Opinion: Apple’s troubles don’t have a whole lot to do with trade wars.
If you have been following our articles, weekly podcast, and social media discussions throughout most of 2018, you are probably aware that we predicted some regularity that 2019 would likely be a rough year for Apple. With Apple losing $57 Billion in market value in the day following Tim Cook’s warning to investors, and a 39% drop in shares since October 3, it looks like we weren’t wrong. And while the worst of Apple’s stock market troubles may (or may not) already be in the rear view mirror, the problems plaguing Apple (and which, for the last few years, slowly brought us here) are far from over, meaning that Apple’s precipitous stumble of late could turn into a slow, painful grind for most (if not all) of 2019.
What I want to address today is the notion that trade wars or China were responsible for what happened to Apple last quarter. Sorry but that argument just doesn’t hold water. While the specter of trade disputes between China and the US potentially bleeding over into Apple territory has indeed loomed near for most of 2018, it never materialized – at least not in a meaningful way. In our view, Apple’s troubles aren’t about trade disputes at all. Aside from an overall slowdown in smartphone sales around the world and a contracting economy in China, Apple’s troubles are mostly self-inflicted. Below are the eight factors that guided our prediction in 2018, insight into how we arrived at our reasoning, and some ideas regarding what Apple probably should do to get out of its own way and get out of its current predicament:
1. Product Cycle Velocity is out of sync with reality: The smartphone category’s natural product cycle falls somewhere between 20 and 26 months, not 12 months. Fact: Most smartphone users don’t need upgrade their phones every 12 months. Also fact: Most years, improvements in performance and capabilities are incremental, and as such, aren’t compelling enough to warrant a new phone purchase after only 12-15 months. (Software upgrades are more effective at improving device performance in 8-12 month intervals.) Handset makers’ habit of releasing new premium phones every 12 months probably needs to be reevaluated. This is not just an Apple problem. It is category-wide.
Corrective guidance: 1) Shift product cycle to 24 months for new flagship phones. 2) Release limited intermediate models in the interval. (If your initial flagship phone is the iPhone XIV, intermediate models might be the XIVs, XIVr, XIVg, or just the XIV with special edition colors.) 3. Focus intermediate upgrades on software improvements. 4) Abandon incrementalism. Give consumers compelling reasons to upgrade to each new generation of flagship phone.
2. Pricing Elasticity has reached its limit: If phones are to be priced like computers, product managers need to stop thinking about them as mere phones. $1,000 every 12 months for a phone, even if the upgrades are monumental, is a bridge too far for most consumers. If H2 2018 has taught us anything, it is that a significant number of smartphone users will gladly spend $600 to $800 on last year’s pretty good phone instead of spending $1,000 to $1,400 on a marginally better brand new phone. That’s just reality.
Corrective guidance: Now that iPhone’s specs and performance have hit the category’s price elasticity ceiling, Apple now needs to decide if it wants to be a luxury handset maker or a popular handset maker. Translation: Either keep selling iPhones at $1K+ and go for a niche play but significantly improve the product’s quality (more on that in a moment), or keep the quality where it is and drop the price closer to $700 (or lower, depending on the market) and go for a volume play. Apple should probably consider doing both. This will require being conspicuous and clear about its premium and standard product lines. iPhone branding will have to change to reflect the differences between those parallel but separate tiers.
3. iPhones aren’t impressive enough to warrant premium pricing anymore: Don’t get me wrong – iPhones are terrific devices. They are extremely well designed, the quality is solid, they work, and the UI is still smooth as butter. There is a lot to love there. But compared to premium Android phones from Samsung, Alphabet (Pixel), and Huawei, iPhone struggles to compete in some fairly crucial user-centric areas. Feedback from smartphone users identifies several key complaints: Slower download speeds (Intel makes great gear, but wireless modems are still not something Intel excels at), inconsistent-to-horrendous battery life, and software glitches sit at the top of the list. Comparatively, flagship Android phones impress with significantly longer battery life, blistering download speeds, noticeably better cameras, better AI (not to be confused with digital assistants), and often packaged at lower price-points than the iPhone.
Corrective guidance: As mentioned in the previous section, if Apple insists on charging $1,000+ for its flagship iPhones, the product’s specs and user value must match the price. Slapping an Apple logo on a B+ phone isn’t going to cut it at that price-point. That might have worked back when Android flagships weren’t in the same league as the iPhone, but those days are gone. iPhone has fallen behind Android now for going on two years now, and that needs to change. Apple must return to its Jobs-era culture of pushing the limits of technology and design with its products. Being “also-in” is a recipe for disaster for a company like Apple: If it isn’t the best or the coolest, it has no competitive advantage, and no purpose in the market.
