Is Apple Doomed?
by Mark W. Hibben
The Post-Earnings Season Blues
Apple had another spectacular quarter, with record revenue for the quarter, so as usual, it was time for financial pundits to declare that Apple’s best days were behind it. This time it was George Colony of Forrester Research declaring that Apple would go the way of other tech giants once bereft of their charismatic leaders: Sony sans Morita, Polaroid sans Land, and Apple sans Jobs (1980’s). I’ve rarely heard Apple nay-sayers utter their doom and gloom prophesies with such an air of inevitability. And such pronouncements only seem to have accelerated what has become an almost ritualistic post-earnings report sell-off of Apple stock, such that the price/earnings ratio is now well below the Nasdaq average. Is Apple really doomed to mediocrity without Steve Jobs?
Exceeding Expectations and Bruising Egos
Much of the analysts’ gloom is probably attributable to resentment over their prediction errors. As the table on the next panel shows, the pros continue to underestimate Apple, although the bloggers are too bullish by almost the same margin.
|Category||Fiscal Q2 2012 (Cal. Q1 '12)||% Change Q2 2011||% Change Q1 2012||Apple Guidance at Q1 '12||Blogger Consensus Apple 2.0||The Street, Thomson Financial|
|EPS (US$/diluted share)||12.300||92.2%||-11.3%||8.5||12.7||10.1|
|Gross Margin (%)||47.400||13.7%||6.0%|
|Mac Unit Sales (M)||4.017||6.8%||-22.7%|
|iPhone Unit Sales (M)||35.064||88.0%||-5.3%|
|iPad Unit Sales (M)||11.798||151.3%||-23.6%|
|iPod Unit Sales (M)||7.673||-14.9%||-50.2%|
The post-report pessimism may also be fueled to some extent by the sequential downturn in revenue, which is larger than the typical post-holiday season drop:
One could certainly look at this chart and conclude that the trends were unsustainable and that Apple was coming off its peak. However, financial trend lines are not a good predictor of future performance when it comes to Apple, and I wouldn’t read too much into the above chart. The 2012 Holiday season was exceptionally good for Apple, and this accounts for the larger than normal sequential decline.
Apple’s Eroding Lead
More worrisome is the chart I recently published in Android’s Relentless Surge. As shown below, Google continues to close the gap in total Android device population compared to total iOS device population worldwide.
Here, I think the trend line is significant. As I warned back in November 2011 in Barbarians at the Gates of Apple, the rapid expansion of the Android ecosystem could provide Google an insuperable advantage in the War for Mobile Internet Supremacy (WMIS). As I reported in Android’s Relentless Surge, Apple shipped an average of 557K iOS devices per day in the most recent quarter (Apple’s fiscal Q2), whereas Google reported an Android device activation rate of 850K/day.
Despite confident assertions to the effect that all Apple had to do to maintain its lead was add more telecom carriers (see Elmer-Dewitt’s article quoting Katy Huberty of Morgan Stanley), doing so has failed either to arrest Android activation growth or maintain Apple’s iOS population lead. To be sure, Apple can and will continue to add carriers in the coming months, but this becomes a zero sum game in which eventually both Apple and Android saturate the global telecom market. Huberty’s analysis failed to reckon with a fundamental advantage of the Android ecosystem in the eyes of consumers: much greater variety and choice.
The Issue of Convergence
Much has been made of Tim Cook’s recent statement at the earnings conference call regarding platform convergence, specifically in reference to Windows 8. He did say, “Anything can be forced to converge . . . but the result may not be pleasing to the consumer.” Specifically, he was ruling out a universal OS for both desktop and mobile devices similar to Windows 8, and this seems to leave analysts perplexed, especially those who think Metro is really cool, despite having flopped on Windows Phone. But convergence at the user interface level had already begun at Apple with the introduction of Mac OS Lion, which brought into Mac OS many of the features of iOS, including full screen apps and support for multi-touch gestures. The incorporation of touch support is now so good in Mac OS that the Magic Track Pad has become my preferred input device. Unlike Microsoft, Apple is taking a gradualist approach to touch. Will there eventually be a touch-screen enabled version of Mac OS? I believe that it’s already under development, with many of the hooks in place as of Lion. Cook even alluded to the possibility of a touch screen Mac Book Air, and I believe that is the first place where a touch-enabled Mac OS will be used. But developing a touch enabled Mac OS is not the same thing as the one-size-fits-all approach of Windows 8. Apple realizes that there are severe processing limitations in the ARM processors used in mobile devices and that they cannot match Intel processors, even mobile versions, in computational power. Reserving iOS for ARM and Mac OS for Intel amounts to right-sizing the OS for the target processor. Although the jury is still out on Win8 for ARM, I really doubt that Windows on ARM is going to take off, and Windows Phone is all but dead. However, I do consider Win 8 on Ivy Bridge to be a significant threat, both in lightweight notebooks and non-so-light tablets. Here, I expect Wintel to come roaring back, denting both Air and iPad sales when Win 8 is released.
