Why Apple is not a One Trick Pony
Apple’s recent earnings report was spectacular. The company sold 74.5 million iPhones in the last quarter and had $18 billion in profits, setting a record in both categories. Most of the revenue and profit came from the iPhone which has clearly become Apple’s cash cow. But it begs an important question or two.
The first has to do with the ability to sustain growth with the iPhone and to continue to have strong profits from this product. The second has to do with the three legged stool metaphor in which Apple has three legs with the iPhone, iPad and Macs yet only one continues to deliver blockbuster earnings. To many, this is a troubling trend and they wonder what else Apple can do to boost long term profits.
The first question is quite significant to Apple’s long term profitability. Keeping up demand for the iPhone is strategically important. I am certain this is top of mind at Apple. In fact, in Tim Cook’s answers during the analyst call, he pointed out that, during this last quarter, only a small fraction of their current customers actually upgraded to the iPhone 6 and 6+. He also stated Apple saw record numbers of Android switchers jumping to the new iPhones. I suspect it will be hard to continue to set records with iPhone sales every quarter but it does appear there is still a lot of pent up demand for these new iPhones and, at the very least, it will drive strong iPhone sales through this year. And who knows what they bring to iPhone 7? Any significant new features could boost sales again by year’s end.
I base this prediction on a couple of important facts. As Tim Cook pointed out, very few of the Apple iPhone users have actually upgraded and we know that, when their contracts come up for renewal, it is highly likely they will go with a new iPhone. You don’t see a lot of people switching from the iPhone to Android and, more importantly, most iPhone users have an ecosystem of apps and services already committed to the iOS platform. Another reason to expect strong iPhone growth this year is that these larger iPhones are a big draw here in the US and around the world. In fact, one of the reasons Samsung made such strong inroads in China and parts of Asia is because they beat Apple to the market with 5 inch and 5.5 inch phones, something highly prized in China, Korea, Japan and most of South East Asia. When Apple finally introduced larger phones, demand jumped significantly in China during the last quarter and we hear demand even in Korea for iPhones over Samsung was amazingly strong.
One more interesting fact about this upcoming quarter. We believe Apple will do record iPhone sales in China due to the Chinese New Year. This is a major holiday in the country. People go home for two weeks, have big celebrations and buy gifts for themselves and their family. We believe iPhones will be at record numbers during this time and will keep Apple’s China growth strong in this new quarter too.
Another leg of the stool is the iPad. Yes, growth has fallen off but it is still a strong and profitable business. Apple sold about 75 million iPads in 2014 and most likely will sell at least that many again in 2015. One problem for Apple and other tablet makers, especially those making tablets at the upper end, is the refresh cycle of tablets is longer than most anticipated. Also, the build quality of Apple’s tablets are especially high — they last a long time. That said, I don’t believe Apple is sitting on their hands when it comes to innovating around the iPad. Rumors are strong they are doing a 12.7″ or 12.9″ tablet and this could help sales of iPads, especially in the enterprise. In fact, I suspect this larger tablet is specifically aimed at mobile business users and could bring some interesting new UIs and innovative input to the design when it comes to market. I also think we will get faster and thinner iPads by year’s end that will have some new UI features to re-energize iPad sales by the end of 2015.
The third leg is the Mac. Apple has good news here. They sold 5.5 million Macs last quarter, up by 500K over the previous quarter. I believe Apple is going to bring new Macs out this year that could help boost Mac sales even more. One product I am certain will be refreshed is the MacBook Air. Rumors have Apple doing a 12″ version and I suspect this will end up being the thinnest and lightest laptop ever made when it comes out. I also believe Apple is going to innovate on Macs and, while they’ve already added 5K monitors to this computer, it too could become thinner and lighter as well as more powerful with enhanced UIs and inputs.
However, I think we actually have to look at this stool analogy and add at least two more legs to it — as awkward a stool as that may be. Sometime in April, Apple is going to ship their new Apple Watch and I believe it will be a big hit. Next month, I will do a more extensive piece on why I think the Apple Watch will be huge but Creative Strategies and many other forecasting firms are predicting Apple will sell between 22-24 million Apple Watches in the first 12 months it is on the market. That could bring another $20-$35 billion in new revenue to Apple and make it another important profit leg in this stool.
Then you have the Apple TV. Apple has sold over 25 million Apple TVs and clearly this is past the hobby phase. Given Steve Job’s comments to his biographer about Apple planning to do more with the TV, I am pretty certain this too could eventually become a cash cow of sorts to add substantially to their bottom line as early as Q4 of 2015.
Add to the fact I believe Apple plans to become the largest broker of health data between a consumer and their health provider as well as extending IOS through HomeKit to IoT and CarPlay, adopted by over 12 automakers so far, and it is hard for me to see Apple as a one trick pony. Plus, Tim Cook has said there are things they are working on that people have not even written about, which says, at least to me, Apple has even more irons in the fire that could add many new legs to this stool over time.