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Profits Don’t Mask Apple’s Need to Innovate

Gordon Kelly

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Profits don’t mask Apple’s need to innovate

meThat bookies exist should be enough to tell you gambling doesn’t pay. That no matter how many winners you back, ultimately somewhere along the line you’ll come crashing down to earth.

The world’s biggest gambler Apple hasn’t crashed yet but, after quite possibly the longest winning streak in financial history, the stakes for its next big bet have never been higher.

Fighting Fit Finances

This all sounds like nonsense looking at Apple’s latest financial results. On Tuesday the company announced figures for its fiscal 2013 second quarter which ended on 30 March. The numbers were mind boggling. $43.6 billion (£28.6bn) in revenue, $9.5 billion (£6.23bn) in profits and sales of 37.4m iPhones, 19.5m iPads, 5.6m iPods and 3.95m Macs. It also reported a cash balance of $145 billion. $145 billion!

cook

Tim Cook sounded optimistic as well. He teased reporters saying “Our teams are hard at work on some amazing new hardware and software and services for this fall and throughout 2014.” He also crowed that “We have a lot more surprises in the works", but naturally wouldn’t expand upon them.

The financial markets seemed impressed. Stock increased by five per cent as Apple fractionally outperformed estimates and over $17bn was added to the company’s value overnight.

Out of ideas

So why all the drama? Because, quite simply, nothing much is going on. Doubters point to the fact that Apple’s year-on-year quarterly profits fell for the first time and that the share price has crashed from a high of $702 to a low of $390 last week, but the trouble is not about what has happened but what hasn’t.

Right now Apple appears stagnant, dull, out of ideas. For a company that trades on ‘magic’, having this perception gain traction would be disastrous.

In reality, Apple doesn’t make magic or cast spells, it gambles. The company’s business model is very simple: enter a struggling or early adopter sector, revolutionise its ease of use, wrap it in a slick design to create demand and facilitate high margins. When the sector popularises jump to a new one.

The jump is the gamble and, given Apple’s disinterest in small profit margins and the mass market, the crucial part in securing its business model and pioneering reputation for the next three to four years. To date Apple has a near flawless record leaping from PCs to MP3 players to smartphones to tablets.

Consequently Apple doesn’t care what competitors do in its existing markets so long as it gets the jump right into the next one and hence jump the competition. The problem this time is the competition is leaping first and that brings the whole model crashing down.

Even the rumours are dull

Let's look at the current popular Apple rumours:

  • An iWatch? Apple remains silent while Google, Microsoft, Sony and Samsung have already declared their intentions and Pebble continues to ride the wave it arguably started.
  • A 5in iPhone? Cook shot down these rumours yesterday citing, but not expanding upon, ‘trade-offs’ and the competition is already there in any case.
  • A cheaper iPhone? Maybe, but it compromises profit margins, is purely reactionary to existing products and does nothing for the premium of the brand.
  • iGlasses? Now you’re talking… or rather Google was 12 months ago and is already shipping Google Glass to developers and limited numbers of consumers.
Yes Apple can still enter these sectors, and it probably will, but not with the same revelry that greeted the iPod, iPhone or iPad. Which leaves the company with an iTV, the holy grail of Apple rumours, though it breaks the mould by entering an already highly developed and hugely price-sensitive market.

Furthermore Cook’s tease of “amazing new hardware and software and services for this fall” simply confirms there are no new Apple products coming in the summer. This would mean nearly 12 months since Apple’s last ‘new’ product which was the iPad Mini - itself a catch up product - back in October. With the competition pushing towards bi-annual product cycles, Apple’s scrapping of its once famous January events at MacWorld leaves a gaping hole. There is also the little matter of Google I/O 2013 in May.

So ignore headlines about finance. Apple has long preached it is so successful only because it is focused on making great products driven by innovation. Well it is time once more for the company to innovate, to jump, to gamble. To try and beat the bookies yet again…

Read about the new iPad Air and iPad mini 2

diddler

April 24, 2013, 12:34 pm

On the one hand we have Apple which is arguably the most successful company of the last 10 years and on the other we have Trusted Reviews which achieved a website redesign that was done so poorly and with disregard to almost all reader opinion that it resulted in such innovation as 90% of articles, even click bait ones like this one, that don't have any comments. Who to bet on?

