In reporting its first decline in annual sales and profit in 15 years, the vultures are naturally circling around Cupertino.
With sales sliding eight per cent and profits plummeting 14 per cent, the arsenal of Apple products - spanning iPhone, iPad, Apple Watch and Mac computers - appears to have reached its peak audience.
While still posting profits a vendor could only dream of in $US45.7 billion in the twelve months just passed, the tech giant’s financials highlight its weakening influence on the devices market.
Yet this isn’t merely opportunistic media outlets chomping at the clickbait, rather a serious question of Apple’s standing within a technological world it once dominated.
“Apple has become a victim of its own success,” Technology Business Research senior analyst, Jack Narcotta, said.
According to Narcotta, Apple’s “largely iterative updates” to Mac PCs and the iPhone are due to the world’s most valuable company perceiving a "lack of true competition" in its target markets.
Consequently, this has provided competing mobile device vendors such as Huawei, Samsung, OPPO and vivo, and PC OEMs such as Asus, Dell and HP with opportunities to loosen Apple’s grip on the premium device segment, the most coveted as it generates greater profits.
“Apple’s addressable markets, and the company’s revenue and profits, are shrinking as sales of hundreds of millions of entry-level and midrange Android smartphones and resurgence in Windows premium consumer PC demand weaken Mac PC and iPhone demand,” Narcotta explained.
For Narcotta, the iPhone remains “at the nexus of Apple’s current and future ambitions”, yet key challenges remain.
Presented by the hundreds of millions of iPhone customers keeping older iPhones longer, Narcotta believes such customer behaviour has subsequently stunted the one- to two-year upgrade cycle that drove most of Apple’s prior growth.
Apple CEO, Tim Cook, would argue however that iPhone revenue and profit volume still surpassed that of its competitors.
As outlined during TBR’s 2Q16 Devices and Platforms Benchmark, the iPhone alone accounted for 24.1 per cent and 41.8 per cent of the total device revenue and gross profit, respectively, generated by 17 vendors.
“As iPhone demand wanes, Apple prioritises pursuing growth in markets adjacent to the iPhone,” Narcotta added.
Specifically, the company’s Services segment revenue climbed 24.4 per cent year-to-year to $US6.3 billion, because of Apple’s commitment to greater monetisation of iPhone user engagement.
“The emergence of the iPad Pro as a “hero device” for the company’s iPad business, particularly in Apple’s underserved commercial PC markets, inform Apple’s post-iPhone direction,” Narcotta added.
“Sustaining revenue growth in these segments will emerge as a priority for Apple in 2017 as iPhone demand wanes, but the scale of the iPhone business will dictate Apple’s overall gains or, more likely through 2017, declines.”
Delving deeper into the smartphone market, Narcotta believes that newer versions of Android are creating “viable threats” to the Apple experience, hampering iPhone revenue and profit growth as a result.
Narcotta said Google’s Android operating system, once considered to be a distant competitor to Apple’s iOS, has vastly improved over its last two major releases, Marshmallow (Version 6) and Nougat (Version 7).
Particularly by injecting a more consistent look and feel to the user interface, and in emerging input technologies such as voice-powered interaction and search,” he explained.
Currently, Narcotta said Android OEMs are designing mainstream smartphones that equal, or in some cases surpass, the technical specifications and features sets of the iPhone.
“Apple’s greatest obstacles to overcome in 2017 will be rekindling demand for the Apple experience, the mantra on which the company has built its branding, go-to-market strategies and value propositions,” Narcotta added.
“Apple will be able to mine its loyal existing customer base for iPhone revenue and profits, but stronger competition from Android OEMs, particularly from Huawei, means the iPhone segment overall is no longer in growth mode.”
Additionally, Narcotta said the lack of a compelling new device or service - Watch sales are retreating, and while usage of Pay and Music services is climbing they generate micro-revenue compared to hardware sales - is hampering efforts to ease the burden of the iPhone to generate revenue and profit.
Premium PC market
At the other end of the market, Narcotta believes that incumbent Windows OEMs are complicating Apple’s enterprise strategy, moving forward to claim greater share in the premium PC market.
“Bolstering growing, but smaller, segments such as the iPad, and restoring growth of flagging segments such Mac PCs, are typically secondary concerns for Apple given the rate at which the iPhone has usually generated gross and operating profits,” he added.
According to financials, Mac PC revenue declined 16.6 per cent year-to-year to $US5.7 billion during the third quarter as unit shipments fell 14.4 per cent year-to-year to 4.9 million.
Within this segment, iPad revenue was essentially flat year-to-year as the iPad Pro lifted overall iPad average selling price (ASP) 6.1 per cent year-to-year to $US459.
Even amid declines, Narcotta believes the substantial profits generated by the iPhone allow Apple to underwrite longer-term initiatives in enterprise computing - via its partnerships with IBM, Cisco and SAP, and in-house development of the iPad Pro - that have not yet become meaningful contributors to overall revenue and profit.
“Apple’s enterprise initiatives aim to curb slowing growth in its Mac PC segment, particularly as iterative, if not outright questionable updates such as removing USB ports that would ostensibly amplify the MacBook’s functionality and extend its peripherals support, hamper demand for the company’s latest PC models,” Narcotta added.
In parallel, Narcotta believes the iPad Pro helped validate the enterprise tablet market as much as it announced Apple’s renewed interest in enterprise computing.
“The growing enterprise-ready iOS software ecosystem surrounding the iPad Pro boosts the legitimacy of Apple as an enterprise computing vendor, enabling it to compete for new deployments as well as protect its iPad enterprise install base,” he added.
However, Narcotta said enterprise Windows PC vendors, particularly Microsoft partners such as Dell, Lenovo and HP - with greater expertise and broader support portfolios - are well-equipped, particularly in commercial PC services for which Apple lacks a comprehensive portfolio, to deflect Apple’s attempts to infiltrate their install bases.
Additionally, the evolution of Windows’ touchscreen capabilities into a supportive input method - instead of the wholesale computing change it was originally intended to be - has cultivated greater awareness and purchases of premium Windows traditional notebook form factors and 2-in-1 PCs.
“HP, Lenovo, Asus and, to a lesser degree, Acer are now fully engaged in enticing users to upgrade to higher-end PCs as well as loosening Apple’s grip on the premium PC market,” Narcotta added.
- Secret Reseller - How will Dell EMC impact resellers?
- Top performers profiled as HP unveils 2016 Partner of the Year Awards finalists
- Apple follows Microsoft’s lead on 2-in-1s to rebuild iPad growth
- CIO50 2016 #26-50: Ryan Klose, National Pharmacies
- Can Samsung recover from the Galaxy Note 7 saga?
- Roll-out of tablets to the elderly has profound effect
- Apple unveils red iPhone and cheaper iPad
- National Portrait Gallery paints a digital future
Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.