Apple

Maker of Tech Magic Searches for Its Next Act

By | Updated Oct 17, 2016 4:33 PM UTC

After 13 years of uninterrupted expansion, Apple’s sales dropped for the first time at the start of 2016. But what a streak it was. Driven by the iPod, iPad and, above all, the iPhone, the company’s revenue jumped to $234 billion in the most recent fiscal year from $14 billion a decade earlier. Even after a stock decline last year, it was valued at more than $500 billion. The users of its 1 billion active devices comprise a global elite and its wannabes. Apple’s got the most cash, the strongest brand and the world’s best-performing retail stores, but the sales hiccup underscored questions about whether its business model can endure.

The Situation

Apple sells only a handful of luxury-class products and never adjusts its prices to match competitors. Steve Jobs, its co-founder, smashed the long-held tech industry dogma that an open standard — think Microsoft’s Windows or Google’s Android operating systems that can work on any hardware — beats a closed, proprietary platform such as Apple’s. He did so by pouring resources into design and customer service, disciplines that tech giants treated as afterthoughts. With just a few devices running on the same software, and a large percentage of repeat buyers, Apple is able to spend far less on R&D  and marketing than Microsoft and Google do. But Apple’s No. 1 seller, the iPhone, is also the biggest source of concern. The iPhone accounted for 66 percent of Apple’s 2015 revenue. In early 2016, the company reported its first year-on-year decline in quarterly sales in more than a decade. It rolled out its iPhone 7 line in September in the hopes that pent-up appetite for a new model would reignite sales. Earlier this year, investors had ended Apple’s four-year run as the world’s most valuable company when the market value of Alphabet, the parent company of Google, briefly surpassed Apple’s in February. Apple is now looking beyond its home-grown products — it announced a $1 billion investment in Didi, China’s largest ride-hailing service, in May — and opened Siri, its voice-activated personal assistance, to third-party apps, hoping to increase revenue from software and to keep messaging programs pushed by Google and Facebook at bay. In August, Apple was ordered to pay a record 13 billion euros ($14.5 billion) plus interest after the European Commission said Ireland illegally slashed the iPhone maker’s tax bill. Apple said it would appeal. But it certainly could afford to pay, with $231.5 billion in cash and equivalents on hand.

Sources: Apple, Microsoft

The Background

Apple was founded on April 1, 1976, in Steve Jobs’s suburban garage. Its Apple II became the first personal computer to achieve mainstream success. After Jobs was ousted in 1995, the company stopped coming up with new hit products and lost market share to Windows PCs. It was days from declaring bankruptcy when Jobs returned as CEO in 1997. He slashed 75 percent of the company’s existing products to focus on just four, starting with a candy-colored, Internet-friendly computer, the iMac. Market share slipped below 2 percent in 2003. Then came a Windows-compatible version of Apple’s iTunes Music Store, which turned the two-year-old iPod into a sensation. Sales ballooned from $6.2 billion in 2003 to $24.6 billion in 2007, when the iPhone was introduced. Within weeks of the launch of the App Store in mid-2008, Jobs knew Apple had the chance to create a platform as large and lucrative on mobile devices as Windows had been on desktops.

Source: Apple

The Argument

Since Jobs’s death in 2011, CEO Tim Cook hasn’t strayed from the one-blockbuster-at-a-time model, or publicly discussed what he’ll do as the smart-phone market becomes saturated. The Apple Watch, the first new product of the post-Jobs era, is estimated to have sold 3.8 million units in the quarter that ended last September — a big number in the smartwatch market but a blip in the company’s bottom line. A big effort to build an Apple car was drastically scaled back. One possible area for growth is in services that could tie customers ever more tightly into a web of Apple products. The Apple Pay electronic payments system will give Apple a small cut from the billions of transactions made by its customers, and the company is charging $10 a month for its music streaming service.  Apple could expand sales to corporations, if partnerships with IBM and Cisco bear fruit. The switch to services is a transition made most famously decades ago by IBM — the company Jobs loved to hate.

The Reference Shelf

 

First published June 9, 2015

To contact the writer of this QuickTake:
Alex Webb in San Francisco at awebb25@bloomberg.net

To contact the editor responsible for this QuickTake:
John O'Neil at joneil18@bloomberg.net