Understanding Apple Part 2

Avi Greengart / October 27th, 2013

If you follow Apple in the press and talk to analysts, you’re probably confused. There are three conflicting narratives being presented: Apple is doomed, Apple is disappointing, or Apple is dominating. So many journalists have written about Apple’s lack of innovation without Steve Jobs that, “Apple is doomed,” has almost become a meme. Most financial analysts are in the “Apple is disappointing” camp – the P/E ratio of Apple’s stock price is certainly depressed relative to the competition, yet market analysts – including yours truly – describe Apple as clearly dominant. How can all these be true?

Part 1 of this article covered how Apple is Doomed and Apple is Disappointing.

Apple is Dominant

On the whole, I have found market analysts to be far more positive on Apple’s position than financial analysts. At Current Analysis, Apple garners the highest scores possible in every category except “Partnerships.” Most market analysts focus on the competitive impact of Apple’s products and strategy, not the stock price. Apple is dominating the most profitable segment of the market. If you are a vendor competing with Apple, what matters is whether you can profitably sell products against them. Samsung can. Everybody else is losing money, treading water, or is selling hardware as a loss leader to make money some other way.

Moreover, Apple’s ability to profit in the future seems clear. Apple has a reputation for secrecy, but its product development strategy is transparent. It develops products in markets adjacent to its existing products, and builds on the investments it already has in software and services platforms – OS X/iOS, iTunes, the App Store, and iCloud. Apple often takes advantage of new component technologies to enter new markets, but it designs the product around a specific – and limited – set of use cases rather than building something because the technology enables it to be built.

When it comes to creating new markets or taking an early adopter market and making it mainstream, Apple is in rare company. There are not many companies that can integrate technology and design on top of existing software and services platforms; it helps if you control the ecosystem, and building one from scratch is terribly hard. Apple will certainly have competitors in any market it enters, but the bigger danger is choosing the wrong set of problems to solve. This is the area where Steve Jobs’ absence is the biggest loss – Jobs seemed to have an unerring eye for what could be left out of a product and still be left with a compelling version 1.0 product. Apple is fortunate that its executive staff has had relatively low turnover – many of the people who helped Jobs make those choices are still at the company and are working on new products today. I do not pretend to know what those products are. Wearables and living room devices certainly fit nicely in Apple’s ecosystem, but Apple could be working on something else entirely.

Apple also has more room to grow its phone and tablet business. Global distribution can be expanded further – Apple still has room to appeal to upper income users in China and India. Over time, the iPhone 5C should drop in price somewhat, enabling upper middle class consumers in emerging markets to buy in. In developed markets, there is still plenty of room for late adopters who are still using featurephones today. This group will not be kept away by the high price of the iPhone because carriers distort the true cost of the phones with subsidies. Even after the iOS 7 refresh, the iPhone still has the simplest user interface of any smartphone, which should be appealing to late adopters, especially technophobes.

Apple could also expand the size of the iPhone to appeal to the segment of the market that can afford an expensive phone, but wants a larger display than Apple offers. This product category has more appeal in Asia than in the West, but Samsung has sold 37 million Galaxy Notes, and Apple is certainly paying attention. I expect Apple to address this market eventually, though it is taking a long time doing so. My guess is that the sticking points are finding a form factor that is manageable while still whetting the appetite for a larger display, and picking a display that doesn’t impose screen resolution fragmentation costs on developers.

Pad sales growth is down, but new models could change that. The iPad Air reinvigorates Apple’s full sized offering, and the retina iPad mini takes away a key differentiator of small Android and Windows tablets. Apple has all but telegraphed that Touch ID is coming to an iPad near you – and your IT manager – with the next update.

