Apple needs to think different – and open its wallet

28th January 2016

Apple has been the world’s most valuable company (at least measured by its market cap, if not sales) for so long now that it’s easy to forget that it was not always so.

Back in the late 1990s, before the return of co-founder Steve Jobs, Apple was months – some say weeks – away from bankruptcy. The launch of the famous all-in-one ‘Bondi Blue’ iMac in 1998, accompanied by the clever ‘Think Different’ ad campaign, helped set it on its way.

After that, under Jobs’ leadership, the company could do no wrong. A stream of premium-priced hit products – iMacs, MacBooks, iPods, various iterations of OSX, iPad, iTunes and, most of all, the iPhone – got the money coming in. Jobs’ ruthless pruning and simplification of the product range, a laser focus on the user experience, yet more clever marketing, great design and the launch of the then-revolutionary Apple Stores, made Apple a brand that people wanted to buy into, and that rivals wanted to copy.By the time Jobs died in 2011, Apple was no longer a computer manufacturer, it was a diversified consumer electronics company with a beautifully clear proposition, selling products at margins others could only dream of (and even better, it never discounted). And let’s not forget the fanatical brand loyalty of many of its users either. No wonder the shareholders were delirious – even if they didn’t get many dividends on their stock.

But away from the success stories, Apple has had its fair share of misses. The Apple Watch, launched in April last year, was kinda cool, but not an essential purchase, especially at the prices charged. Ping, its music social network, was quietly dropped after failing to take off. Some software updates – notably Final Cut Pro X – met with hostility. The $3bn purchase of headphone maker and streaming service Beats Music/Electronics doesn’t seem to have set the world on fire, and Apple TV, while a good product, hasn’t taken off as much as the company might have hoped. And the Apple Music service has yet to really prove itself, as has the iAd in-app advertising platform (the latter six years after launch).

Earlier this week, Apple announced financial results for its fiscal 2016 first quarter ended 26 December 2015. The company posted record quarterly revenue of $75.9bn and record quarterly net income of $18.4bn, or $3.28 per diluted share. These compared to revenue of $74.6bn and net income of $18bn, or $3.06 per diluted share, in the year-ago quarter. Gross margin was 40.1 per cent compared to 39.9 per cent in the year-ago quarter. International sales accounted for 66 per cent of the quarter’s revenue.

So far so good. But what really caught the eye was its admission that its flagship and most profitable product, the iPhone, would see its first-ever quarterly decline in sales. This was put down to uncertainty in the all-important Chinese market and currency fluctuations, but may also have been due to the fact that the iPhone, while still clearly an excellent product with a great app ecosystem, is looking a bit tired; after all, it’s nine years old this spring, and the initial wow factor is wearing off.

This, in the fickle world of tech, is important, and it’s a subject I will return to shortly.

On Tuesday Apple said sales for its quarter to March 2016 would fall to between $50bn-$53bn, at the lower end of already pessimistic Wall Street predictions.

“We do think that iPhone units will decline in the quarter,” Tim Cook, Apple’s chief executive, told investors on Tuesday’s earnings call. To be fair, he also indicated that Apple Watch and Apple TV sales would be the best ever, but these are far less important as an indicator of the tech giant’s health.

Obviously, despite the warnings, smartphone sales will still be stellar, but the point is they’re no longer growing as of old. Leaving aside the argument that Wall Street’s expectations of endless growth are unrealistic, it does give the company’s senior management – and Apple-watchers – plenty to think about. Worryingly, margins are expected to drop as well, from 40.8 per cent to as low as 39 per cent.

Cook promised investment in software and R&D, which is good, especially the latter, because Apple needs a new, sexy product. Not yet, perhaps not for a few years, but it needs to capture the public’s imagination in the way that iMac, iPod and iPhone did. Services and software are all very well, and may be profitable, but they don’t get people excited (ask Microsoft), don’t get the world talking beyond the geek blogs.

The iPhone 7 is due, of course, but that won’t be for another couple of quarters. What it will look like, or what its capabilities will be, we don’t know. But they need to be really sexy if they are to capture the imagination like the original iPhone did, or the 4 or the 6. A thinner case and better camera might not do it.