Gordon Kelly

April 25, 2013, 12:20 am

1. What a ridiculous comparison to make
2. This is not a criticism of Apple, but an analysis of its current position
3. Since I have nothing to do with the redesign I don't appreciate the trashing of my article off the back of it.
4. The redesign happened more than 2 years ago. Let it go. Perhaps things will change.

Rob

April 25, 2013, 2:07 pm

You flatter yourself rather calling your article an analysis of anything. It's nothing more than a rehashing of a load of guff from numerous other websites and gives no meaningful or intelligent analysis of how things really are. Just because Apple hasn't followed the crowd and added loads of new pointless features to it's existing products and then rolled them out badged as "major updates" doesn't mean that they aren't being innovative.

Try thinking a little bit more about what you're writing and how it reflects reality, rather that just regurgitating what you've read elsewhere.

I mean seriously, which of the new marquee features of the new S4 for example could really be called innovative? And which ones will anybody actually use?

Gordon Kelly

April 25, 2013, 7:26 pm

Comparing Apples and oranges seems an obvious pun here.

Samsung doesn't have the same business model as Apple. It mixes high end, high margin devices with low end, low margin. As such it doesn't have the same pressure to keep innovating.

THAT SAID it has provided the iPhone with its biggest rival and been the company to blast past it in terms of pure technology. Whether you like it or not (and I'm not a great fan) it is pioneering more innovative apps on its phones and tablets than anyone else including health tracking and eye tracking. It is pushing for the world's first curved TVs, flexible phone displays and has already declared its intention to enter the smartwatch market. It has also created the first Android camera and drives advances in RAM and SSDs - components it long supplied to Apple - and processor technology. Octocore with quad core high and low power chips?

Samsung also builds ships, jet engines and cutting edge medical equipment. If you'd like to know more here's another 'analysis' where I already covered this 6 months ago: http://www.trustedreviews.com/...

Then again what I am most eager to see is your own analysis pieces. Do send me a link so we can compare and contrast.

And I answered you respectfully. Learn some manners.

victu89

April 26, 2013, 7:59 am

While I agree Apple faces some difficulties right now I do not think that it is the right time to say that Apple is out of ideas. iPad was released 3 years ago. You cannot open new markets each year. Apple is very well known for its secretive environment and you can never tell what is up their sleeve.

Yes, they start disappointing shareholders by leveraging but all financial buzz with Apple started with Steve Jobs passing away and not lack of innovation. I was a long time Windows user and about a year ago I shifted to Apple products so it has been about a year I really enjoy tech products.

By the way, even if their share prices soar, Apple's market capitalisation still enjoys all the glory and it will if Apple calms down the shareholders.

Gordon Kelly

April 26, 2013, 12:36 pm

They are very fair points.

I am certainly not saying Apple is out of ideas, simply that it is now time for its next innovation and it is crucial to show shareholders and consumers it still has vision without Steve Jobs.

This next idea is crucial also because the areas it can move to are no longer as poorly represented as MP3 players, phones and tablets were when it moved into each one of those.

Apple remains a reremarkable company and it became the biggest company in the world for a reason. It is becoming time to show the world why once again.

Jamie C

April 26, 2013, 4:31 pm

Just a few points I'd like to pick up on:
"This would mean nearly 12 months since Apple’s last ‘new’ product which was the iPad Mini - itself a catch up product - back in October."

Not true. The latest product debuted was actually the new slimline iMacs at the very end of November, which arguably leaves Apple with a bit more time to meet this arbitrary 12 month limit. And I still think that people are reading too much into Cook's turn of phrase. Moreover, if Apple release a slew of new innovative products come the Fall, then this hiatus will be quickly forgotten.

"Which leaves the company with an iTV, the holy grail of Apple rumours, though it breaks the mould by entering an already highly developed and hugely price-sensitive market."

Again, not really true. I don't think anyone would say that mobile phone market in 2006 was not developing, merely the trajectory that the major manufacturers of the time (Nokia, Sony Ericsson etc) were on, was a very different one than the iPhone which Apple introduced. It shows that Apple can break into an already aggressively dominated market as long as they can redefine the product category in a way that makes more sense to consumers and plays to Apple's strengths of design and simplicity.