Argument by Analogy
The problem with arguments by analogy is that they tend to gloss over too many details, and the analogies of George Colony are no exception. For instance, after Akio Morita left Sony in 1994, Sony went on to introduce the PlayStation 3 and the Blu Ray disk, and more importantly, won a crucial format war with HD DVD analogous to the war Sony lost to VHS. Innovation at Sony didn’t grind to a halt merely because Morita left. In general, Colony ascribes too much influence to these leaders, who more usually foster innovation than author it. This was also true of Jobs, who was especially adept at recognizing the value of the creative contributions of the talented engineers at Apple and elsewhere. Recall that Apple didn’t invent the mouse driven GUI, or the windowed desktop; these were developed at Xerox Palo Alto Research Center (PARC). But Jobs, on a tour of PARC, realized their potential value in a consumer-oriented OS, which Xerox had not. In the course of developing Lisa and later the Mac OS, Apple added significant innovations including pull down menus and the ability of windows to overlap.
Colony’s assertions regarding the post-Jobs era also overlook the fact that having a charismatic leader is a double-edged sword. When the leader is right, all is well, but such strong personalities often overwhelm underlings and effectively suppress good ideas that don’t happen to fit the leader’s mind set. Thus, while Jobs was in charge there was basically one version of iPhone and one version of iPad. Jobs just wanted to produce the best of each kind of device, and that meant so did Apple. Apparently, Jobs wasn’t interested in doing anything with Apple’s huge pile of cash, and that meant neither did Apple. That Tim Cook is willing to break with the past on these and other issues has been cited by some authors as signs of Apple’s decline, but in fact, Apple must break with some of the more idiosyncratic aspects of its deceased leader. As I’ve pointed out repeatedly, Apple really needs to broaden its iOS phone and tablet offerings in order to be more competitive with Android, and I regard the rumors of a small iPad as a hopeful sign. Comments that Tim Cook made at the recent conference call regarding the higher demand of the newly reduced price of the iPad 2 also are indicative of a growing realization that Apple needs lower cost versions of the iPad and iPhone. Although an iPhone 5 may not be in the immediate future, we may yet see a lower cost iPad “mini” or iPhone “mini” before the end of the summer.
Masters of their Fate
Colony’s analogies also overlook an extremely important factor, which is Apple’s relative competitive strength. When Jobs left the company in the 80’s, Apple wasn’t nearly as strong as it is now. That strength is conferred not merely by Apple’s impressive revenues but also by its huge cash reserves, nearly US$ 110 B as of the latest quarter. That kind of cash buys a lot of freedom to shape the destiny of Apple and makes Apple management the masters of their fate. More than anything else, Apple’s future depends on what they do with that cash. In the past I’ve advocated that Apple use this cash primarily to enhance their competitiveness, and there is some evidence of this in the investments Apple is making in cloud infrastructure and in component production facilities. But if the cash pile is still growing, then Apple isn’t doing enough. I’ve also advocated using some of the cash for acquisitions of companies such as Adobe and nVidia. These kinds of acquisitions also seemed to run contrary to the Jobs mindset. He liked running Apple as a small, entrepreneurial company. This also needs to change, because Apple’s competitors are not similarly inhibited. I agree that Apple shouldn’t get bigger merely for the sake of size, but it’s clear that Apple can’t grow organically fast enough to keep up with the Android consortium, let alone stay ahead. But rather than detail the actions I believe Apple needs to take, I’ll refer the reader to the November 2011 article. Nothing really has changed, except that Apple has continued to lose ground in the WMIS.
In these articles, I keep coming back to the central question: Who will win the WMIS? Right now, it’s only clear who won’t win it. RIM, Nokia, and Microsoft won’t win it, although Microsoft at least may survive on the basis of Windows 8. It’s come down to a slugging match between Google and Apple, and here nothing is predestined or certain, except that Apple’s decisions (or lack of them) will be critical in the coming year. The war is theirs to win or lose.