With no Jobs around to create instant success stories, what can Apple do?
Steve Jobs is gone, but Apple Inc. is still riding high. Sales of the consumer electronics company are set to reach a staggering $263 billion in fiscal 2018 — up 144% from $108 billion in 2011, the year that Jobs died. Apple’s $1 trillion-plus market capitalization has woven its story into the fabric of global business history. Pull any strands of the Apple saga, though, and they all lead back to its better-known founder.
What is Apple without Steve Jobs? The market wants to know. Apple, under current CEO Timothy Cook, has only partially answered the question. Apple, they’ve shown, can become even greater than its founding partners ever thought, and the company’s enormous profits indicate that the current executive team knows how to run a smooth engineering and supply chain marvel. However, the iPhone, iPad, Mac, iTunes, and “other services” fueling Apple’s massive sales and huge stock valuation all hark back to the Steve Jobs days.
So the market waits. Consumers, institutional investors, regular Anne and Joe stockholders, contractors, component suppliers, software developers, and everyone else in Apple’s huge universe are watching and waiting. We all want to know what non-Jobs inspired “new thing” Apple will create and make an instant success. Everyone wants to believe that the company has an incredible and unique innovative spirit.
It may be a long wait. Or it may happen tomorrow. Few people outside of Apple’s management know enough about the “secret projects” that the company is believed to be working on to authoritatively announce them. Apple engineers and senior software employees — we think — have bits and pieces of the information, but putting these together to form a complete picture is quite difficult. What everyone agrees on, though, is that “the next Big Thing from Apple will be huge.”
Why? Because investors and suppliers do not want an end to the Apple story. Everyone wants and expects the company to continue to grow at breakneck speed. And herein lies the greatest challenge that Apple faces, masked by its $1 trillion market capitalization achievement. Apple is at a crossroads today: It is growing, but the biggest sales spurts on a percentage basis are in services rather than the iPhone.
The iPhone remains a compelling purchase for many consumers, but there are ominous signs that the product is flagging. Annual shipment has been wobbly, zigzagging depending upon what buyers think of new iterations of the iPhone. In response, Apple is focusing on getting buyers to pay more for each unit, turning invariably into a sort of entrepreneurial magician.
The next big thing
A cottage industry of experts, analysts, and enthusiasts has sprung up around the core question of what Apple will roll out in future, each group vying to divine what that next “Big Thing” from the company would be. What, they ask, will Apple do for an encore?
It’s a fair question. But before hazarding a guess, let’s do the numbers. Analysts estimate that Apple’s revenue will top $263 billion in fiscal 2018, up about 15% from $229 billion in the prior year. To put these numbers into perspective, consider this: In fiscal 2008, Apple’s revenue was a mere $32 billion. iPhone sales of $1.84 billion accounted for less than 6% of Apple’s revenue that year. At the time, Apple was essentially a PC ($14 billion, or 44%, of sales) and iPod ($9.2 billion, or 28%) manufacturer.
In 2008, Apple was betting that its future success would be anchored in the iPhone. It was a well-placed wager. By 2017, the iPhone was contributing 62% of Apple’s revenue, while PCs represented 11% and iPads 8%. Services, Apple’s fastest-growing division, contributed $30 billion, or 13%, of sales. (More on this critical Apple business later.) What happened to the iPod, the contributor of nearly one-third of revenue from just nine years earlier? iPod sales were so minuscule in 2017 — for a company of Apple’s size — that they were folded into a group of “other products” that include Apple Watch, TV, Beats products, and third-party accessories.
Next page: Docking station?
The lesson from this for anyone trying to figure out Apple’s future product direction is quite simple: Look at the trending numbers. Whatever is going up represents future growth, and whatever isn’t will remain a stable but possibly not a major contributor to sales. Where does the iPhone sit in this classification? The numbers foretell what will happen to this device. Unit shipment is still rising, albeit with occasional dips, but the overall growth rate has crawled to single-digit levels. Perhaps fiscal 2018 will be different, but the trendline is clear: iPhone shipment growth rate will continue to decline.
The iPhone will remain Apple’s top revenue generator for many more years, but it has today become a matured product. Apple will continue to invest a huge chunk of its product development capital on the iPhone, but this will not dramatically alter its profile. Competitors have largely caught up with the iPhone innovations that roiled the market in its first years, which means that price-sensitive buyers now have numerous compelling options. This is already showing up in the margin pressures that Apple is facing.
