughts on what the company needs to do to revive its brand.
Yet Apple announced last quarter revenues of $54.5 billion with a net profit of $13.1 billion, both of which are company records. Indeed the only company to have ever posted larger numbers was Exxon and they had the happy coincidence of high oil prices to juice their figures. But the great crime in Apple’s revenue was that growth is not increasing – Apple is still growing, just not at an increasing pace, a second order offense. I’m sure that there is not a CEO in the world that wouldn’t swap places with Tim Cook to announce such disappointing figures.
Now some of this Apple woe is self inflicted. Apple is a secretive company and only comes up for air at the quarterly results calls and for two or three product announcements a year. The rest of the year is pretty much silent and so journalists and analysts are reduced to scanning Chinese language rumor sites and making guesses based on competitors’ technology. But since the genie was let out of the bottle in 2007 for the original iPhone, Apple has to work increasingly harder to impress and unless then come up radical innovation then there is always going to be a chorus of ho-hums.
Much is made of Apple’s decreasing market share, even though they sold 75 million iOS devices in the last quarter. But interestingly, AT&T announced that 84% of smartphone activations in the latest quarter where for iPhones, and for Verizon iPhones accounted for 63% of all their smartphones sold. So, in the US at least, Apple’s market share is heading in an upwards direction.
Another thing about these 75 million devices is that supply of the iPhone 4 and iPad Mini was constrained for the entire quarter and the iPhone 5 for much of the quarter. So Apple could have sold many more devices if they had just been able to build them quicker. I’m sure every company would love to have problems like that. These supply constraints help to put a lie to many of the proposed solutions such as producing cheaper phones and the iPad Mini is too expensive.
Let’s consider the iPad Mini. Economic theory states that if supply exceeds demand then you increase the price, hence scaling back demand, to bring the relationship back into equilibrium. So actually Apple is leaving money on the table by selling the iPad Mini at $329, but when the product was launched, it was roundly derided as being too expensive. I guess the market doesn’t listen to the analysts.
The iPhone 4 is Apple’s cheap phone, in the US carriers sell it for $0 with a data contract. It doesn’t come much cheaper than $0 and while it doesn’t have all the processing power of an iPhone 5, it is not that compromised and can certainly run the latest version of iOS and the vast majority of apps without any difficulty. If the iPhone 4 was supply constrained for the entire quarter then cost conscious customers are certainly snapping them up. If Apple is having difficulty building all the devices it could sell (and maybe with their large capital expenditures they are moving to alleviate that problem) then the company doesn’t have much incentive to increase the product portfolio to chase down even more market segments.
Apple’s supply chain is very large and very complicated, but they have great economies of scale by restricting the number of products. Diversifying that portfolio with different screen sizes and form factors, complicates the supply chain and introduces unnecessary risks to the manufacturing cycle. Apple appears to be a company that keeps things simple to minimize risk. A reduced product mix is also beneficial to customers as a lot of redundant decisions are removed from the purchasing process. The more variables you have in the product range, the more the paralysis over decisions that are often difficult to evaluate. When you are selling 10 items every single second, and your stores are crammed full with people, you hardly want them agonizing over several perfectly good devices. More choice is not always good.
Every-one, outside of Apple, has suddenly developed these outsized expectations for the company, that it should be innovating every time it turns around. But in its 36 year existence it has introduced three original and revolutionary products – the Mac, the iPod and the iPhone. Everything else has been an iteration on those devices, which it is very good at. But this concentration on iteration is diametrically opposite to the Japanese model of throwing a bunch of stuff at a wall and seeing what sticks (and for generating journalistic excitement). Apple has built a readily identifiable brand and they are not going to cheapen it for the sake of a few extra dollars.
I don’t think Apple feels the pressure to change its approach because the market is constantly providing validation by record sales, and why should it?