Why Apple's big launch fell so far short

It should have been Tim Cook’s crowning moment. Instead, questions over where he’s taking the company still linger.

Almost three years after Steve Jobs passed away, Cook finally seems to have shed the ghost of Apple’s mercurial co-founder. The new iPhones introduced yesterday are solidly engineered, competitive products that should allow Apple to extend the franchise cash cow for at least another few quarters. The Apple Watch similarly gives Cook his long-awaited product in a new category. Instead of only refreshing existing products, Cook is finally introducing his own, as well.

Share values don’t lie

Unfortunately, the verdict is not a positive one. A close look at Apple’s stock performance during the live-reveal provides insight into investor sentiment. As soon as the iPhone 6 and 6 Plus were announced at 1:10 p.m. Eastern, shares almost immediately shed $2 to just over $98 before recovering near their all-time high of $103 thanks largely to positive response to the Apple Pay mobile payment solution.

Values fell off the cliff again after the 2:03 p.m. announcement of the Apple Watch, and bottomed out at $96.71, over $6 in barely an hour, as the online live feed struggled to keep up. Values recovered somewhat – up 1.5 per cent – by midday Wednesday as positive reaction to Apple Pay balanced off the initial disappointment with the hardware.

The roller coaster ride suggests strongly that shareholders were unconvinced that they were looking at the next breakout product. The product timeline – its early 2015 ship date means it will miss the crucial holiday shopping season – and lack of sufficiently differentiated applications means Apple still hasn’t figured out how to convince mainstream consumers the watch is something they need and don’t simply want. Apple needs to kick start developers to create compelling apps between now and launch day, otherwise watch sales could stall in the new year after the early adopters have all bought in.

Pipeline falling short

By this time, so late in the year, Apple should have had more net-new products in-market. The company’s SVP of Internet Software and Services, Eddy Cue, famously told attendees at last May’s Code Conference in Rancho Palos Verdes, California that big things were in store.

“Later this year, we’ve got the best product pipeline that I’ve seen in my 25 years at Apple,” he told conference attendees. Unfortunately, yesterday’s event fell short. The updated phones play catchup with high-spec, large-screened Android devices and don’t appreciably differentiate Apple in an increasingly competitive, mature market. The tepid response to the largely unsurprising smartwatch only compounds the problem, as Tuesday’s event was Apple’s final major launch event of the year. The company now finds itself running out of time to wow the market with something else before the new year dawns. Cue may have overstated the health of Apple’s pipeline.

If the company simply sold hardware, this wouldn’t be an issue, as breakout sales of the new iPhones – Apple is estimated to have pre-ordered a record 70 million to 80 million units for the initial launch period – would easily fuel the company’s near-term revenues. But outside of hardware, some of the arrows are already pointing downward. British research company MIDiA Research last week released figures that show streaming music is rapidly taking over from traditional digital downloads as consumers’ preferred way of listening to music. With 70 per cent of digital revenue expected to come from streaming services by 2019, iTunes is at risk if it can’t transition away from its traditional purchase-and-download architecture.

Its US$3 billion acquisition earlier this year of Beats Electronics was a strategic move designed to accelerate its adoption of streaming culture. But almost five months later, it still isn’t clear how Apple intends to leverage the headphone maker’s technologies and processes. Beyond adding co-founders Jimmy Iovine and Dr. Dre to Apple’s executive team, there’s little sign of strategic integration between the two.

No killer app

The Apple Watch presents a confusing business case as Apple’s Next Big Thing. As expected, it’s a highly refined, premium-priced product that fixes many of the mistakes of its competitors, including chunky size and form factor, weak battery performance and convoluted application development tools and processes. Different sizes and styles – mainstream, sport and luxurious – cover the bases that seemingly tripped up earlier offerings. But without apps that go beyond replicating what’s already available on a smartphone, there’s little evidence mainstream consumers will be willing to cough up at least $349 for the privilege of reading a tweet on their wrist. It’s the longer-term adoption to more mainstream buyers in the absence of a compelling use case that muddies the waters.

The message to Apple is stark: The market will no longer automatically snap up a magically marketed new product just because it has an Apple logo on it. The iPod, iPhone, and iPad all solved vexing problems with existing, but inferior competitive products. They immediately legitimized their respective markets and galvanized consumer interest. Apple has until early next year to explain what problem its new watch solves and how it intends to solve it. In that period, Apple also needs to convince developers to create the kind of innovative watch-based applications that will differentiate its smartwatch from the growing wave of competing models.

It needs to do all this while fending off a surging Android rush. IDC says global Android share grew 33 per cent in the past year to 84.7 per cent, while Apple’s was down to 11.7 per cent. In 2011, Android held 36.1 per cent compared to Apple’s 18.7 per cent. The iPhone 6 and 6 Plus are great phones, but it’s really their software that sets them apart. The company’s September 17 release of iOS8 for earlier iOS devices – it already ships preinstalled on the new phones – is a crucial step in engaging developers to add features and value faster than Google’s camp. Apple can’t afford to botch this upgrade.

Even with some of the highest hardware margins in the industry, smartphones and tablets can’t carry the load indefinitely. Tuesday’s event was heavy on the hardware, but the rest of the new ecosystem remains AWOL. It’s a miss for Tim Cook, and left unresolved, it means Apple is still trying to figure out where its next growth spurt will come from.