Apple, the company, just had one of its best quarters ever. AAPL, the stock, just had one of its worst quarters ever. What the hell is going on here?
It’s hard to say who gets criticized the most, the successful person, or the failure but it’s mighty close. ~ Joe Moore
Apple And AAPL
The first thing we have to understand is Apple, the company, is a very different thing from AAPL, the stock. It’s true that severe stock fluctuations can have an ill effect on a company but on balance, the stock follows the company, not the other way around.
Bad Advice
Whenever Apple’s stock (or any company’s stock) suffers a precipitous drop, the know-it-alls ((Bloggers just like me.)) come crawling out of the woodwork with advice on what they should do. As Harry McCracken pointed out in his January 2014 article entitled “Apple Must…”: A Brief History of People Instructing the Company to Do Things, this advice has been uniformly awful.
Most of the “advice” people have been giving Tim Cook today on how to run Apple would eventually bankrupt the company. ~ Neil Cybart on Twitter
Advice to Apple usually falls on one of two sides of the same coin. Apple should:
— Stop doing what made them successful; and
— Start doing what made their competitors unsuccessful.
You guys keep asking Apple to do what everyone else does yet somehow think the result would be different. ~ Ben Thompson (@monkbent)
What Is Apple Afraid Of?
A good way to sharpen our focus on the actual threats to Apple is to ask ourselves: What is Apple afraid of? What is the worst case scenario Apple is trying to avoid? What worries keep Apple’s executives up into the wee hours of the night?
Benedict Evans suggests Apple’s worst fear is developers leave the Apple platforms.
For Apple, I’d suggest the fear is that the developers leave. This is what happened in the 90s and it was a key part of the company’s near-death experience.
Once developers start leaving you’re in a vicious circle that’s very hard to reverse (this is where Windows Phone is now). ~ Benedict Evans
Most industry observers thought the Apple of 2007 was going to suffer the same fate as the Apple of 1984: Introduce a great new product (Macintosh/iPhone), keep prices extraordinarily high, allow a competitor to undercut their price and gain market share, (Microsoft Windows/Google Android), inevitably lose their developers, then their platform, then just plain lose everything.
Apple has done a great job of keeping their developers by attracting the most profitable customers to its platform. The developers go where the money is. So even though Apple only owns about 14% of the smartphone market, they control almost all of the customers developers cherish most.
Out Of The Woods
But that doesn’t mean Apple is out of the woods. They need to find new ways of insuring their current developers stay with their platforms and new developers are attracted to their platforms. I would suggest Apple is currently taking a three-pronged approach to this problem.
Customer Sats
First, Apple needs to maintain its premium customers since they’re the ones most willing to pay for the developer’s wares. This is why Tim Cook absolutely OBSESSES over “Customer Sats” (customer satisfaction).
It’s a virtuous cycle. Apple creates great products that attract great customers that attract great developers. Apple’s customers are happy, which makes Apple’s developers happy, which makes Apple happy, and so on and so forth.
Accelerate Refresh Rates
Second, Apple is attempting to accelerate the iPhone’s refresh cycle. You buy a phone from Apple, you pay it off over two years, but every year you can upgrade it. This will cause a certain segment of iPhone buyers to routinely upgrade their phones every year instead of every two years. And the the incentives for buyers to stick with the iPhone will be enormous.
Growth
Third, Apple needs to find a way to continue to grow its iPhone platform.
Wall Street’s greatest fear is Apple has nowhere to go and nowhere to grow. They have a point. There’s only so many people who are willing to pay $600-$700 for a smartphone. ((Although the number of people willing to buy an iPhone is always greater than the naysayers believe. The cry that Apple was going to soon run out of customers has been made each and every year since the iPhone’s inception.)) At some point, Apple will no longer be able to go up. What then?
When companies run into their market ceiling, the traditional business strategy is to go down. That is, expand their product portfolio, introduce cheaper versions of the existing products, gain more market share. There are two problems with this strategy.
First, lowering prices would hurt Apple’s brand. Apple attracts premium buyers because they sell a premium product. Lowering prices might increase sales, but it would dilute Apple’s cachet among its existing customers.
Second, Apple already controls most of the profits in the smartphone sector. For example, Apple garners between 90 to 95 percent of the profits from smartphone hardware sales. What is the point of lowering prices and lowering margins in order to gain another point of profit share? It’s counterproductive.
Expanding The Platform
Instead of going down, Apple is, instead, spreading their platform out. Apple may be running out of customers willing to spend money on an iPhone but that doesn’t mean iPhone customers are running out of money.
[pullquote]Apple may be running out of customers willing to spend money on an iPhone but that doesn’t mean iPhone customers are running out of money.[/pullquote]
Apple is spreading their platform so those who own and love their iPhone can buy more and more Apple products. That’s why Apple works very, very hard to maintain the quality of their notebook and desktop computers and why Apple is introducing new platform products, such as the Apple Watch and the iPad Pro. These various additions to the overall Apple platform give happy buyers more opportunities to buy, give happy developers more opportunities to sell, and give happy Apple more developers developing.
Is It Enough?
Will this be enough to guarantee Apple’s continued future success? Absolutely not. This is a holding action, but it’s a holding action that’s netting Apple as much as $18 billion a quarter. Someday Apple will have to create new and better products. But is this a surprise to anyone? Every company, everywhere, throughout all time, has had to do the same.
New products cannot be rushed. Microsoft came out with a smartphone in 2001, but Apple — even if they had been the Apple of today and not the nearly bankrupt Apple of yesterday — could not have come out with the iPhone in 2001. The technology was simply not ready yet.
