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Apple iPhone, therefore I am

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.