The Fu­ture of Ap­ple

Is This the Be­gin­ning of the End?

iPhone Life Magazine - - Contents - BY DAVID AVERBACH

Is it all down­hill from here for the tech gi­ant?

I n April, Ap­ple CEO Tim Cook an­nounced the com- pany's first quar­terly de­crease in earn­ings in 13 years. Ap­ple re­ported $10.5 bil­lion in profit for the sec­ond quar­ter of 2016, down roughly 13 per­cent com­pared to the same quar­ter last year. Most dis­con­cert­ingly, Ap­ple an­nounced the first-ever de­cline in iPhone sales. Im­me­di­ately fol­low­ing the an­nounce­ment, Ap­ple stock fell 8 per­cent, de­creas­ing the com­pany's value by over $46 bil­lion. We're left won­der­ing, was this just a slow quar­ter for Ap­ple or did this earn­ings re­port sig­nal the end of Ap­ple's his­toric run?

To dis­cuss the fail­ure of a com­pany that has an­nual earn­ings of over $50 bil­lion and has more than $200 bil­lion in cash may seem a bit lu­di­crous. But the fact that Ap­ple is one of the most suc­cess­ful com­pa­nies in his­tory is mostly ir­rel­e­vant to Wall Street. All of Ap­ple's cur­rent suc­cess is (hy­po­thet­i­cally) wrapped into its cur­rent share price—the only thing that mat­ters to in­vestors is growth. When pun­dits talk about the death of Ap­ple, they are not re­ally dis­cussing whether Ap­ple will con­tinue to earn a lot of money, they are spec­u­lat­ing about whether Ap­ple's prof­its will con­tinue to grow and there­fore drive its stock higher.

TECH­NOL­OGY LIFE CY­CLE

Ap­ple's fu­ture prospects are tied to iPhone sales, which ac­count for 63 per­cent of Ap­ple's rev­enue. While it may dis­ap­point in­vestors, the de­cline of iPhone sales was in­evitable. Ac­cord­ing to the Pew Re­search Cen­ter, 64 per­cent of Amer­i­can adults now own smart­phones, in­clud­ing 87 per­cent of adults with an in­come of at least $75,000. It's been nearly a decade since Ap­ple un­veiled the first iPhone, and now the Amer­i­can smart­phone mar­ket has sim­ply be­come sat­u­rated. The iPad and iPod have fol­lowed sim­i­lar life­cy­cles.

When the iPhone first came out, each new gen­er­a­tion rep­re­sented a huge leap for­ward in smart­phone tech­nol­ogy. Even if you'd shelled out $499 for the orig­i­nal iPhone, you'd be tempted by the iPhone 3G, which had built-in GPS and 3G data. As the iPhone has be­come a ma­ture prod­uct, the pace of Ap­ple's in­no­va­tion has slowed. Ap­ple sim­ply can't in­no­vate fast enough to con­vince ex­ist­ing iPhone own­ers to up­grade at the same pace.

THE CHINA PROB­LEM

Given that iPhone sales in the United States and most other de­vel­oped coun­tries have be­gun to reach mar­ket sat­u­ra­tion, Ap­ple's best chance of con­tin­u­ing to grow iPhone sales is to in­crease mar­ket pen­e­tra­tion in de­vel­op­ing coun­tries such as In­dia and China. In the chart of Ap­ple prod­uct sales, you can see that iPhone sales growth started to slow as early as 2012. Then sud­denly in 2015, with the re­lease of the iPhone 6, there was a huge jump. A large rea­son for the in­crease in 2015 is that iPhone sales ex­ploded in China. In the third quar­ter of 2015, iPhone sales in China grew by a staggering 112 per­cent year over year, and in Q4 they grew by 99 per­cent. Un­for­tu­nately, due to a re­cent re­ces­sion in China and an in­crease in com­pe­ti­tion from cheaper Chi­nese-made smart­phones, 2016 has seen that growth come crash­ing down. Rev­enue from China dropped by $4 bil­lion in Q2, ac­count­ing for 58 per­cent of Ap­ple's de­cline.

"The fact that Ap­ple is one of the most suc­cess­ful com­pa­nies in his­tory is mostly ir­rel­e­vant to Wall Street." "Ap­ple’s long-term suc­cess hinges on whether or not the tech gi­ant can cre­ate an­other dis­rup­tive tech­nol­ogy."

