Apple's future depends on replacing the iPhone

The world's biggest company makes a record profit of $18.4bn, but are we nearing 'Peak Apple'?

by Adam Gale
Last Updated: 03 May 2016

Apple turns 40 this year. With middle age fast approaching, it would do well to consider its own mortality. No company lives forever, after all. Given enough time, the innovative, nimble start-up inevitably gets fat, complacent and therefore vulnerable to the next generation of challengers. And nowhere is this more true than in Silicon Valley.

Yet, like a Hollywood star enduring a brutal regimen of green juicing, Pilates, Dead Sea facials and cosmetic surgery, Apple is determined to resist the ravages of time. You will find no crow’s feet or blotchy jowls in Cupertino. Like its great rival Google, Apple wants to stay forever youthful by thinking like the dynamic, boundary-pushing start-up it used to be. 

The problem of course is that it’s no such thing, at least not any more. Apple is huge (the world’s biggest company by market cap) and hasn’t unveiled a truly original, world-changing product since the iPad in 2010. Yes, it reported record revenues ($75.9bn or £53.4bn) and record profits ($18.4bn) last night for the quarter to the end of December, but that represents growth of only 1.7% and 2.2% respectively. Next quarter, it predicts its first decline in revenues for 13 years (between $50bn and $53bn, down from $58bn last year).

What comes up...

Has Apple peaked then? Well no, not yet. Its sluggish growth is as much the result of the strong dollar (ignoring currency fluctuations, revenues were up 8%) and a tough comparison with last year’s iPhone 6 launch, as any underlying weakness.

It is true that Apple depends on the iPhone (sales of which produce 68% of its revenues) and that the American and European markets are saturated with smart phones, but the same cannot be said of the developing world. So long as Apple maintains its global market share, growth in Asia, Latin America and Africa will mean growth for Apple.

There is no guarantee however that the iPhone will continue to dominate the smart phone market. It seems unstoppable now, but great brands and products always do – until one day they don’t. The car industry proves that brands can survive for a century or more, but also that preserving market share is anything but guaranteed. Detroit giants Ford and GM are still huge, but what would they give for a return to their past dominance?

Consumer electronics is of course a much faster moving sector than cars. Tech from a year ago is out of fashion. Tech from three years ago is obsolete. All it would take for Apple to lose its shine would be a few poorly received iterations of the iPhone and the rise of one or more aggressive competitors, probably in China where Apple’s incumbent strength is less.

This is why it’s so important that Apple diversifies – no matter how successful any product is, there’s always a risk it will fade. But where is the diversification? Sales of the iPad and now the Mac are declining as their sectors slow down. Apple’s software and services depend on its hardware user base, Apple TV faces tough competition from Netflix and Amazon Prime, and the Apple Watch – well, let’s just say there’s a reason Apple doesn’t give specific figures for the watch. The overwhelming consumer demand for wearable tech just isn’t there (yet) in the way that its prophets would have us believe.

Va va voom?

That just leaves the Apple car. The company has the resources ($216bn in the bank and counting – it could easily buy any car company in the world) and the brand to join Tesla in the space where tech and automobiles meet – no matter what Elon Musk may say. It’s clearly looking into this in a big way, but how much it will invest in the project remains to be seen.

None of this is to say that Apple’s days are numbered if it doesn’t develop a car or some other ‘Next Big Thing’. It’s so strong that even if it coasts for twenty years, it would still be a huge company. Indeed, its cash pile effectively insures it against being disrupted - it could just buy its way out of trouble, or if all else fails start again as a rather enormous asset manager.

But if Apple wants to stay at the head of the tech pack after ten years or more, it does need to find the next game changer to replace the iPhone. If only Steve Jobs were around with some new ideas. One day before too long, Apple's going to need them.

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