‘Can’t innovate any more, my ass!’
Apple’s head of marketing, Phil Schiller, came across a little defensive in his speech at last year’s Macworld conference. I can see why he might feel that way! For the last decade, Apple set the pace when it comes to consumer electronic gizmos…but now, its competitors are closing in.
In fact, I think Apple’s glory days could be over…
Don’t get me wrong — Apple is a great business. But I have severe misgivings about its longevity, and the way it treats its customers. Last week, I seriously looked at shorting Apple’s stock…but in the end, I thought better of it. After all, Apple’s products are still selling like hotcakes, and it’s making great strides into the emerging markets.
Apple released a trading update on Monday…and boy did I wish I’d put my money down on a short position! It reported record profits, but the stock took an 8% whack.
Apple’s problem isn’t sales. It’s got plenty of those. The problem is growth — or lack thereof. And if Apple is no longer considered a growth stock, then there needs to be a fundamental revaluation of the shares.
At first sight, Apple’s customer service may look nothing like Ryanair’s. After all, Apple’s loyal fan-base seems to love the products, and I’m pretty sure that Apple doesn’t flagrantly abuse its customers like Ryanair. But there are some similarities.
First, customers are loyal because they’re forced to be. Apple operates what’s known as a ‘walled garden’. Apple controls its products’ operating software and also decides what applications and services you’re allowed to use.
Like Ryanair, once you’re on its plane, you’re limited to what it wants to offer you. Three quid for a bottle of water anyone?
But it’s not just customer services that Apple controls with its iron fist. It’s the actual hardware too. One of the big reasons I’m against Apple’s mobile gadgetry (which is the most important aspect of Apple’s business) is because of how limiting the stuff is.
Take the latest iPhone. It’ll cost you 50 quid more for a higher spec unit if you want to increase the memory from a measly 8Gb to 16Gb. Other customers can just add a memory card to their phone. I just upgraded my phone’s memory by 32Gb for less than £15.
Of course, this means Apple makes very decent margins. In fact, Apple’s gross margin comes in at just under 40% — that’s at least double what any other hardware maker might expect.
Apple is clearly profitable. But is this sustainable? I propose not. There are now cheaper and better alternatives.
Apple just can’t keep up. Market share is falling — from about 18% last year, I see it falling to 15% by the end of this year. Though that may not sound like a lot, but in reality it’s a massive drop.
As market share falls, the business will find it increasingly difficult to keep up with Google’s Android offering.
Regular readers will know that I’m a fan of Google, and the way it’s using cloud technology to integrate the user experience. I’m working on documents on my laptop, phone and tablet, seamlessly in the ‘cloud’. I know that Apple offers something similar — but it’s just not as joined up as Google.
Apple’s Research and Development budget has doubled in the last two years. But still market share dwindles. The fact is, Google doesn’t need to spend gazillions on trying to keep up. Much of the R&D function is effectively done by outsiders. They don’t need to control the whole process. Not only is this approach cheaper, but it produces better results.
As I survey the market for Android devices, I see products that could suit just about anyone’s requirements. Literally thousands of devices. With Apple on the other hand, you have to pick from a very limited range indeed.
Of course, Apple has been able to get away with all of this in the past. After all, it was the innovator. It seemed to know what the punter wanted before the punter knew it himself.
But now, it looks like the game could be up. Manufacturers across the globe are innovating like mad. Apple can’t keep up. A walled garden approach simply isn’t good enough.
On Tuesday Apple’s biggest hardware rival, Samsung, announced that it is to launch 60 new retail stores across Europe. It’s talking about a ‘powerful new retail concept’ that will include an ‘exciting new customer experience with merges retail and technology innovations’.
I guess what it’s talking about is an experience not unlike Apple’s wonder stores?
Apple is going to get hit from all sides. Watch out as the great innovator gets out-innovated.
Bengt Saelensminde,
Contributing Editor, Money Morning
Ed Note: The above article was originally published in MoneyWeek.
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