Gordon Kelly

April 28, 2013, 1:27 pm

This is a good point, though you are mixing up refinement with new. The iPad mini was a new product category for the company, the iMacs and improvement on an existing one. That said even the Mini was an evolution of an existing idea.

Don't get me wrong, Apple is far from being in the mire. Just look at its finances and loyal customer base! It is, however, famed as the tech industry's biggest innovator and pressure is building for the company to demonstrate that again given both the change in leadership, some notable software stagnation in recent years and increased competition and price squeezing from rivals in product sectors where it was once dominant.

Paul Brasington

April 28, 2013, 2:16 pm

I think fluctuation of share price etc says more about stock markets than it does about Apple ... but then I'm not sure the gambling insight is that helpful either. I don't think Apple has been much of an innovator as such ... It's real skill has been to spot categories that looked promising but were poorly served and executing better, changing the game in the process (btw this highlights the commonsense illegitimacy of current patent claims on all sides). So maybe complaining about lack of innovation misses the point about previous success, and the question it faces is what categories remain open for transformation in this way? TV? Perhaps ... Washing machines? Probably not .. I suspect as the market matures across all these categories Apple's position will change. I think it's already becoming the Mercedes Benz of consumer technology - not particularly cutting edge, definitely not cool, but usually high performance, comfortable and easy to use - premium priced. I suspect this would have happened regardless of who led the company (and it will ensure Apple's continuing success within its own terms). Not being one for tightly closed systems I wouldn't use Apple products any more than I'd drive a Mercedes, but it's important to give credit where it's due.

Borkr

April 29, 2013, 12:50 am

"Just look at its finances and loyal customer base!"

I was just wondering to myself, if Apple's greatest and most innovative product wasn't in hardware or even software, nor their convergence, but in promoting an image that customers want to be a part of. Though back on a far more tangible level, I think the quoted comment hits the mark dead on, with the advent of Apple's iOS system and Google's Android, the real creativity and genius was in providing an exclusive point of sale (their respective virtual stores) that could be controlled and which developers had to then give the respective party a not insignificant cut of their sales revenues.

Of course Apple weren't first out the gate for this walled garden approach - Valve recognised the opportunities existent in digital content delivery systems and since, Microsoft, Amazon and many others (like games publishers) are clamoring to get a piece of the 'deliver to your digital door' action. With people locked into software ecosystems their investment makes them far more loyal consumers and businesses have obviously put a lot of thought into this (enforced) loyalty based system. It's the ultimate win-win-win for them: all that marketing data, tick! Influence over purchasing decisions, tick! Promotions, deals, cuts, tick, tick, tick! The hardware almost becomes irrelevant in the end except that the likes of Amazon, Google and Apple are not exactly cross platform compatible so what is bought on one company's device will largely not be available on a competitor's device (Kindle might be a possible exception).

Microsoft are attempting to further control the PC market but along with Valve, are looking for more ways to play a more active part in people's living room environments. The battle for digital content consumption continues: with the Valve box in one corner, the Xbox 720, Sony PS4, Apple iTV and whatever else in all the other corners. They all want to serve you up with consumable media content: books, games, movies, music, magazines and whatever else gets cooked up (more interactive/cross-platform stuff maybe). That's the future in my view. I think the big players in the movie, music and games/printed materials industries ought to be very afraid. Effectively this is a war of the middle man and on the high street, he's not doing too well but inside our own homes, well, thing's are looking pretty healthy as Apple, Google, Amazon and even Microsoft's financial accounts would attest to.

So, I personally feel we're all going full circle back to convergence and walled gardens and the likes. No doubt it'll change again in future. I don't see an iTV from Apple being all that revolutionary really. Then, I don't suppose the iPhone could not be said to have *truly* revolutionised its market either (they didn't invent mobile telephony) but for me, it's not so much the hardware as the portal through which we consume the media that Apple did in fact revolutionise in a way we had not seen before. A smartwatch or smart glasses aren't really revolutionary devices in themselves but the intimacy these devices are gaining in our lives for pushing companies' products at us and harvesting our data might well be the more important, though slower burning, revolutionary aspect in the way corporations interact with their customers in the 21st century and hence, the smart investment is not in the short term hardware gamble but the continuing smaller sales that we make when we buy those little items in our daily lives to keep us ticking over and wile away the time: songs, books, films and games.

