H4cked off: Welcome to the real world, Apple

By Graeme Burton
03 Feb 2014 View Comments
Apple logo on Palo Alto store

When Computing published the analysis "The fall of the house of Apple", the hardware giant was close to its zenith. The iPhone 5 had just launched and the company was still struggling to keep up with demand for the iPad. Sales of Mac desktop and laptop computers, meanwhile, were still bearing up respectably in an overall falling global market.

We argued that while the company was doing well then, and would continue to shine, a reckoning was fast approaching. This is because as a developer of premium-priced, trail-blazing products, that pipeline of blockbusters must be fed or the old blockbusters either fade, if the people fall out of love with them, or a new market is developed in which the premium-pricing is chipped away as it becomes a commodity.

Further reading

Challenging times

Apple's challenge was - and remains - two-fold. It must either continue pumping out these blockbusters, for which people are happy to pay a premium, or it must accept the inevitable commoditisation of the markets it helped to created and compete accordingly on price as well as quality.

In many respects, Apple is a prisoner of its own stellar success: investors love companies with big, fat margins, especially ones that have grown at the pace that Apple has. But if those margins are pinched, the share price takes a hammering. Suddenly, the premium placed on the company's shares as a result of investors' unrealistic growth expectations is reversed.

That is the scenario that Apple now faces.

When it announced its first quarter results for fiscal 2014, investors - unusually - were nonplussed. Sure, sales of Macs, iPads and iPhones were all up, but the steep trajectory of just a few years ago showed all the signs of levelling off.

In raw numbers, the company sold a record 51 million iPhones, up from 47.8 million in the same quarter in the previous year. But that was "only" up 6.7 per cent and other companies are posting bigger gains, while the Android army now accounts for 80 per cent of the global market for smartphone operating systems.

Sales figures for iPads also reached record levels - up from 22.9 million to 26 million or 13.5 per cent. Again, that's good, but it is half the 28.2 per cent growth rate for tablet computers that IDC estimates for the fourth quarter, which itself is well down on the 87.1 per cent rate of growth that IDC claimed for the fourth quarter of 2012, this time last year.

Overall revenues were up by a solid six per cent from $54.512bn to $57.594bn, but these sales were largely driven by China, where sales grew by 29 per cent. This, in turn, was driven by Apple's decision to cease treating the world's biggest market, where its products are made, with detached disdain and to cut a deal with China Mobile, the world's biggest mobile operator, instead. In the Americas, Apple's biggest market, sales even fell - by one per cent.

The levellers

The fear of investors - that Apple's growth is levelling - therefore led to a sell-off of the company's stock. The figures also suggest that Apple is not going to compete head-to-head with Google Android and will let Android take de facto control of the mobile operating system market. Over time, that dominance will tell. It may even lose out to Microsoft, whose Windows Phone operating system is finally shifting some units.

Indeed, in some markets in Europe, Windows Phone and Apple's iOS are running neck-and-neck. Windows Phone sales have largely been propelled by the low-end Nokia Lumia 520. Apple, in contrast, offers just old kit - the iPhone 4S - as its desultory budget offering.

Apple's strategy in the mobile sector, therefore, is reminiscent of its strategy in the 1980s - staying resolutely proprietary and premium. That, though, is a strategy of drift, one that will end in the same way: allowing nimbler, more price-competitive rivals to become the market standard.

Meanwhile, the future of the marginalised pioneer, Apple, is at best to become the Bang & Olufsen of computing: producing stylised, niche, high-end products for a moneyed elite, while others exploit the markets that it initially opened up.

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