These waves of technology, you can see them way before they happen, and you just have to choose wisely which ones you’re going to surf. If you choose unwisely, then you can waste a lot of energy, but if you choose wisely it actually unfolds fairly slowly. It takes years. ~ Steve Jobs
Nor should Apple rush new products to market. That’s not smart and that’s not their raison d’être.
Our north star is to make the best product. Our objective isn’t to make this design for this kind of price point, or for this arbitrary schedule, or line up other things or have X number of phones, it’s to build the best. ~ Tim Cook
The smartphone market is eight years old. Eight. That’s it. The pace of technology is certainly accelerating, but the smartphone market has hardly seen its best days. It took the desktop/notebook market forty to fifty years to mature. I suspect the smartphone still has a few good years ahead of it too.
Very well done. I don’t want to diminish the valuable thoughts you’ve put down, but I want to offer a non-investor’s, notoriously un-loyal customer’s, perspective.
You did not make up the term, but I get a kick out of B-School epiphanies sometimes. Virtuous cycle? Self propagating, yes. But virtuous? Low standard for ‘exemplary moral authority’. Must be a marketing term.
You’re spot on about developers (so was Ballmer btw 😉 )
“they control almost all of the customers that developers cherish most.”
They also excessively control the singular customer I cherish most… Care to venture a guess?
Much has been written in recent days about Apple becoming more of a ‘services company’. They’ve been a services company since the iTunes store. Apple is probably the largest IT department on the planet, administering all aspects over one billion devices.
“Nor SHOULD Apple rush new products to market. That’s not smart and that’s not their raison d’être.”
Very true. No one company can do it all. Problem lies with their tendency to insist that their reason for being become mine. If they don’t do it, I don’t need it, and I can’t have it.
What should also keep Apple execs up at night should also be something more fundamental. Perceptions!
“We should be thanking Apple for launching the $10,000 “apple watch” as the new gold standard in douchebag detection.” -Anna Kendrick
Like it or not, fashion is fickle. So is Wall Street. It all depends on where we individually, or collectively, find out particular brand of vanity.
“Virtuous cycle?”
I think they were trying to come up with the opposite of “vicious” cycle and start it with a “V”. Whatever.
“You’re spot on about developers (so was Ballmer btw 😉 )”
I always felt that Steve Balmer got that part right and I’ve said so in several of my articles.
“they control almost all of the customers that developers cherish most.”
They also excessively control the singular customer I cherish most… Care to venture a guess?
“Much has been written in recent days about Apple becoming more of a ‘services company’. They’ve been a services company since the iTunes store. ”
Meh. I don’t think Apple is really a services company. They make billions from services, but their business model to to make software and monetize through hardware.
“No one company can do it all. Problem lies with their tendency to insist that their reason for being become mine. If they don’t do it, I don’t need it, and I can’t have it. ”
This is an area where we always disagree. In a capitalist system, if Apple isn’t your cup of tea, you can always get your stuff elsewhere.
What should also keep Apple execs up at night should also be something more fundamental. Perceptions! … Like it or not, fashion is fickle.
I’m writing a series on branding. Part 2 — which defines brands — should go up on Sunday. Part three focuses on Apple’s brand and whether they are a premium, a luxury or a Veblen brand.
“Meh. I don’t think Apple is really a services company. They make billions from services, but their business model to to make software and monetize through hardware.”
Agree completely. And if they do try to pivot into one by bringing more and more of their services to other platforms, they’ve lost touch with their DNA.
The main point of the quote was left out. They are indeed the world’s largest IT department, responsible for one billion devices. They are a services company, by default.
I respectfully disagree. Just because Apple does services (and they do) doesn’t make them a services company. Oil companies own ships, but that doesn’t make them a shipping company. Apple controls one of the largest investment portfolios in the world, but that doesn’t make them a financial institution.
The reason they are not a a financial institution is because they don’t manage other people’s money.
Their very main value proposition, the deep integration of hw/sw/ecosystem, in the end, is but a service. The goods are the individual hw, sw, store, but how they are put together is a service.
And the reason they are not a services company (with the exception of Apple Music) in the manner that FB / Google / MS are, is because they don’t develop cloud services for other platforms.
Apple’s services are created to prop up / create value for their own platform.
“in the manner that FB / Google / MS are”
True, but arbitrary. When you buy the product, you also buy the service.
But the service isn’t the product. Not that arbitrary.
Joe
This is more about where you set the bar. That’s why it’s arbitrary. The ‘service’ is the very essence of the product. (Or so I’m repeatedly told). 🙂
being a services company is not Apple’s core competency. Apple’s core competency is living at the intersection of hardware + software + services (IOW, services are only one piece of the puzzle).
And yet, taste in integration is the service which provides the ‘experience’. Among other things, Apple is a service company and a service provider at it’s core.
So that I’m not accused of making up definitions, I looked it up and what is not a tangible good, is a service.
Services, until Beats, was a feature, not a product.
Joe
“These waves of technology, you can see them way before they happen, and you just have to choose wisely which ones you’re going to surf.”
When you’re a visionary like Steve Jobs, this skill is almost second nature to you. Question is, does the current executive team have that skill? There’s certainly no lack of no-confidence out there.
“does the current executive team have that skill?”
Steve Jobs really did have the gift of knowing what was going to be the next big thing. Whether Jonny Ive or others at Apple have that gift? We will really only know in hindsight.
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