The future of the iPhone
With sales stumbles and innovative rivals, could the iPhone go the way of the BlackBerry?
With sales stumbles and innovative rivals, could the iPhone go the way of the BlackBerry?
Apple might find itself too far behind its rivals to be able to catch up
Apple’s money-making ability is legendary. In 2016, the firm made a staggering $44.9 billion in profits, making it the most profitable company in the world. In fact, it took 79% of all smartphone profits in that time, despite only holding a 14.5% market share. If there’s a secret code to making money, Apple has cracked it.
And, as that market share figure indicates, Apple has achieved record financial successes despite selling fewer phones than some of its rivals. You would think this would be an indication of Apple’s rude health, but not everyone sees it that way. People have been predicting the downfall of Apple in the smartphone world for some time now – do they indeed have a point? We dived in to see if Apple’s iPhone dominance could be about to falter.
No Steve Jobs
For all of Apple’s record profit-making in the Tim Cook era, there are still grumbles – some of them quite loud – about his leadership. He’s no Steve Jobs, they say. They compare the removal of the iPhone’s headphone jack to the advances under Jobs’ watch (slightly unfairly, perhaps) as a sign that Apple doesn’t innovate any more.
Long-time Apple watcher Joe Wilcox put it this way: “Much of the ‘Ah-ha!’ moments during a Jobs’ One More Thing unveiling – and user experience that followed – sparked the ‘you didn’t know you needed [it]’ realization. Is that really the emotional reaction to an over-sized tablet or new features like 3D Touch? Honestly?”
He’s not the only one who has concerns about the iPhone’s future direction. Renowned developer Marco Arment famously suggested that Apple could go the way of BlackBerry if its rivals’ gambles on artificial intelligence (AI) proved successful.
Smart and intelligent
Google, Facebook, Amazon and more are pouring money into AI, while Apple – though not totally absent – hasn’t made headlines in quite the same way. But Arment highlights Google as being particularly strong in this field when it comes to things like “search, relevance, classification, and complex natural-language queries” that he feels will be hugely important in the coming years. In his words, Apple’s competitors are “far ahead of them, and the gap is only widening.”
Arment says that BlackBerry didn’t fail because it made bad phones, but because the purpose of a smartphone changed when Apple released the iPhone. Similarly, if AI suddenly becomes integral to smartphones, Apple might find itself too far behind its rivals to be able to catch up, despite being very good at making smartphones at the moment.
Of course, for the time being this is
speculation on Arment’s part, but it highlights the recurring fear among Apple watchers that the company isn’t innovating enough under Cook’s tenure as CEO.
An Indian summer?
Also of note is the iPhone’s recent sales stumble. Revenues from iPhone sales fell for the first time ever in 2016, where sales in quarters 2, 3 and 4 were all lower than their 2015 counterparts. Of course, we’re not talking dramatic slumps or freefall losses, but it was a striking turn for a product that has known nothing but growth since it launched.
Sales have since recovered well, but the incident indicated that the iPhone is perhaps not as resilient as was first thought, and that sales – at least in Apple’s key markets – will not always be so strong. That’s potentially a worrying sign for Apple, as iPhone sales make up around two-thirds of its revenue at present. If the iPhone falters further, the company’s dominant financial position could come under threat.
Apple’s rivals have already begun to look elsewhere for growth opportunities, and Apple is no different. The consensus among many smartphone pundits is that India is the prime location for expansion.
The country recently outstripped the US to become the world’s second largest market for smartphone sales, sitting only behind China. However, the average price of a phone in India is expected to be around $102 in 2018; most iPhones sell for many times that. With its expensive, premium products, Apple may be poorly positioned to take advantage of India’s huge potential for growth.
In order to boost sales in India, Apple may be forced to introduce lower-priced iPhones like the iPhone SE. That could eat into its huge profit figures, eroding the advantage it currently has despite not selling as many smartphone units as its rivals.
It’s already tried importing and selling refurbished iPhones in India, but that was rejected due to an Indian law that requires products to source 30% of their materials locally. That law was relaxed in June, and Apple will start making iPhones in India this year, according to The Hindu newspaper.
