With smartphone sales plateauing, the iPhone can no longer propel Apple to the sort of stratospheric success the company (and its shareholders) enjoyed over the past decade.
Is Apple CEO Tim Cook clueless? Will Apple be caught flat-footed, unable to pivot and move to the next big thing? The latest prediction of Apple’s impending doom sounds particularly dire.
The dangers of being a one-hit wonder
Whether you like what Microsoft founder Bill Gates did in the tech industry or not, there’s no getting around the fact that he’s a smart guy. When he offers a warning, it’s worth listening.
Recently, Gates told a reporter that, “As good as Apple may be, I don’t believe the success of the [iPhone] is sustainable in the long run.” Sooner or later, he suggested, the product will run out of steam. It would hit peak market penetration and be superseded by a new “must have” gadget.
Apple was making a strategic error by becoming a company built around one product, Gates said. And if Cupertino didn’t watch out, this approach would bite it in the ass.
Except Gates didn’t recently say it. In fact, his comments about Apple’s lack of long-term sustainability came way back in 2005. And he wasn’t talking about the iPhone. Instead, he was referring to the iPod — a product that was overwhelmingly Apple’s biggest seller at the time.
Oh, and as it turns out, Apple was listening to Gates — or, at least, to people like him. Two years later, Apple cannibalized the iPod by releasing the iPhone. It was, as Steve Jobs proudly pointed out, an iPod, an internet communicator and a phone wrapped up in one. And the company never looked back.
The same old song: Apple is doomed
Today, Bloomberg published the latest in a long line of “Apple is doomed” op-eds. (The list of previous such predictions is handily archive here.)
The thesis is the same one that critics and jealous rivals have used to hammer Apple for years: Apple is desperately clinging to its sole hit product, and sticking its head in the sand to avoid facing the inevitability that one day it won’t sell any more.
“Smartphone sales are stagnating, but the company doesn’t want to discuss it,” writes Shira Ovide. “Apple executives … prefer to brush off the facts about broad changes in the smartphone market or how Apple is changing to reflect this new reality.”
Ovide correctly points out a few things. Yes, smartphone sales are slowing down globally. New markets like China and India are still there for the taking, but they’re not going to be the magic fix-all some have been awaiting. Technology (and prices) have also reached a point where existing users aren’t upgrading every year. The low-hanging fruit has been plucked, and it’s going to be hard work to come up with compelling new features to sell new devices every single year.
None of this is necessarily wrong, but it also frames the argument incorrectly. The Bloomberg op-ed paints Apple as a company that won’t accept this kind of change. It’s the iPhone company and, if it can’t be the iPhone company, then it’s going to suffer some kind of existential crisis. And Apple is the only ones not smart enough to see it.
Apple is no longer just the iPhone company
The reality is different. Apple has long been preparing for the day when it’s no longer the iPhone company. And that strategy is starting to bear fruit. Above Avalon analyst Neil Cybart described this shift in a 2017 blog post, in which he noted that:
“The iPhone no longer has the same kind of influence over Apple shares as it once did. Instead, Apple has turned into a balance sheet optimization story on Wall Street. Apple’s growing net cash balance … has taken the place of iPhone unit sales growth as the most influential variable impacting Apple shares.”
Cybart’s argument, which he recently revisited, suggests that three main things drive Apple’s current valuation, which is increasingly built upon capital allocation. (Oh, and also likely to land Apple in the $1 trillion club later this year.)
One of these is Apple’s frankly bonkers cash flow. The company generates more than $60 billion of operating cash per year. Second is Apple’s capital efficiency, which involves an amazing supply chain that enables the company to report more free cash flow than Alphabet, Facebook and Amazon combined. Third is Apple’s insistence on returning excess capital to shareholders, rather than sitting on it.
The upshot? When a predicted iPhone “supercycle” fails to materialize, it doesn’t matter quite so much.
“While there will continue to be value in monitoring iPhone sales trends, Wall Street will increasingly not care about the quarterly gyrations in iPhone unit sales growth,” Cybart writes. “This is my theory for why negative iPhone reports have simply been tossed aside by the market.”
Other Apple divisions are booming
But it’s not just a clever market framing narrative. Apple really is no longer a one-product company. Yes, the iPhone is the biggest seller, but it’s not a lone hit in a sea of failures.
The iPad has a new lease of life, with a fresh, education-oriented tablet on the market. In Apple’s last quarterly earnings report, iPad sales rose 6 percent.
The Apple Watch is also doing well. While Apple will not release exact numbers, overall sales for the most recent quarter rose 50 percent. Most analysts think the device is the most popular watch in the world. Mac sales continue to decline, but the modular Mac Pro on the horizon could reignite sales.
All of these pale in comparison with Apple’s services business. The term describes its iCloud business, more than 40 million Apple Music subscribers and other income generators. Late last year, we reported that services is now worth more to Apple than its individual iPad, Mac and Apple Watch businesses. And when Apple gets around to releasing its original TV content, that should give the services sector a very welcome bump.
So what’s the problem? The smartphone market is slowing down, but Apple is still enjoying record profits. One recent report suggested that Apple took home 86 percent of worldwide smartphone profits in Q4 2017.
The stock price is no longer predicated solely on iPhone sales. As the gap between the iPhone’s share of Apple income and that of everything else continues to shrink, Cupertino’s reliance on its smartphone becomes less.
Will there be another iPhone?
It may well be a long time before Apple can find a smash hit product like the iPhone to replace it, the way the iPhone replaced the iPod. But Apple isn’t the same company that it was in 2005 or 2007. That’s good news for customers and good news for investors. And it’s particularly great news for Apple.
Could it be that failing to accept change is something that’s not a problem for Apple so much as for its critics? I’d certainly suggest so. Steve Jobs once said it’s important to skate where the puck is going, not where the puck has been.
Focusing on what made Apple a success in the past doesn’t tell us anything, except that certain analysts need to wake the puck up!