4. Apple loses more trust than it builds these days: Apple customers are growing increasingly disillusioned with Apple, and for a company built on loyalty, that’s a problem. Among the major causes for that erosion of trust and loyalty: Apple getting caught artificially throttling older phones, presumably to drive new phone sales, Apple being sloppy with user data and privacy, product quality concerns, Apple charging increasingly exorbitant prices for its devices (greed is not a good look), and Apple’s alleged pattern of patent infringement isn’t exactly helping improve the company’s reputation. (Batterygate sits squarely at the top of my list.) If you have to sabotage your own products’ performance to trick your own customers into buying new phones, you don’t deserve anyone’s business, let alone their trust.
Corrective guidance: 1) Apple needs to stop exploiting and betraying its loyal customers. 2) Apple needs to return to being 100% devoted to designing kickass products for its customers, and a lot less focused on squeezing every possible penny out of customers (and channel partners) in order to make investors happy. 3) Apple needs to become a company that consumers and channel partners can legitimately trust again.
5. Apple’s bad behaviors are starting to hurt the company: In case you missed it, Apple was slapped with two injunctions in December that effectively ban the sale of several popular iPhone models. One such injunction was in China (Apple’s third largest iPhone market) and the other in Germany (Apple’s biggest iPhone market in Western Europe – Apple’s second largest iPhone market). There are dozens more cases like this in China, Germany, and in the US, and Apple could lose more of them this year.
Note that the financial impact of these iPhone bans in Germany and China, whatever they may turn out to be, have not yet begun to impact Apple’s numbers. That could change over the course of the next few months, however, and make an already bad quarterly numbers much worse.
Apple is also accused of stealing source code from one of its key innovation partners and transferring it to Intel, which, if true, could have additional repercussions both financially and with regard to Apple’s reputation. Fact: Apple cannot be seen to behave like a bad actor and maintain a “good guy” brand image at the same time.
Corrective guidance: Apple needs to stop behaving badly. In my view, this is purely a leadership issue. Whether the company’s leadership is driving the company’s behaviors or somehow oblivious to them is irrelevant. Toxic leadership and negligent leadership both require the same course of action: Identifying the problem, acknowledging the problem, taking ownership of the problem, and correcting the problem. There is zero reason why Apple needs to be a bad actor in an industry it dominated until recently, and zero reason for Apple to want to be a bad actor in the first place. This should be an easy fix, especially now that reality is (hopefully) drowning out Apple’s PR spin. Whether it requires some changes in leadership remains to be seen. I would caution that we should treat Apple’s leadership failures the same way we treat Facebook’s. Bottom-line: Apple is at its best when it is a force for good, and when everyone can believe that its culture is ethical, honest, and benevolent.
6. Sales of Apple hardware, including iPhone, were already looking dangerously flat last year: This was clearly not trade-war related. Based on that trending, and looking at other factors (some of them listed above), we came to the conclusion that 2019 would likely be the start of a significant slowdown for Apple. Apple’s decision in November to stop reporting unit sales also triggered our spider senses. (It is never a good sign when a company with stalling sales decides to stop sharing units shipped data.)
Recap: A slowdown in demand for new premium smartphones, the increasingly out-of-reach pricing of new iPhones, incremental improvements failing to inspire consumers, less-than-impressive device performance, and eroding brand loyalty all signaled to us that Apple was about to hit a rough patch. Apple failed to correct this trending, and investors have begun to notice that Apple has no solution as of yet. Tim Cook’s letter to investors the other day may have only confirmed this.
7. Apple missed out on some major market opportunities in 2017 and 2018… and presumably in 2019 as well. Apple was perfectly positioned to own the smart home space, for example: As a lifestyle brand, an image brand, a design brand, a tech company, and a UX brand, I cannot think of a single company better equipped to sell the public on smart home tech. Apple’s smart speakers would have been works of art. Integration with iPhones and iPads would have been seamless. Apple could have easily made smart home tech easy and slick (complexity is a significant pain point/obstacle in smart home automation for your average consumer), not to mention fun. Apple could have been at the heart of people’s home life, made the category synonymous with its brand, and built an entirely new ecosystem of services around it. Instead, we have Apple TV.
Google, Amazon, and Philips currently own that space, and aren’t doing a particularly great job of it. Perhaps Apple decided that the only way to do this effectively would be to open itself to a much more fluid degree of interoperative compatibility than it is accustomed to (and there, Apple would be 100% correct) and decided that it was a bridge too far. Perhaps. Whatever the reason, Apple’s failure to conquer that space and make it its own may have been one of its biggest strategic blunders this side of Y2K, especially given how massive a gateway into Apple services (Apple’s most potent opportunity going into 2019) it could have opened up.
