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Apple Inc. is a formidable company but its role as a trendsetter may be coming to an end. Electronic hardware propelled the company to the top of the global consumer electronics market and will continue to be its major sales generator. However, hardware and software intersected years ago and one has triumphed over the other; the future of the electronics market is determined by software and the eco-system. Hardware are become less utilitarian for buyers and therefore vendors will suffer price and equity market value erosion as commoditization spread through the market.
Does Apple get this? The company is primarily a hardware vendor even if it generates billions of dollars from non-hardware products. It’s main sales and profits generator is the iPhone. But while this product will for the near future remain highly profitable for Apple, it isn’t any longer a “futuristic” must-have gadget. It has achieved market saturation in Western markets and, in China, the iPhone is losing out to local devices. Meanwhile, Apple CEO Timothy Cook says smartphones have only penetrated about 42 percent of the globally available market and, therefore, has huge potentials for the company.
“[The] iPhone is still attracting millions of first-time smartphone buyers each quarter, especially from emerging markets,” Cook said during the company’s latest quarterly conference call. “For example, in India our iPhone sales were up 56 percent from a year ago.” So, the future of Apple is more iPhone sales to emerging markets?
While it is concentrating on penetrating deeper in India, South America and Africa with its iPhone the rest of the electronics market is moving on and beyond smartphones. The era of connected devices (or the Internet of Things) is here, bubbling under the surface, but certain to spark revolutions in many parts of the economy within the next 3 to five years. If Cook disagrees and doesn’t want to believe the hype he should pay Intel Corp. a visit because the iPhone has a fate waiting for it that is quite similar to that of the PC.
The PC era, people say, is coming to an end. Intel, the world’s biggest chipmaker by sales, understands this now. It is reorganizing to refocus on the “connected” world, according to CEO Brian Krzanich. The smartphone came after the PC but in today’s world of rapid product obsolescence, we might already be seeing products like the iPhone sliding into the sunset. It will take many more years before this happen – and the product will most likely continue to be used – but a new generation of devices are being prepped to take its place.
Neither Apple’s dedicated billion-plus followers in the consumer electronics sector nor its $233 billion in cash and marketable securities will save the company if the management doesn’t accept and respond to the simple fact of the new technology age that is pulling a curtain over the reign of PCs and smartphones.
The iPhone, other smartphones, phablets and tablets are displacing the PC but these gadgets themselves are being eclipsed by the era of the connected devices. This time a single product will not replace the PC or the smartphone but instead they will be supplanted by a swarm of internetworked devices spread throughout the economy. That scenario as envisaged by analysts and technology experts will not be dominated by a single company but by hundreds of enterprises producing hardware and the software powering these devices. In that near future, hardware will be the secondary product – probably even given away to attract subscribers generating Big Data.
Meanwhile, Apple wants and sees the iPhone at the center of the new connected world. This won’t happen. Too much is at stake for the global economy; manufacturers and regional governments can’t allow Apple or any one single company or device to dominate profits from the connected world as Apple has in the case of the smartphone market. This emerging world will have implications for the electronics supply chain.
As noted, no single company will be able to dominate this new business world. Any single enterprise that initially prevails will be continuously pressured by known and unknown (start-up) rivals nimble enough to displace the top manufacturers. Also, non-traditional OEMs will enter the market from all segments of the economy. It’s likely, for example, that we will see pharmaceutical companies transform into equipment vendors or partnering with other OEMs to deliver a range of new products to consumers. What this new market will look like is anyone’s guess. However, it will require a flexible and vibrant supply chain that puts no single company at its center. It will be responsive and self-healing when disruptions occur.
Apple will either be a victim of this overpowering force or refashion itself again to ride its waves. That’s why many of its followers say Apple need a new vision that embraces the change others see around it. However, when the company this week announced its first quarterly sales decline in more than 10 years it ascribed the decline to unfavorable year-over-year comparisons following giddy demand for a new iPhone in 2015.
Tim Cook, CEO, Apple Inc.
“Despite the pause in our growth, our results reflect excellent execution by our team in the face of ongoing macroeconomic headwinds in much of the world and difficult year-over-year comparisons,” Cook said. “The Services business is powered by our huge installed base of active devices, which crossed one billion units earlier this year. Those one billion-plus active devices are a source of recurring revenue that is growing independent of the unit shipments we report every three months.” True. Apple can still spin billions of dollars from its “installed base” of iPhone users. But the storm that’s coming will sweep the iPhone from their hands. There are no compelling reasons for a smartphone to be at the center of the connected world.
The Apple Watch and the rumored Apple car won’t anchor the world of connected devices either. Apple’s management still needs to get, accept and factor this into their new product development programs before it’s too late.