Three Narratives

That is how we ended up with such divergent narratives in the press and analyst communities. Journalists are reporting on whatever is deemed newsworthy – and launching incremental improvements is not exciting, even if it is wildly successful. Financial analysts are trying to assess Apple’s future profit growth without betting on Apple being successful in markets that don’t exist. Some of them also don’t trust that Apple’s current profit level is sustainable, even if they don’t actually question Apple’s market dominance in the slightest. Market analysts look at Apple’s platform and see possibilities where it could be extended. In the meantime, Apple’s strategy of selling a lot of phones and tablets and making a lot of money on them seems fundamentally sound.

Avi Greengart

Avi is the Research Director for Consumer Devices at Current Analysis. He is responsible for the Mobile Devices and Digital Home Devices groups, including CurrentCOMPETE (market, company, event, and device competitive analysis) and Wireless Tracking (pricing, promotions, availability, and device feature data and analysis) content.
  • Mauryan

    Too much credit is given to Steve Jobs. Most of what one sees in Apple’s attractive product features are a creation of those who worked for him. Steve took credit for many of what they did. He was the face of that company. I have read that he did not like the idea of apps. But apps strengthened Apple’s position and if Steve had been adamant about not letting it happen, Apple could have taken a different path. allowing competitors to catch up and go past them. In Steve’s absence, I think the high ranking lieutenants are able to do things much better. They have decided to take a slow, incremental approach and are winning. Apple is in good hands. It is good in a way for them to be underestimated and overshadowed by Steve Jobs’ image. It cuts down expectations while they come up with cool products. Most of what we see today from Apple were not due to Steve Jobs. His presence definitely helped. But in the long run, that success was enabled by people like Tim Cook who set up an envious manufacturing and resource management infrastructure. Companies like Samsung are now trying to mimic that. Jonny Ives is the one who has created all those mouth watering products for Apple and Steve Jobs is mistakenly credited for them. I think the real talent in Apple can now work without the constraints and unpredictability of Steve Jobs and come up with more creative products. Once they establish that name, then Apple will succeed even better.

    • H_U_Y_A

      Steve Jobs deserves all the credit he gets, he was a true visionary. Where I would agree with you somewhat is that he wasn’t always 100% on the money on every single issue, but he could be persuaded otherwise. Products like iTunes for Windows and native Apps are two examples. Also he was a major proponent of skeuomorphism and Scott Forstall was in charge of overseeing it. Now that they are both gone this is the sea change in Apple’s direction that stands out the most.

  • Space Gorilla

    One correction, iPad sales are not down. Yes, yes, if you want to look at specific quarterly data and ignore reality, you can make a weak argument that iPad sales are down. And you can weasel around and say “sales growth” which becomes more slippery since any growth rate will change over time. The problem is when you write “sales growth is down” normal people think that means “Apple is selling fewer iPads”, and that isn’t true.

    In 2011 Apple sold 32 million iPads. In 2012 Apple sold 58 million iPads. And so far in 2013 Apple has sold over 70 million iPads, and they’ve got holiday season sales to go yet so that number is going to get a fair bit bigger. Apple continues to sell more iPads each year. You should be careful how you write about that, the SEC frowns upon “False or misleading statements about a company.”

    • DarwinPhish

      Avi wrote that growth was down, not sales. You should read more carefully.

      • Space Gorilla

        As should you. I acknowledged that he wrote about sales growth, and made the point that many readers will understand that to mean sales are down. That’s the problem. Saying sales growth is down without adding context is sloppy writing, at best.

        • DarwinPhish

          But what he wrote is accurate, sales growth is down. That is neither false not misleading.

          • Space Gorilla

            The context of the sales growth change re: iPads makes it clear the ‘down’ part is merely a technicality which will correct itself at the end of 2013. You and I may understand what Avi meant, but I can guarantee you many people will misunderstand it to mean ‘sales are down’. In fact, there was a fair amount of media coverage which made that exact mistake.