DIS­RUP­TIVE TECH­NOL­OGY

Ap­ple has been able to sus­tain its his­toric growth by con­tin­u­ally re­leas­ing dis­rup­tive tech­nol­ogy that launches en­tire in­dus­tries. One of the first per­sonal com­put­ers ever cre­ated was the Ap­ple I, and it helped launch the en­tire per­sonal com­put­ing in­dus­try. When Jobs came back to Ap­ple, he rein­vig­o­rated the com­pany and dis­rupted the PC in­dus­try by re­leas­ing the iMac. As sales for that prod­uct be­gan to slow, Ap­ple took on the mu­sic in­dus­try with the iPod and iTunes, which of course led to Ap­ple's lat­est prod­ucts, the iPhone and iPad. While Ap­ple's short-term suc­cess will be de­ter­mined by its abil­ity to con­tinue to re­lease in­no­va­tive iPhones, it's ul­ti­mately fight­ing a los­ing bat­tle. Ap­ple's long-term suc­cess hinges on whether or not the tech gi­ant can cre­ate an­other dis­rup­tive tech­nol­ogy.

EMERG­ING IN­DUS­TRIES

Ap­ple is no­to­ri­ous for its se­crecy dur­ing re­search and de­vel­op­ment, how­ever, there are two prod­ucts that the com­pany is ru­mored to be work­ing on that I be­lieve have the po­ten­tial to fuel its growth for the next 13 years. The first prod­uct is the Ap­ple Car. Many ex­perts pre­dict that the self-driv­ing car is only 5–10 years away from be­ing com­mer­cially avail­able. When this hap­pens, con­sumers will choose their cars based as much on soft­ware as specs. As with any new ven­ture, there are a num­ber of challenges for Ap­ple, in­clud­ing low mar­gins, high com­pe­ti­tion, and man­u­fac­tur­ing dif­fi­culty. But a prod­uct that com­bines soft­ware and hard­ware as well as huge mar­ket po­ten­tial makes the au­to­mo­bile a very tempt­ing prod­uct for Ap­ple. Ap­ple is ru­mored to have hun­dreds of em­ploy­ees work­ing on de­vel­op­ing the car, which could be re­leased as early as 2020.

The sec­ond prod­uct is a vir­tual re­al­ity (VR) de­vice. VR is just be­gin­ning to en­ter the main­stream, with prod­ucts like the Ocu­lus Rift and HTC Vive launch­ing this year. While the early VR mod­els are fo­cused pri­mar­ily on gam­ing, the tech­nol­ogy has mas­sive po­ten­tial in the busi­ness, ed­u­ca­tion, and en­ter- tain­ment sec­tors. Many ex­perts be­lieve that VR units may one day re­place com­put­ers, TVs, tablets, and smart­phones al­to­gether. At Magic Leap, a lead­ing com­pany in the VR space, em­ploy­ees have al­ready be­gun re­plac­ing their desk­top screens with mixed-re­al­ity screens that over­lay vir­tual scenes with phys­i­cal sur­round­ings. Ap­ple is ru­mored to have hun­dreds of em­ploy­ees that have been work­ing on a VR de­vice for over 10 years.

AP­PLE’S ROAD MAP

In or­der for Ap­ple to con­tinue its in­cred­i­ble growth, it must do three things: First, it must find a way to grow iPhone sales in de­vel­op­ing coun­tries, where the mar­ket is not yet sat­u­rated. To this end, Ap­ple re­leased the iPhone SE, a cheaper phone aimed at de­vel­op­ing mar­kets. Ap­ple's next quar­terly earn­ings re­port will be the first to in­clude iPhone SE sales, which will be very telling about whether or not this strat­egy has been suc­cess­ful for Ap­ple. The sec­ond thing Ap­ple must do to main­tain growth is to con­tinue to in­no­vate on the iPhone. In or­der to main­tain iPhone sales, let alone grow them, Ap­ple must im­prove the de­vice enough with each gen­er­a­tion to keep cur­rent own­ers in­cen­tivized to up­grade reg­u­larly and to give An­droid users a rea­son to switch over.

The fi­nal and most im­por­tant thing that Ap­ple must do in or­der to en­sure its con­tin­ued suc­cess is in­vent an­other dis­rup­tive tech­nol­ogy that can re­place the iPhone as Ap­ple's pri­mary rev­enue gen­er­a­tor. Even if Ap­ple is suc­cess­ful in re­leas­ing in­no­va­tive fu­ture iPhones and cap­tur­ing for­eign mar­kets, it will only be de­lay­ing the in­evitable de­cline of the prod­uct. Ap­ple's fu­ture de­pends on its abil­ity to find an­other prod­uct that grows as quickly as the iPhone did.

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