Gordon Kelly

April 29, 2013, 2:17 pm

That's an equally valid viewpoint. Certainly the premium factor to its products is now as much of a factor as its innovation.

Gordon Kelly

April 29, 2013, 2:21 pm

This is a really well thought out point. In January 2012 I wrote a feature entitled: Why Microsoft is turning into Apple (http://www.trustedreviews.com/... and it has certainly continued to go this way while even Google looks likely to face a similar dilemma soon (ironically with Microsoft as the catalyst!): http://www.trustedreviews.com/...

You are right to point out though that advertising models and search for both Microsoft and Google give it another revenue stream Apple lacks and it can be used to subsidise hardware to apply extra pressure.

Watch this space!

Borkr

April 29, 2013, 11:22 pm

Well, actually, to be honest I was more on about Google's Playstore rather than their sheer advertising/big data collection business model. Of course, no one can play down the importance of the latter but it's the whole 'portal' thing in this instance, rather than just hardware or software changes, that I was driving at that's the important point to me: it's a bit like how, with Nokia's early success, the customisability and individualising of their phones with snap on plastic covers offered (!) customers a way to spend extra cash. Then custom ringtones and now you can spend even more money on your personal mobile entertainment player tied into your account. Who said DRM was dead eh?

I did read your Google Antitrust article and might return to it to refresh my memory. I think I might've missed the MS turning into Apple article though so I shall definitely have a look at that one. Your link has a 'close' bracket on the end that breaks it btw: http://www.trustedreviews.com/...

Simply put, for Google et al to do no evil they must pay taxes fairly. It's a hugely important part of business ethics but that's another story I suppose. Your articles are a very much appreciated aspect of TR that keep me coming back actually. The opening comment I cannot agree with at all, though I can appreciate why people have become frustrated with the site in general, just not with the personal contributors though! You are owed an apology for sure on this one, I expect he meant no harm.

Gordon Kelly

April 30, 2013, 5:52 pm

Thanks Logi_N, the Playstore is certainly crucial though they have advertising/big data in the locker too which could turn out to be an increasingly useful weapon for Google and Microsoft in time. Certainly it has benefitted Google Voice search for example.

Did the link work for you in the end? Taxes is a huge issue for corporates right now as they technically aren't breaking the law and public perception and maximising shareholder value clash head on. Countries must tighten their tax laws so the issue is dealt with once and for all.

It's very kind of you to mention my articles in general. They do take a lot of intense research as they have to be turned around quickly, given their topical nature. This can leave me a bit snappy at times, but in particular with this article since time difference meant we got the Apple results at 10pm GMT (and I wrote until 3am). So waking up to be accused of no analysis and copying others in the first comment did make me cross! :)

Borkr

May 1, 2013, 5:09 am

You guys here must be real paragons of restraint then, if that's how hard you have to work. Only a complete idiot would think you didn't know your onions. Some of us have been reading long enough to know you know your stuff plenty, inside and out.

Well, take it easy GK. Looks like you guys have been pretty busy, judging by all the new 'news' stories I've been catching up on. The one thing I'm thinking is I may have not given enough credit to Google's Glass headset thing and underestimated it just as I did when Apple announced their first iPad. Sometimes you have to see things in action don't you?

On taxation: some are commenting we, as consumers, should boycott certain companies who don't pay taxes fairly but then I for one would have nothing to spend my money on. There's little option as they all seem to be doing the dodge. And that's even truer if you consider ruling out companies who indulge in other unethical activities like sweatshop labour, dodgy environmental practices etc. So, I guess I can't agree that the deciding hand lies with us humble consumer folk if that's the only way we can change things. Shame we can't rely on our elected governments to exact fair policies. The Westminster set are all too busy cooking up new schemes to get our votes: hard policy doesn't seem to be a part of that voter strategy, just rhetoric these days.

Gordon Kelly

May 2, 2013, 12:39 pm

Have to agree with you on the tax issue. Companies exploit loopholes to maximise value to shareholders. Asking companies to be moral seems naive... close the loopholes.

Yes we've certainly been busy and a lot of exciting things are happening behind the scenes. Sometimes the UK/US time zone difference plays against us, but we wouldn't do it if we didn't love it :)

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