Apple At The Cross-Roads----A Deep Dive Into The Worst Case Scenario

By Jim Edwards at Business Insider

Apple just booked its biggest ever quarter, with revenues of $76 billion (£52.4 billion). Profits were $18.4 billion — the most of any company, ever.

It also sold 74.7 million iPhones — another record. The company could not be in better shape.

And yet Apple is a troubled beast:

The fear is that Apple is at its peak, and the only way from here is down.

Of course, only idiots bet against Apple. The company has a history of confounding its critics by emerging from brief troughs with renewed growth and exciting products. (Just look what didn'thappen the last time we examined the worst-case scenario for Apple!)

Nonetheless, it's worth asking: What would happen to Apple if everything that can go wrong does go wrong?

Here's the worst-case scenario.

Apple's biggest fans think Apple has problems

Apple's most famous fans are Walt Mossberg of The Verge, John Gruber of Daring Fireball and Jim Dalrymple of The Loop. They all believe the quality of Apple's software is in decline. Too many bugs and too many slow-loading programmes, they say. Apple's internal corporate mantra is "It just works!," a phrase Steve Jobs used to describe the way Apple products functioned simply and intuitively. Yet some services like — iTunes, Apple Music, and iCloud for Web — are harder to use, and more complicated.

It's rare to see the loudest choirboys in the Apple fanboy army all singing the same song like this.

Other tech companies have been down this road before: Their product portfolio expands to offer a wider range of more complicated products. And their best executives get spread thinner between them. As they rack up sales, and become bigger, these mini-empires within Apple find it harder and harder to move quickly.

The iPhone — launched in 2007 — was a one-off miracle product, never to be repeated

Apple is the iPhone company. 68% of Apple's revenue comes from iPhone sales. If iPhone declines, Apple declines — and iPhone is already in decline. All we're talking about now is the scale of the decline. If iPhone declined by 10%, say, it would wipe $5 billion off Apple's topline.

iPad and Macbook unit sales declined by 25% and 4%, respectively, last quarter.

Apple can launch new products of course, like the watch. But Apple Watch hasn't lit the sky on fire, yet. Apple TV is still a tiny part of the entire business. And the Apple Car is years away from launch.

It's going to be tough.

iPhone 7 may not be sufficiently new or exciting to relight growth at Apple

Time was, everyone expected that iPhone sales would take a breather when the company released an "S" update model rather than a new one with a new number. By contrast, new number models — iPhone 4, 5 and 6 — were all huge, physical updates to the device, and the sales followed. So expectations should be high for iPhone 7.

But this time, people are worrying that iPhone 7 will not be new enough to spur new sales.

Leaks are suggesting the new phone will look a lot like the old iPhone 6S. And some analysts believe the sales bump from iPhone 6 was so big that iPhone 7 won't be able to match it. Apple has nowhere to go in terms of new screen sizes. It could copy Samsung and introduce a curved screen edge or a stylus ... but that doesn't seem to be on the cards.

The iPhone is becoming like the iPad — so well-made that people don't need to replace them very often

Part of the danger for Apple comes from its success: iPhones these days are so well made that they continue functioning for years after their "natural" lives are over.

If you own an iPhone 6 you probably didn't feel much need to upgrade to iPhone 6S and you could probably forgo iPhone 7 missing out on too much. A massive 60% of Apple customers have not upgraded into an iPhone 6, the company said.

You see people still using iPhones 4S, 5, and 5S, every day.

A source at Apple told Business Insider that it's relatively common for customers to walk into the store carrying an original iPhone from 2007 (although staffers do gather around in curiosity when that happens).

The iPad has the same "problem": It lasts a long time. People don't need a new one. They're great products ... but they hurt future sales.

Apple is trapped inside its hardware universe while Google is free to go anywhere

Apple's software problems wouldn't be such a big deal if the hardware it sits on was growing in sales. But now iPhone, iPad and Macbook are all in decline, in terms of units sold, and because Apple's software is proprietary to Apple, a decline in hardware means a decline in software.

Apple is in the opposite universe to Google (and its parent, Alphabet). Google makes hardly any hardware products and its software is designed to run on anyone's system. Google doesn't care whether a device is the best-selling iPhone or the worst Chinese Android: Gmail, YouTube and search work on them all, the same way.

What if Google gets its act together, and Android becomes more like iOS?

One of the main things holding back Android was the lack of system updates. Many Android manufacturers are lazy — they don't transmit Google's software updates to users' phones even when those updates are important, for security.

That's not so with Apple. The vast majority of iOS users get their software updated promptly by Apple, because Apple owns both the software and the devices it rides on.

But Google is changing, and paying more attention to how quickly its manufacturers keep Android updated. It has begun taking more control of the Android experience, demanding more from its manufacturers, according to The Information.

A better, faster, safer Android is more of a threat to Apple.

Android has been surprisingly resilient to competition from iPhone

iPhone 6 looked like a game-changer: It's new, bigger screen wiped out whatever advantage Android phablets had enjoyed over the previous two years. Apple began stealing significant share from Android.

But Android is back! iPhone 6S wasn't a big deal for Android, and Apple lost share to Android in every major market except one, according to Kantar. Broadly, Android retains 80% of the market for smartphones worldwide, and Apple has about 15% on its iOS system.

