It isn’t easy getting older.
Apple’s strong Q2 2014 performance, capped by a 7-for-1 stock split, an 8 per cent dividend boost and a US$30 billion increase in its stock buyback plan, was more than enough to keep investors happy as the company’s shares soared by 8 per cent in after-hours trading. But weak iPad sales and an ongoing mystery over next-generation product announcements continue to underscore the company’s sometimes-painful transition from fast-growth innovator to a more value-oriented legacy company. Financial gymnastics can only mask so much.
Initial investor response notwithstanding, Apple’s middle-aged growing pains are far from trivial. Despite earning $11.62 per share, 15 per cent more than during the year-ago period, softening iPad sales – 16.35 million compared to 19.4 million in Q2 2013 and well below analyst consensus of 19.2 million – threaten to undermine the company’s position as the consumer electronics market’s Pied Piper. Apple’s current products won’t sustain earnings growth indefinitely.
For well over a decade, Apple’s growth has been built on successive releases of groundbreaking new products. The iMac, iPod, iPhone and iPad each created order and focus in markets that had previously been disorganized and limited to niche appeal. As each of these offerings topped out amid increasing competition and market maturity, Apple introduced its next big thing to drive growth for a few more years. Four years after the iPad’s debut, shareholders are wondering when that next big thing will appear.
They may want to reset their expectations. The days of the mega-successful single product powering a company’s return from the dead or reinforcing its existing dominance are over.
Single new products or product categories no longer function like rabbits pulled from magicians' hats. Electronics is no longer a tertiary product for the average consumer or corporate buyer. Consumers no longer simply dump product A in favour of product B. They’ve invested in apps, data storage, workflows, and training, and none of this is easily left behind. Consequently new products don't have the same greenfield opportunities they once did, and vendors can’t simply invest all their hopes in singular releases.
Indeed, all of Apple's potential next-generation products - in automotive, health care, fitness, and wearables, among others - now exist in market contexts that are much more crowded than, for example, media players were when the iPod was released in 2001 or the iPhone bowed in 2007. Apple can't simply walk in and mop the floor with a revolutionary TV product because TV as we know it is overbuilt. Even if Apple can muscle its way in and force order much as it did on a then-disorganized music industry, it’ll be a lot more expensive and risk-prone today.
The answer lies in a shift toward software – the only remaining platform for differentiation – a focus on larger numbers of smaller launches, squeezing more revenue out of its now-800-million-strong iTunes user base, and extending existing platforms like the iPhone, which now accounts for 57 per cent of Apple’s revenue.
“The iPhone is obviously a huge winner, and what we’ll likely see is Apple coming out with products that will drive the growth of that winning product,” Troy Crandall, VP and equities analyst at 3Macs, told Yahoo Canada. “Ultimately the main core will be the phone and everything will be an accessory to the phone.”
Crandall said CarPlay, the recently announced in-car dashboard interface, exemplifies this approach, and any possible wearable or health care-related products would similarly leverage the iPhone.
Investors waiting for Apple to pull its next hardware-based rabbit out of its hat might want to re-adjust their expectations. The future of the company has little to do with a Hail Mary-esque new product. Get ready for smaller big bangs, be prepared for the end of Apple’s hardware-first era, and stop waiting for that iWatch. Because even if it eventually ships, it simply won’t matter as much to Apple’s future as it once might have.
Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. firstname.lastname@example.org