For all of the rumors about Apple’s ambitions in AR in the last two years, we haven’t seen anything concrete from Apple yet on that front, and may not for some time. (Teasing rumors of vaporware is not a product strategy.) As much as I think Apple can do something special with AR (and VR, for that matter), I find it difficult to imagine a scenario in which Apple will somehow conjure up an AR wearable in 2019 that will outflank the competition by somehow managing to fit the performance and capabilities of AR gear from industry leaders like Meta, Microsoft, and Magic Leap into stylish form factors but far less capable devices like the ones developed by Vuzix, ODG, and Intel. Apple’s partnership with Intel in other product categories could give Apple a way to enter the space, but unless Apple can deliver something truly unique and exciting, I don’t anticipate a huge win this side of 2020 (and more realistically 2022).
The Apple watch was a great idea, but there too, Apple seems to have run out of runway and ideas. Even Android watches seem to have finally solved a problem that Apple still hasn’t addressed very well: battery life. (I expect Android watches to give Apple a run for its money on that front in 2019.) Apple’s laptops still have their fans, but new ACPCs and tablet PCs with touch-screens and near-multiday battery life will be signaling a new direction for the category’s future in 2019 while Apple still appears anchored in a 2010 product design mentality. I don’t see an Apple car anywhere in our immediate future, or an Apple companion robot, or a viable Apple digital assistant (sorry Siri), or a truly scalable Apple classroom. For now, Apple seems stuck in place with a finite set of products in a finite ecosystem that caters to a finite community of users. That model isn’t likely to motivate and excite investors anymore, especially with Tim Cook circling the wagons to protect Apple’s aging (albeit profitable) product categories. At least not with product sales now trending downward, and no clear strategy to make people care about Apple again in 2019.
8. Apple running afoul of its technology partnership with Qualcomm may be killing Apple’s innovation pipeline, especially relative to iPhones and iPads. This one isn’t as obvious to the average person as it is to us, but I think it is pretty fundamental. You can almost trace Apple’s innovation slowdown to the moment Apple decided to start moving away from its partnership with Qualcomm. It isn’t just a modem issue. (Intel has occasionally struggled to deliver smartphone modems that can compete with Qualcomm’s modem performance). Qualcomm’s IP portfolio is massive and powers some critical features in smartphones that Apple hasn’t – to date – always come up all on its own. (The patent litigation mentioned in item 5 focuses on specific instances of this.) Meanwhile, propped up in part by Qualcomm IP, the Android space is now out-innovating and outpacing Apple in a number of areas critical to users. This isn’t a coincidence. Apple appears to have shot itself in the proverbial foot with its scorched Earth Qualcomm litigation strategy, and it may be time for Tim Cook to wrap it up and hit the reset button.
Corrective guidance: Apple’s global campaign to pressure Qualcomm to lower its licensing fees isn’t quite over yet, but given the cost of Apple’s failure in that attempt so far, and how far iPhones are beginning to lag behind their top tier competition, it might not be a bad idea for Apple and Qualcomm to bury the hatchet and settle their differences. It would be a win-win-win-win: A win for Apple, which would finally be able to deliver top-rate iPhone products again; a win for consumers, who could now justify sticking with (or coming back to) iPhones over higher-performing and lower-priced alternatives (more choices = good for consumers); a win for Qualcomm, who would probably be thrilled to start supplying Apple with chipsets again, not to mention eager to collect on the billions of dollars in royalty payments Apple is allegedly holding up, pending the resolution of their dispute; and a win for investors, who would reap the benefits of an uplift in Apple and Qualcomm stock value resulting from a return to regular order.
SITREP: CNBC’s Michael Sheetz notes that in the last 3 months, Apple has lost $452 BILLION in market capitalization. Shares having fallen 39.1% since October 3. Per Michael: “To put the Apple market value plunge in context, $446 billion is: more than double the size of Wells Fargo, more than three times the size of McDonald’s, more than five times the size of Costco.” He’s right, and putting Apple’s nosedive in perspective like this helps frame just how big of a deal this is.
This is Apple’s new reality, and unless the iPhone maker finds a way to address all eight of the above items, and fast, I don’t see a comeback for Apple anytime soon. To be clear, I think that Apple can and will make a comeback. Even Microsoft managed to pull off a killer comeback after Steve Ballmer made many of the same mistakes that Tim Cook appears to be making now. The $450 billion question is twofold: 1) How quickly (or not quickly) will Apple fix the above problems? 2) Is Tim Cook the best person to solve these problems and fix Apple?
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