If iPhone 7 doesn't create a new sales surge, it might leave the door open for further gains by Android.

Samsung may be about to get its act together (no, seriously!)

For years, Samsung has played second fiddle to Apple in terms of product design. But Samsung's last three major phones — the Galaxy S6, S6 Edge, and the Note 5 — were widely regarded as being more beautiful than the iPhone 6 line. Samsung learned its lesson, ditched the plastic, and started making phones with all-metal bodies. (It has also dialed down the amount of promotional bloatware on each new phone.)

Samsung has "leapfrogged" Apple in terms of hardware design, my colleague Steve Kovach says.

Now we're hearing that the new iPhone 7 is going to look a lot like iPhone 6S, which looked a lot like iPhone 6. Yawn. That might be a mistake: Consumers might drift away from Apple if the new phones are the same as the old. People feel less pressure to upgrade if their old phone is indistinguishable from the new one.

What if "high-end Android" actually becomes ... a thing?

what-if-high-end-android-actually-becomes--a-thing

This chart from Jackdaw Research of Samsung's mobile phone revenues show the company might be — just might be — turning a corner.

Samsung won rave reviews for its expensive Galaxy S6, S6 Edge and Note 5 phones. Google's Nexus phones are cheaper but they are still high-end purchases, and they have high-end specs.

But they are costly, and until recently price competition from cheap Android-makers eroded their sales. If Samsung and Google can build on Android's resilience to market share erosion from Apple, and if they can provide products that do not leave people wishing they spent a little more for an iPhone, then "high-end Android" might provide some uncomfortable competition for Apple.

Apple may come under pressure to reduce prices

Until recently, this was unthinkable. Apple made expensive devices, and earned the profits that came from them. The entire value of AAPL is based on Apple's outstanding EPS.

But on the last earnings call, Tim Cook and CFO Luca Maestri discussed the pricing environment. A world with a strong US dollar and weak European and Asian currencies works against, Apple they said. "Just on the currency side, and that's before thinking through the effect that price increases can sometimes have on the business over a period of time, it's clear that the economic piece is large," Cook told analysts.

The obvious implication is that Apple's growth may be limited unless it lowers prices, or that its products may be vulnerable to price competition.

Google Play revenues start to overtake App Store sales

google-play-revenues-start-to-overtake-app-store-sales

Google Play currently delivers twice the number of app downloads that Apple's App Store does, according to this chart from App Annie, the app store data company.

Apps in the App Store still deliver more revenue. In fact, Apple widened its lead on that metric. But what happens as the Android system — 80% of users — matures? Can Apple really always deliver more app revenue in total than Google Play, if it only has 15% of users?

If it ever became the case that Google Play offered developers equal or more revenue than App Store, then the tide would change among developers. Why prioritise the less lucrative platform, even if it has high-end users, when it also has fewer users?

Apple Watch isn't going to be big enough​ to matter

If Apple Watch 2 isn't the best product we've ever seen, then the entire Watch business might turn out to be like the iPod — a nice device that people liked at the time, but a footnote in the grand scheme of things.

Apple doesn't disclose Watch sales, which suggests they are modest. It's still the No.1 smartwatch on the planet. But that's still not enough for Apple. The company is so big, that being No.1 in a small category isn't much use.

The Apple Car is years away, at best

Cars are hard to make. Just ask Elon Musk at Tesla. That company makes great, smart, electric cars. Yet it can only turn out about 50,000 cars a year. And Tesla only does one thing — cars.

Is Apple really able to reinvent this wheel, on the scale required?

Governments decide that, actually, they would like Apple to pay tax

Apple has about $200 billion in cash and marketable securities (ie stocks and bonds) on its balance sheet. And about $200 billion in reserves on Apple's balance sheet are parked in non-US foreign countries. Apple cannot bring it back without paying US taxes. And many countries, including those in Europe, have reached very lenient corporate tax deals with Apple.

Governments, of course, are always strapped for cash, especially in a no-growth, deflationary world. Taxpayers are generally not happy that American companies pay tiny rates of tax.

So it would not take much for a few governments to decide that yes, actually, Apple really ought to start paying taxes the way everyone else does. At that point, Apple's cash situation becomes a lot tighter.

Apple turns into Microsoft, like all large, mature companies

A lot of Apple's problems aren't specific to Apple. Big companies are simply harder to run, and slower to change. They have more stuff going, and more people trying to herd those cats.

Apple has added a watch, a car, a music app, a radio station, a corporate enterprise business, and a new type of TV experience to its post-iPhone product portfolio over the last few years. That's a lot of new plates to keep spinning.

Big companies become like Microsoft, in other words — hugely successful but often ignoring the little details in order to keep the engines running.

WAKE UP! IT WAS ALL A DREAM! This is Apple! Everything will be better, not worse than expected!

So that's the worst-case scenario. But everything we know about Apple suggests the opposite will happen: iPhone 7 will ignite sales, the company will continue to churn out new products, and Apple will go from strength to strength. Apple always attracts haters when iPhone sales take a breather.

Even Apple's "failures" are huge successes: the Watch is No.1 in its category. Apple Music gained half as many subscribers as Spotify in just a few months. iTunes still has the biggest collection of music and video titles, and it performs flawlessly.

Source: Apple: The Worst-Case Scenario - 2016 - Business Insider

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