Apple’s Earnings Slump Is A Symptom Of A Flawed Strategy

Apple’s quarterly earning report came out earlier this week and, for the first time in many years, the company had to tell the world that profits weren’t going to reach the targets they had set previously. Is Apple circling the drain or is this just a minor glitch?

The figures released by Apple revealed that their services business is doing well on the back of 1.4 billion total active users of its devices, up by 100 million on last year. So, in once sense, they are in a strong position with about 18% of the world’s population having a foot in the Apple ecosystem.

And that’s a critical thing. Apple isn’t a hardware company. And they aren’t a software company. Ever since the iTines Store started selling music they were transitioning into an ecosystem company. So, while many pundits point to falling iPhone sales as a major issue (and I’m sure there are plenty of people in Cupertino wondering how it’s possible that sales of a device that risen in price to in excess of $2000 are falling), the ecosystem customers buy into when they start using Apple’s products makes it challenging to switch platforms.

I’m not sure Apple CEO Tim Cook has it right when he said “We’re seeing what we believe to be a pause in purchases of iPhone which we believe are due to the earlier and much more frequent reports about future iPhones”.

When he looks at falling revenues, he might want to consider the price of the current product lineup. Apple has never really catered to the budget end of the market but even the Mac mini starts at $1249 and that’s with a pissy little 128GB SSD. There’s no change from $2000 when you jump to 512GB of storage and you’ll need to add a display, mouse and keyboard to that package.

The iPad Pro is expensive. The iMac is not terrible value at $1599 for an entry level 21.5-inch model but the laptop range no longer boasts a mid-range option with the new MacBook Air – which is a great computer – getting a hefty price increase over its predecessor.

Put simply – Apple’s products are expensive and there are few affordable entry points for new customers. Revenue growth only happens by selling more stuff or by charging more. Apple seems to have opted for the latter as their strategy. And, at the moment, it doesn’t seem to be a successful strategy.

Hardware sales are down on the back of plunging iPhone numbers but the Mac has made more money. And while I think Apple’s computer range still lacks a low cost entry point, it’s not hurting them. iPad sales aren’t doing well either but that’s not a new story. I’ve only seen one other iPad Pro in my travels since its release last year. That’s not surprising now that it’s a $2000+ tablet once you spring for the keyboard and Pencil accessories.

One of the problems Apple faces is that people keep looking for them to release a new, ground-breaking product. And while its US$245B cash holding gives the company a lot of opportunity for research and development, all the money in the world can’t make a bad idea good, or create innovation out of thin air.

What we’re seeing is a company that is in a holding pattern. Growth is flattening out after two decades of massive progress. The ecosystem it’s created is solid (and a little stifling if you want to do something the company didn’t anticipate or doesn’t like), the hardware is well made and lasts well.

Revenues could grow if it chose to enter lower-cost markets. For example, an updated iPhone SE would likely be successful, particularly in price sensitive Asian markets. When in India last year, I don’t recall seeing any locals using iOS devices. It was all Android. And the rise of Oppo and other challengers highlights the importance of servicing every price point – not just wealthy consumers.

Apple’s earning report this week is not a sign that the company is about fail. But the fall in iPhone revenue is a sign that the company needs to do something. The remaining addressable markets Apple can grow into are very price sensitive and simply won’t be interested in smartphones that are priced at Apple’s current levels. The lack of a sub $1000 option is a massive issue that Apple could easily address.

What do you think? Are Apple’s best days behind it or can it turn this slump around?


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