Rot sets in at core of Apple

Competition, lower profits and management confusion have wiped US$245 billion off Apple’s value, writes Simon Duke.

THE BOSS of the world’s biggest technology company had a rare piece of advice for those looking to steal his crown: Learn the art of reinvention or face extinction.

‘‘Apple has changed every day since I have been here,’’ Tim Cook said last month.

This declaration, made after Apple launched the latest version of the money-spinning iPhone, has proved prescient. The company has indeed transformed itself – though not in a way the chief executive might have hoped.

In just a few weeks, the image of Apple as a slick machine churning out an endless supply of groundbreaking gadgets has significantly changed. Its reign as the undisputed king of the technology sector could be drawing to an end as the creative ferment that has revolutionised the computer, music and phone industries fizzles out.

For the first time in a decade, profit growth has ground to a halt at the Silicon Valley giant, as results revealed last week. Competitors such as Samsung have caught up and are eroding Apple’s dizzying profit margins.

More seriously, perhaps, a series of mishaps has altered perceptions of the company. Under Cook’s predecessor, the late Steve Jobs, Apple was maniacal in its pursuit of perfection.

For Cook, who took the reins 17 months ago, the honeymoon is over.

After presiding over a US$245 billion ($293b) plunge in the company’s market value since September, Apple has lost its place as the world’s most valuable company. Cook’s mission now is to convince Wall Street that he can reverse a seemingly inevitable slide into staid middle age.

Superficially, at least, things look rosy enough. Revenues in the final quarter rose 18 per cent to US$54.5b and 48 million iPhones were sold. That was an 11 million improvement on the year before, helping Apple to deliver the fourth-highest quarterly profit of any company in history.

As a result, its cash pile grew 13 per cent to a colossal US$137b, larger than Vietnam’s GDP.

‘‘It’s simply phenomenal,’’ Cook told investors following the results. ‘‘Apple is in one of the most prolific periods of innovation in its history.’’

Scratch beneath the surface, however, and the flaws are all too easy to discern. Earnings rose a mere US$12m to US$13.1b – the slowest rate of growth since 2003. At this pace, the first three months of 2013 may bring Apple’s first fall in quarterly profits since the dotcom crash.

The downturn is all the more surprising because of the welter of new products Apple brought out in time for Christmas, including the iPhone 5 and a new version of the iPad tablet computer.

Samsung, meanwhile, has continued to grow at breakneck pace. Fourth-quarter profits from the South Korean goliath soared 76 per cent to a record US$6.6b.

Paradoxically, Apple executives blamed insatiable demand for its pre-Christmas fumble. The company had trouble meeting demand for the iPad and the revamped Mac computers, and