Quick Thoughts: The Apple Roller Coaster Gets Rougher – What Next?

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–          12 month product cycles may be too long given the pace set by the Android eco-system – iPhone sales drop-off now 6 months post release, with new Samsung Galaxy S III now the hot product.

–          Cutting price on old models vs. purpose building midrange models may miss opportunity for more frequent product introductions while dragging down margins.

–          Apple is not yet exploiting the power of its iOS platform to control web-based services to its user base – e.g. advertising, e-commerce, media streaming, etc. – to drive revenue.

–          Without changes to the above, future product-driven boom/bust cyclicality will be even more pronounced.  The next big product cycle begins in Apple’s 2Q13.

 

Apple missed its 3Q12 in a manner eerily reminiscent of its 4Q11 miss 9 months ago.  iPhone is the culprit, at 50% of the company’s revenues, any shortfall is particularly painful, and short it was.  Apple’s strategy of releasing a single new iPhone model once per year has served them well over the years – R&D is conserved, launch costs are amortized over a long product life, and thirst for the new model builds.  However, the Android ecosystem is not playing by Apple’s rules, and Cupertino would be well advised to note that the summer of their discontent is playing out while rival Samsung has launched the phone of the season in the Galaxy S III.  Google is pushing out major platform updates on a 9 month schedule, and its smartphone partners led Apple 56% to 23% in global market share as of the first calendar quarter, a gap that is almost certain to widen for 2Q12 based on Apple’s reported numbers.

Looking on the bright side, iPhone shipments were up 30% YoY despite the 4S seeming a bit long in the tooth – what with a small screen and no LTE – and today’s disappointment may well be erased by the deluge of anxious upgraders hitting the stores for the new iPhone expected for the Holiday season.  Nonetheless, it may be time for Apple to get a bit more aggressive with its product refresh cycle.  Pushing last year’s models to the bargain bin does seem to have bulked up sales a bit, but perhaps at the expense of cannibalization on the newer, higher priced model, and certainly at the expense of margins.  It may seem clever to squeeze every drop of the development and launch costs out of those older models, but they do nothing to enhance the brand or generate mid-term excitement during the interminable wait for the next flagship.

I think that it is time for Apple to broaden its product line with purpose built products for the price sensitive customer that bring some sizzle of their own, and a more aggressive replacement plan at the top of the range to boot.  The competition is just too good to abdicate the middle six months of the year.  This issue extends to the iPad as well.  Yes, competitive products have been sorely lacking during the first two years of the modern tablet market, but Android smartphones languished far behind the iPhone at the start as well.  An 8 inch iPad is a fantastic idea for the Holiday season, and perhaps a sign that Apple will be more aggressive in defending its tablet hegemony in the market than it has been in smartphones.  The end result of a broadening product line may be more modest margins, as each individual product will sell in lower volume, but investors are expecting those margins to come down anyway and protecting market share should pay substantial dividends in the future.

Market share is important, because Apple should have plans for all of those locked-in iFans.  The beauty of iOS is the ability to use the platform to guide (perhaps too gentle of a word) users to apps and services of Apple’s choice.  Apple already makes a lot of money from charging Google for the privilege of being the default search engine, and from the 30% triple-tithe it asks from app vendors and media publishers that seek virtual shelf space in the Apple app store.  As the Internet continues to absorb value from the rest of the economy, and as the app model becomes the primary way that consumers access web based services, Apple’s current share of that pie is just the tip of the iceberg.  Advertising, e-commerce, transactions, and media streaming – Apple is positioned against all of these opportunities, yet remains curiously passive.  Time is growing shorter and there are investments – i.e. cloud infrastructure, content delivery capacity, content deals, etc. – that need to be made.

If Apple will not fill out its product line, close the holes in its new product delivery calendar, or exploit the opportunities for annuity-like service revenues from its loyal customer base, this wild roller coaster ride will only get worse.  Perhaps an iTV could become a third leg of the product stool to smooth things a bit, but a successful TV product will require that some of those investments – notably content delivery network capacity and content deals – are completed, and would suggest an Apple committed to developing its non-device revenue stream.  Given the integrated platform that Apple has built and deployed to a famously loyal and affluent user community, the future is Apple’s to lose and I am not inclined to bet that they will lose it. It would be nice, however, if they started moving more resolutely toward it.

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