We have made no bones about it, we're a little soured on the notion of
analysts, because they tend to just tell us stuff that we already know.
But, this time around, we're kind of interested, because this
prediction, while something we've heard (and said ourselves), is very
detailed as to why Apple may be heading for a repeat of "the mistakes of
the Mac era". As we said, this is a concern that we have heard before,
because many things about the current iOS vs Android fight are quite a
bit like the Mac vs Windows fight that we saw so long ago.
This
time around, the questions come from Sector & Sovereign Research
(S&SR), which has put together some pretty compelling info, and some
dire warnings for Apple to consider. We'll tackle each in turn,
starting with:
"Apple
caused a paradigm shift and reaped a windfall, but now faces strategic
challenges that will require changing the company DNA"
The
idea here is that while Apple started the smartphone revolution with
the iPhone in 2007, and changed how mobile users can engage with the
Internet, the current trend is moving to cloud-based services. In other
words, we're moving from a hardware-centric market (Apple's strength),
to a cloud software based market (Google/Microsoft/Amazon's strengths).
We
do agree that the market is shifting towards cloud platforms, but we're
not totally sold on the idea that will require Apple to "[change] the
company DNA". We'll come back to this point in a minute though, because
another of the positions laid out by S&SR is very closely tied to
this one:
"Platforms
are integrating cloud services as critical elements of the user
experience, but Apple is far behind in the skills and infrastructure
necessary"
The idea here is an extension
of the last in that the rise of cloud-based services is "tying users to
a broader architecture, with significant revenue opportunities from
advertising, e-commerce, subscriptions, and services." The trouble we
have here is with the idea that Apple is "far behind in the skills and
infrastructure necessary" for this kind of shift. Apple has the skills
and infrastructure built from iTunes to be able to compete in this
space, the issue for Apple is that its business model is the opposite of
Google, Microsoft, and Amazon when it comes to this type of
integration.
Where Apple uses its
cloud-services as a way to sell hardware, the other companies use
hardware to bring customers to other sources of revenue like advertising
(Google), e-commerce (Amazon), and services (Microsoft). The similarity
to Mac vs Windows comes in especially clear here because as before, it
doesn't matter what platform a user chooses if they still see Google ads
and buy products from Amazon, but it certainly helps those companies to
offer an integrated system.
Apple is
definitely at a disadvantage in this regard, but we think it may be a
bit hyperbolic to say that Apple needs to "[change] the company DNA" in
order to compete. Apple has already entered the mobile ad business, and
is competing with Google there. Apple has a quality business in iTunes,
and has begun work on moving its other software to the cloud. Apple's
business model may be aimed at selling hardware, but it is still a
company with software experience, so this shift may not be as difficult
as one would think.
That said, even if Apple
were to "[change] the company DNA" that would cause more problems,
including those related to S&SR's next two points:
"Android
smartphones outsell iPhone 5 to 1 worldwide, while aggressive subsidies
on new Android tablets threaten the iPad hegemony"
and
"Apple
is accelerating its refresh cycles and broadening its product line, but
can only slow its market share losses while accelerating margin
erosion"
We've watched it happening for
the past couple years, and there is no arguing the fact that Apple is
losing its market share. Android hardware can be far less expensive,
especially when backed by a company with little interest in hardware
profit margins, like Google and Amazon. There are many different
companies in the Android ecosystem and all are working hard to push
hardware and software faster than Apple can keep up with its once-a-year
update cycle.
The interesting idea is the
second one. Apple is slowing down its market share losses by adding
products like the iPad mini, and selling discounted older models of
iPhone and iPad, and possibly beginning a 6-month cycle with the newest
iPad. But, it could be killing its profit margins in the process,
because more frequent updates cuts off sales of a product before the
most profitable part of the life cycle. Apple's margins are so good
because while the company is making upwards of $400 profit on an iPhone
at launch, that hardware only gets cheaper to build, so iPhones sold in
the leadup to the next launch make even more profit.
This
is the really dangerous part of the equation for Apple because as we've
noted before, Apple's business isn't really concerned with dominating
the market share, it's based on dominating profit margins. As we've seen
Apple's operating profit dwarfs other companies in the mobile space, and only Samsung is even in the conversation with Apple.
It's
still too early to say whether Apple really is ditching the yearly
device cycle, but there are other issues to consider as well:
"The slowly emerging opportunity for mobile platforms in the enterprise is huge, but Apple is poorly positioned to exploit it"
The
basis of this argument is pretty simple: enterprise is big business,
and with the decline of BlackBerry, there is an opportunity there.
However, S&SR isn't too high on Apple's potential. Right now, Apple
is seeing some success because many businesses have implemented a
"bring-your-own-device" policy, but S&SR doesn't think that model
can continue.
Once you get down to it, Apple
products are more expensive, and cannot be as easily customized for
proprietary enterprise software as other devices. This is a big reason
why Windows ended up winning against Mac, because Mac couldn't break the
enterprise market, and had to settle for the education market. We have
to agree on this point, because Apple would have to make major changes
and concessions to make this work.
The last point is one that we've all been annoyed with for some time now:
"Apple’s
Thermonuclear War” is a costly, and ineffective distraction – broad
cross-licensing agreements are inevitable and beneficial to
shareholders"
No argument at all. Aside
from the perpetual annoyance of the news behind these lawsuits, and the
ridiculous claims levied, the end result is just a waste. S&SR
points out that Apple is pursuing "50 different legal actions in 10
different countries, spending hundreds of millions of dollars
annually, and distracting its own management in the process". That is a
lot of time, money, and resources in pursuit of vengeance.
Tim Cook has expressed interest
in licensing deals instead of lawsuits, but with a new round of
lawsuits starting up between Apple and Samsung, we certainly haven't
seen any actions to support this interest in deals.
Conclusion
As
we said, a complete rewrite of Apple's DNA may not be in order as
S&SR claims, but there are pivots that are necessary. If Apple is to
keep its identity, it will have to find ways to keep its profit margins
up, and find other sources of revenue. iTunes may have to change from a
self-sustaining system, to a store that adds to Apple's profits, and
Apple will need to keep pushing forward in efforts in the cloud.
It's
hard to imagine a way that Apple could avoid being the minority
platform in the mobile market. Android is everywhere, and Apple can't
slow it down. Even Microsoft is showing interesting potential with
Windows 8. But, as Apple showed with its recent resurgence in the PC
market, having a small market share doesn't matter so much if the
profits are there. So, we can't predict the doom of Apple as S&SR
has done, but the company is certainly facing quite a lot of threats and
will need to change some practices if it is to avoid a repeat of its
fate during the Mac era.
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