            We could get way into the weeds and argue that any change in growth rate is an opportunity to say ‘sales growth is up’ or ‘sales growth is down’, and you would be technically correct. But is that useful? I’m reminded of the doom and gloom stories about Apple’s margins decreasing. Yes, margins went from incredible to only great, so saying margins decreased was technically correct, but that single point of data doesn’t tell the actual story.

            It’s the same situation here, saying sales growth is down without adding context doesn’t tell the actual story. We can agree to disagree, I’m fine with that. Part of my background work-wise is journalism and I’ve watched the industry collapse quality-wise, so it’s possible I’m just too sensitive to this kind of thing.

          • Avi Greengart

            The sentence reads, “iPad sales growth is down [which we all agree is factually correct], but new models could change that [there’s your context, in the same sentence].”

            If you misread the first half of a sentence and can’t get context from the second half of a sentence, I don’t know why you’re reading business analysis at all. Maybe I need to try writing like Dr. Seuss?

            See Apple sales. Grow sales, grow! Oh, no! iPad sales growth
            has begun to slow. Apple does not want sales growth to slow. Hey, ho! Apple has
            a new iPad in San Francisco! iPad Air might make sales go, go, go! So why do
            the finance guys look so low? The iPad is a Thing they already know.

          • Space Gorilla

            It’s not enough context in my opinion. At the same time, I’m well aware of the current constraints built into the business of journalism. I understand why you wrote it that way.

            And your Seuss needs work. If you’re going to do something like that, then *do it*.

          • Barnes

            “You should be careful how you write about that, the SEC frowns upon “False or misleading statements about a company.”

            Are you going to tattle to the SEC? Making implied legal threats is not very nice. I have kicked people off forums I moderate for lesser infractions.

          • Space Gorilla

            *yawns*

          • Space Gorilla

            I admit I could be more clear about what I want re: more context. When you write “sales growth is down” that generates a number of questions which I want you to answer and provide context around. Such as: How much did the growth rate change? What are the possible causes? Is it driven by consumer demand? If so is it a natural buying cycle? Did Apple shift product launch dates which affected the cycle? Are products like the iPad now seeing peaks in calendar Q4 and trailing off until the next calendar Q4 again? Did the growth rate change so much that we expect a unit sales decrease year over year? What is the natural evolution of growth rates for other products like the iPhone or PCs and how does that compare to what is happening to the iPad. Is growth rate an important/meaningful metric for a product three/four years old? Those are just a few of the questions I want answered. Perhaps that’s another article, a deeper look at what the change in sales growth actually means.

          • Avi Greengart

            That’s a fair request for a separate article.

    • Defendor

      I am just going by memory, but hasn’t Apples Profit actually declined for the last 3 quarters. While during the same period, Samsung saw 3 quarters of record profits.

      Apple used to be more profitable than Samsung, but because of shrinking profits at Apple and growing profits at Samsung, Samsung is now the more profitable company.

      It definitely looks like the sign of a shift in favor of Samsung.

      • Majipoor

        Profit has declined mostly because 2012 margin was exceptionally high, even compared to Apple standards. Now, margins are more comparable to 2009-2010 margin and still higher than pre-2009 margin.

        “It definitely looks like the sign of a shift in favor of Samsung.”

        You might be right if only one winner was allowed in the race. The reality is that the last 2-3 years show the sign of a shift in favor of both Apple an Samsung against all other competitors.

        Now, I would not bet on the future growth for Samsung: a big part of their recent success is due to the wide coverage they have in all segments of the market. Competition from chinese manufacturers is going to be very strong in the future in the low and mid-range market.

  • thorntondw

    I have a question. There is a lot of mention of “wearable” tech. Other than Samsung watches (a loser) and Google glasses (serious privacy limitations) what “wearable” tech innovations are being considered?

    • steve_wildstrom

      The biggest category of wearables actually in use is fitness devices: Fitbit, Jawbone Up, Nike Fuelband, etc. I think we will also be seeing a considerable range of medical devices, not necessarily fitness related, such as heart rate monitors.

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