The Future of Apple

Is This the Beginning of the End?

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.