Why did the ‘apple‘ fall? Newton said it was gravity, latest reports by Morgan Stanley say it is due to a lack of innovation.
As Apple Inc. (NASDAQ:AAPL) shares plummet down to $110.49 at the closing of trade yesterday, we are left wondering if the golden era of the iPhone is at an end. Since its inception in 2007, iPhone’s have been the primary source of revenue for Apple commanding nearly 62.54% of the total revenue in the last fiscal quarter of 2015.
While we have previously delved into why the iPhone 6s sales might not live up to previous reputations, today we take stock of Apple as a whole. Have they been reduced to a one-trick pony or does Tim Cook have an ace up his sleeve to get the Apple juggernaut going again?
Troubling Times Ahead For iPhone And Apple?
Steve Jobs had once said that Apple was like a three-legged stool in the way that the company was held by three main legs or pillars. However, in recent times, sales of iPads have been disappointing, and the PC market as a whole is under fire leading to Macs gradually diminishing in popularity. Apple has become from more of a one legged pogo stick with their record revenue figures being fuelled by the popularity of iPhone.
The other interesting fact to see how Apple iPhone has been performing in the market could be derived by putting Apple’s smartphone market of the last 3 years in a single frame. The third quarter of every year has always been the best performing quarter for the company by the number of iPhone sales and revenue. Therefore, when we compare Apple’s share of the smartphone market in Q3 2012 with Q3 2015, the results are quite surprising; In the last three years, while the worldwide shipments of smartphones almost doubled, from 179 million units in Q3 2012 to 355 million in Q3 2015, Apple’s market share decreased from 15% to 13.5% during the same period. Though the company performed fairly well with the revenue came in from iPhone sales, the figures clearly articulate how Apple failed to develop new user base for iPhone.
Despite all the impressive numbers, investors in the company have been worried for quite a while. Reacting to Apple’s latest Quarterly Report, Michael Obuchowski, an Apple shareholder and portfolio manager at Concert Wealth Management had an ominous thought in mind,
Once again, we are back to the situation where iPhone…completely drives the company’s future.”
And if recent numbers and future predictions of part manufacturers for fiscal 2016 are taken into account, it does seem to be a bleak few quarters ahead for Apple. While the stagnation of iPhone sales in Q3 2015 was brushed off as people holding out for the release of the new iPhone, it might have been a foreboding that iPhones were losing their mass appeal.
According to the report, chief Apple analyst of Morgan Stanley, Katy Huberty predicts that there will be a 6% drop in iPhone shipments for the fiscal year 2016 which roughly translates into 2.9% for the next calendar year. While the percentages may look small, putting the numbers into units of iPhones makes us realise how big of an impact this will be for the company. Former estimates by Huberty pegged the numbers for fiscal 2016 at 247 million units while recent estimates fall 29 million short at 218 million iPhones sold.
Just How Much Trouble Are They In?
Before we get to that all-important question, we would first like to take a step back and actually validate the claim. This year has had its fair share of sensational analytics like Samsung leaving the smartphone industry, but more often than not, they have had their basis on theory books and not numbers of the real world.
As the numbers indicate, it has been for a fair while that iPhones have earned the bulk of Apple’s revenue and they have done admirably so far! Then, Why would Apple fail or rather Could Apple really fail?
For that, we would have to take a closer look at the current range of iPhones and their potential market. The iPhone 6s and iPhone 6s Plus broke many records in their first few days of sale – 13 million units in just 3 days. However, as the initial excitement died down, news of slow sales came trickling in. Without going into further detail, the basic reasons for Apple’s failure with the iPhone 6s and 6s Plus can be summarised in a few points:
- While excellent devices in their own right, the new iPhones just don’t provide enough of a reason for people to upgrade.
- The exorbitant pricing in price sensitive, but far bigger and promising, markets like India alienated them from a potential new market.
- The economic slump of China caused Apple’s largest customer base to slow down in the growth spur.
- Low penetration in newer markets due to lack of LTE infrastructure coupled with the lack of financing programmes for the new iPhones caused them to lose out to Android.
That being said, it seems like Apple realises that they have made a few mistakes with the new iPhones. The reduced estimates of their equipment manufacturer Dialogue for the March quarter of 2016 indicates Apple has internally reduced the predicted sales numbers for new iPhones. And while this evidence reinforces Huberty’s claim of a bad year ahead for Apple, the very line gives investors a glimmer of hope.
What Does Apple Do From Here?
The fact that Apple has informed their equipment manufacturer means that internally they’re well aware that iPhone 6s and 6s Plus didn’t do as well as predicted. Knowing is half the battle and a company like Apple, with the amount of technical talent and pedigree they possess, should be able to mount a comeback. In fact, for as noted analyst, Piper Jaffray’s Gene Munster pointed out, the S generation of devices are for incremental updates only, and the real facts would come out when the iPhone 7 is launched late next year.
However, it’s not like Apple has put all their eggs in one basket, and we have already seen a few efforts from Apple to branch out into other streams of revenue as well. These are the things that we will look forward to seeing from Apple in 2016:
- A more fine-tuned approach to the already profitable wearable market with the new generations of the Apple Watch with improved iterations of Watch OS on them.
- Increasing their penetration in markets like India where they have a huge fanbase but very few customers.
- Targeting other segments of the smartphone market with the smaller form factor iPhone.
- Upgrading their older customers into newer generations of iPhones.
- Trying to bring back the iPad and targeting niche audiences with the iPad Pro.
While we don’t know for certain if all of these rumours like the specs of the Apple Watch 2.0 are correct, it is heartening for investors to see that Tim Cook & Company are looking at capturing the larger share in the wearable space.
While this section is generally reserved for summing up the entire article into one cohesive answer, this time sadly we have none. While there are clear prospectives for Apple in the future, their recent design choices like the iPhone 6s case and their refusal to listen to their consumers feature requests, might make them their own worst enemy. Their strategy of selling products at a high markup has set industry standards in the past, the arrival of cheap Android phones may cause them to rethink the game plan. With recent reports of top CEOs of major tech companies like Marissa Mayer and Satya Nadella losing their way, it remains to be seen if Tim Cook can carry on the legacy of Steve Jobs a little further than the turtleneck dress code!