But is it too late? Apple only ships around 2% of Indian phone sales at present. In a country deemed to be the next explosive market for smartphones, that could spell
Apple only ships around 2% of Indian phone sales at present
trouble. Even if everything falls into place – it starts making iPhones in India and opens its first Apple Store in the country – its premium price tag and refusal to lower it may still work against it.
Crucially, the Indian phone market is led by Samsung, Apple’s bitter rival. Market analyst Tarun Pathak at Counterpoint Technology Market Research estimates that of the 85 million phones Samsung has sold in India, 25 million – almost a third – are from its budget-friendly Galaxy J range. Apple has no comparable device; its iPhone SE sells for almost three times the price.
And if Apple can’t take advantage of the Indian market in the way its rivals are, its smartphone dominance may start to slip.
Cook’s recipe for success
Still, while Apple hasn’t yet cracked India, it has a lot going for it. For one thing, it has at its helm a man whose flair for supply chain management has led to him being labelled an operations “guru” and a “genius”.
While Jobs was the company visionary, Tim Cook (as Chief Operations Officer under Jobs) helped to forge Apple’s legendary profitability. “Cook’s control over day-to-day operations shaped what would become the financially ginormous tech titan that marvels the industry today,” states Wilcox. So even though it has barely any presence at all in India, Apple has the supply chain clout and experience to potentially overturn this deficit.
It’s strong in other areas, too. In the words of International Business Times writer Rishabh Jain, “With its own operating system, an app store, its own manufacturing supply chain and most importantly, a huge and loyal customer base, Apple easily trumps every other smartphone company in terms of profit. Apple’s image as a premium device maker and the desirability of its devices has gone a long way to put the company at the top.” That won’t change any time soon.
One positive indicator of Apple’s iPhone fortunes is the app economy. As we show on page 82, this has been an unprecedented success story for Apple, generating as much as $5.4 billion in Q4 2016 alone.
All in the numbers
As well as its huge financial payouts, the App Store serves to tie users in to the iOS ecosystem. If you’ve paid for a load of apps and are used to working with them, that might make you reluctant to switch over to Android. If Apple can keep people in its iOS ecosystem and buying new iPhones, that can only be a good thing for the company.
And let’s not forget China, the world’s biggest market for smartphones. Apple sold 44.9 million iPhones in China in 2016 – that’s down from 2015 sales of 58.4 million, but, given Apple’s phenomenal profit margins, would still have brought in a huge amount of money. The sheer number of smartphone consumers in China means that even if Apple finishes in fifth place in terms of sales (as it
did in 2016), it can still make huge profits –
Tim Cook helped to forge Apple’s legendary profitability
the economy of scale means it doesn’t even need to be number one.
Money-making machine
Speaking of huge numbers, there’s also the scale of how much money Apple makes from iPhones globally, which we alluded to earlier. According to Bloomgberg’s Shira Ovide, Apple and Samsung have been dominant for a long time. She cites Mike Walkley, market analyst at Canaccord: “According to his data, since early 2012 – practically an eternity in the smartphone business – Apple and Samsung together have generated 100% or more of all operating profits among makers of premium-priced smartphones.” That figure works out because all other smartphone manufacturers have either just broken even or lost money.
Apple is hardly operating from a position of weakness. It may have some significant challenges on the horizon, but if there’s one thing it ‘gets’, it’s selling smartphones.
There are reasons to be concerned when looking in from the outside, but Apple has always been a company that keeps its cards close to its chest. It’s working to make up its shortfall in India, and may well be cooking up something that changes the smartphone industry in the way the iPhone did in 2007. Perhaps the only significant concern when it comes to smartphones is AI. Marco Arment makes the point that “Becoming a major big-data AI services company doesn’t happen completely in secret and suddenly get released to the world, completed, in a keynote.” Apple needs to be working on this right now, and that’s hard to conceal; we’ve seen no major signs yet.
If the AI gamble Google and others are taking proves lucrative, Apple’s smartphone dominance may be at risk. But the thing about gambles is that they don’t always pay off – if this doesn’t, Apple has little to worry about.
Apple is hardly operating from a position of weakness… but it needs to be working on AI right now