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2016-02-02 10:48:55
Among the firm s biggest difficulties is its past success
Jan 30th 2016 | SAN FRANCISCO
STEVE JOBS once visited an apple orchard while on a fruitarian diet, and it
gave him the idea for the name of the company that he, Steve Wozniak and Ronald
Wayne went on to found. Jobs thought the name would make the company seem
quirky, approachable and fun. Its popular, highly profitable products have
helped make it the world s most valuable company for nearly five years.
However, questions are growing about its shelf life.
On January 26th Apple announced profits for its most recent quarter of $18.4
billion, more than any listed firm worldwide has yet made in a three-month
period. However, the good news was overshadowed by Apple s warning of a sharp
fall in revenues in the current quarter. In the past six months its shares have
fallen by over 20%, more than double the decline in the S&P 500 index, on fears
that sales of the iPhone, which provides most of the firm s revenues and
profits, have peaked. Is it only a matter of time before Apple (worth around
$550 billion) is overtaken by Alphabet, Google s parent ($500 billion)?
In its rise to greatness, Apple has repeatedly shrugged off bouts of panic
among investors, who have suddenly convinced themselves that its glory days are
over. The most recent was three years ago, amid fears of rising competition
from other smartphone and tablet makers. But each time Apple has bounced back
and gone on to greater highs, the job of topping its most recent achievement
has become harder.
Beating the 231m iPhones that Apple sold in the fiscal year to the end of
September will be a formidable task. The smartphone market is ever more
saturated. Worldwide sales of phones costing more than $190 will grow by just
3% this year, reckons Strategy Analytics, compared with 64% in 2011. (The
average selling price for the iPhone is $691, although carriers usually help
subsidise the cost.)
Meanwhile, the global economy and China in particular, upon which Apple depends
for a growing share of its sales is looking more fragile. Recently several
Asian suppliers have been sharing stark warnings that orders for iPhone parts,
such as chips and cameras, are down. Currency fluctuations have made iPhones
significantly more expensive in some markets, like Japan and Australia, which
could put them out of reach for new buyers.
Sales of iPhones are likely to decline by around 10% this year, according to
analysts. But then what? Loyalty among its users is high; perhaps 90% go on to
buy another one. According to an analysis by Sanford C. Bernstein, another
research outfit, if such users upgrade to a new iPhone every two years, in 2017
Apple will sell them another 185m, not including sales to new users. The
installed base of iPhone owners (and thus users of iTunes and Apple s other
revenue-earning services) could easily grow to 534m in 2017, up by 13% from
2015.
The iPhone s future will depend a great deal on how compelling its next
incarnation, expected in September, will be. Cheaper versions can also help
boost sales. The lower-priced iPhone 5c, which Apple launched in 2013, enhanced
the firm s appeal in China. Tim Bajarin of Creative Strategies, a research
firm, thinks that Apple may offer an even more affordable iPhone for the Indian
market. There is currently much excitement in India about Apple s plans to open
shops there. But finding suitable locations, and dealing with the red tape
involved in opening them, will not be easy. And only a small fraction of India
s population has the means to buy even a cheap iPhone.
So, Apple is under pressure to produce another hit product. Sales of iPads have
wilted, and Apple s watch, released last year, has not sold as well as
optimists had predicted. Its answer to disrupting television, Apple TV, has
proved merely a discretional plaything for wealthy consumers who want a slicker
interface and do not mind spending more on films and TV episodes la carte.
Apple faces plenty of roadblocks in making a success of its long-rumoured
electric car, which it is reportedly hoping to complete by 2020. Recently the
head of that project, Steve Zadesky, left.
As an investment, Apple is surprisingly inexpensive. Its shares trade at about
10.4 times forecast earnings, excluding cash, compared with Alphabet and
Facebook, which trade at 21.4 and 33 times respectively. That is because many
perceive it as a hardware company vulnerable, like Hollywood studios, to
product hits and flops. Apple is trying to change that image and become
perceived more as a services company, with stable recurring revenue. Its
services division, which includes its app store and music offering, has huge
sales, of around $20 billion a year. That business will only increase as the
number of users expands and spends more in the Apple ecosystem. So long as it
stays fresh in the eyes of consumers, Apple will be able to prove the sceptics
wrong again.