There’s also the rumoured self-driving electric car, allegedly codenamed “Titan”, which might appear in 2020. If it embodies the sleek design, simplicity and fabulous user experience Apple is famous for, it could be a hit, and would certainly make everyone sit up and take notice. But creating automobiles is a slow and costly process – and 2020 is a long way off. While Apple fans might wait, jittery stockholders used to endless growth possibly won’t.

There are rumours about a virtual reality (VR) or augmented reality (AR) project. Last week, Apple hired one of the leading VR experts in the US, Doug Bowman. It has also made some recent acquisitions that point towards an interest in VR/AR, including AR startup Metaio, real-time motion capture firm Faceshift and expression analysis startup Emotient.

Apple has also filed several patents for VR products over the years, including video goggles, motion-sensing 3D virtual interfaces for iOS devices, and 3D “hyper reality” displays.

I think it’s more likely that AR/VR will be incorporated into existing devices, rather than an Oculus Rift-type device; but again, who knows? But will this really get the world excited? I’m not so sure – Apple has always had success from improving, streamlining existing tech, and focusing on end users, rather than being a technological innovator. When it does innovate – as with the Apple Newton back in 1992 – it’s not always successful.

So what to do? It’s difficult to know. Apple’s secrecy means that it is always nigh-impossible to predict its next movements. But unless Cook has something fabulous up his sleeve, I think he has just one option: buy something.

Don’t forget that Apple has an enormous cash pile, estimated at around $200bn. You could buy a lot with that, and shareholders might start to put pressure on the board to use it (or at least pay some dividends).

What could he buy? Tesla Motors, the Silicon Valley electric car maker, is valued at under $30bn, so is within easy reach, and could fit in nicely with the Titan project, if it exists. Uber, the ‘ride sharing’-cum-taxi company, is another possibility, and buying that would represent small change.

An exciting buy would be Adobe, maker of Photoshop, Lightroom, Illustrator and InDesign, among many others. Apple has long had a relationship – sometimes fractious – with the software giant, and it could be a neat fit. With a market cap of about $44bn, it’s certainly affordable. Its software (Flash aside) runs well on Apple devices, and would provide Cook and co. with an entrée into the corporate (‘enterprise’) world, something it has not quite managed, despite its strength in the consumer space. If I were Microsoft, I would be very worried about this were it to happen.

Even better, it would enable Apple to break the dominance of PC devices in the corporate world, and sell its hardware to big companies.

Box is another company that could be snapped up. It provides cloud-based storage for enterprises, and would enable Apple to offer this service to corporates, a space which its own iCloud service has failed to make much impact. At under $2bn market cap, it’s a snip.

For under $3bn, there’s also GoPro, an ‘action camera’ maker. This would sit well with Apple’s wearable and mobile devices, and could help its moves into VR/AR, where it is in danger of lagging behind. To augment that, perhaps a drone manufacturer like Titan Aerospace, Bluefin, or Skycatch (or even a drone chipset and software maker like Amberella). An Apple Drone could be, as the old saying goes, ‘insanely great’.

There are some ‘out there’ alternatives to consider. Sony has a surprisingly small market cap – $27bn – and represents something of a bargain. Apple could buy the whole lot quite easily, something Sony’s stockholders might go for.

Sony is engaged in business through its various operating segments – electronics (including video games, network services/phones and medical business), motion pictures, music publishing, music and financial services. Apple wouldn’t want all of this, but could sell off or close the bits it doesn’t want (phones, computers, the medical business – Philips would make a ready buyer of this bit I reckon – and maybe financial services, some of which compete with iPay).

But Sony is in a lot of spaces Apple isn’t, and much of it would – subject to regulatory approval – give it a lot of vertical integration in others, particularly gaming, movies and music (and I suspect Apple would manage this rather better than AOL and Time Warner did when they merged 15 years ago). In addition, Sony’s well-regarded photographic and video, audio, batteries, and semiconductor businesses would allow Apple to widen its reach within the consumer electronics space, lessening its dependence on Mac computers and iPhones.

Whatever it buys, Apple has to start spending. Its biggest acquisition was paying $3bn for Beats, which given its vast wealth, represents either a lack of ambition or excessive caution.

Tim Cook, it’s time to change Apple’s ways before you get left behind, before you become (oh the irony!) like Sony. Time to think different.