Obviously, based on the billions of dollars that it spends annually on R&D ($11 .6 billion in fiscal 2017), Apple has something up its sleeve. The market will not settle for anything less than a “huge,” market disruptor, however. The conventional wisdom about Apple goes thus: “Apple’s next Big Thing will be huge. It will eclipse the iPhone, disrupt existing market, reshape the supply chain, create a new set of multimillionaires, and help dispel the notion that outstanding innovations died out with Jobs.”
So, shall we join the prognosticators? Absolutely. Observers think that Apple can make quite a dent in several markets. They include autonomous driving and artificial intelligence. In other words, the iPhone must either transform into a trusted and critical aide in the evolving world or become obsolete. We believe that the iPhone can do better. Anyone who sees it as a messaging and “talk” product hasn’t quite seen the potential. The iPhone — and competing devices — can become the host for multiple docking stations spread across different markets — the Yin to their Yang.
How will this work? Take the autonomous vehicle or any other variants of AI. What all of these devices must have and need to offer, aside from the ability to be aware of and responsiveness to the general environment, is user differentiation. They must intuitively be able to know and comply with the user’s personal preferences. In the future, this means that all AI products — automobiles, homes, robots, etc. — will eventually become docking stations. Each user virtually “drops” the control and data center into the docking station, which proceeds to download or read the personal preferences to customize the environment and overall user experience. Which currently ubiquitous product can do this? The smartphone, or in the case of Apple, the iPhone. That is one way to lengthen the iPhone’s reach and utility without stressing on the hardware.
The iPhone is already serving in this capacity, although at a rudimentary level. A review of Apple’s current product line reveals what’s missing in its arsenal. The company has or offers access to TV, music, computing, telephony, books, health services, storage, photography, time management (scheduling), and podcasts. In other words, Apple is already in most areas of human and enterprise activities. Interestingly, most of these services can be accessed or managed from a single device, the iPhone. Which makes the reference to the iPhone as a smartphone a misnomer. Most people do more than talk or send messages on their smartphones; banking, health checks, home management, travel booking, product ordering, and a bunch of other activities are now done from the handheld device and often on the go.
What connects all of these services is communication access, which Apple, though a major seller of mobile devices, does not offer. To increase its sales-generating capacity, Apple can develop an even tighter relationship with customers by offering wireless communication services or access. In this scenario, the iPhone buying experience becomes unified with what telecom service providers today offer: access. Each iPhone can be sold with a voice and data access package, relieving customers of the headache of acquiring access through service providers. What customers need is a phone and access bundle.
Will service providers kick? Of course, but their anger will soon be dispelled. Telecom providers are transforming themselves, but their biggest asset remains the pipeline. Apple can offer this globally by simply buying access to telecom pipelines, making service providers bandwidth wholesalers.
This is where the “other services” segment of Apple’s income statement comes in. In fiscal 2017, “Services” represented Apple’s fastest-growing business unit, racking up sales of $30 billion, up 23% from $24.4 billion in the prior fiscal year. In the June 2018 quarter, services notched the second-highest year-over-year increase in the company’s portfolio. It grew 31%, exceeded only by “other products,” which rose 37%. iPhone sales jumped 20% during the same quarter, but unit shipments of the handset increased only 1%.
What’s in Apple “services”? The future, I dare say. Remember that Steve Jobs’ goal in starting Apple and upon his return was to make things “simple.” It’s a simple strategy: Take complex products and make them easier for people to use. Apple management now has an opportunity to extend that strategy beyond the hardware world. A long line of consumer and enterprise activities remains complicated, from production management to food ordering and health care. They don’t have to be.
Contrary to what some people may think, Apple isn’t oblivious to the desire of its customers and analysts for a new and distinct product. They know that the iPhone is a cash cow and will continue to milk it for a long time. Cook and his senior executives may know what they’ll like to roll out next, but they cannot be even half as successful as the iPhone or even the iPad.
To better understand what is in Apple’s future, look at the company’s patent filings, acquisitions, and key executives. The executives who are key to Apple’s product roadmap include Johny Srouji, head of hardware technologies; Eddy Cue, in charge of internet software and services; Craig Federighi, senior VP of software engineering; Dan Riccio, senior VP of hardware engineering; and John Giannandrea, chief of machine learning and AI strategy. The future for Apple is clear; hardware, software, machine learning, and artificial intelligence.
The recipe is quite simple: Apple must secure current technology advantages, develop new ones, and create smash hits in the genre of the iPhone. It would be difficult for any enterprise, but Apple has done it before. Can it deliver again?
— Bolaji Ojo is Editorial Director at ASPENCORE Media. The views expressed in this article are those of the author alone, who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant, but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at email@example.com.