Apple Products Are Too Many for a Table But Still Add GrowthBy
Apple Watch and AirPods help offset lower iPhone unit sales
CEO Cook reduces Apple’s reliance on a flagship smartphone
In 2010, before he became chief executive officer, Apple Inc.’s Tim Cook said all the company’s gadgets could fit on a table, arguing such focus resulted in better products.
At the time, the company’s website offered 14 Apple products. Now, under Cook’s leadership, the lineup has ballooned to 27 products available in more than 200 different versions. The strategy -- a departure from co-founder Steve Jobs’ minimalist approach -- is helping Apple grow even as the market for its most-important product, smartphones, stalls.
Products such as the Apple Watch and AirPod wireless headphones, combined with more versions of the iPhone and surging sales from a growing variety of software services, drove revenue growth in the most-recent quarter. That offset weaker-than-expected phone unit sales and helped Apple’s market value top $800 billion this week -- a first for a U.S. company.
While Cook’s Apple has so far struggled to create new product categories, building out the existing lineup is adding to investor optimism: Drexel Hamilton analyst Brian White set a price target for the stock this week that would see Apple valued at more than $1 trillion.
“There was a concern with the reliance on one product, but they’ve been able to find ways that aren’t necessarily innovative to continue to sustain growth,” said BTIG analyst Walt Piecyk. The services business supports profit margins “while the company is able to maintain growth from peripheral products like AirPods and Watches.”
Apple is in a very different position from when Cook made his tabletop comment at an investor conference seven years ago. That fiscal year, revenue jumped 52 percent as consumers fell over themselves to buy more iPhones. Now, with most developed-world consumers already using smartphones, and Apple’s annual revenue exceeding $200 billion, growth is harder to achieve.
Apple’s “Other Products” are picking up some of the slack. Sales of gadgets like the Watch, AirPods, Beats headphones and Apple TV jumped 31 percent to $2.87 billion in the fiscal second quarter. Cook said on May 2 that Watch sales almost doubled year-over-year, and compared this appendage of Apple’s business to a Fortune 500 company.
The iPad has endured a precipitous three years, with unit sales at about a third of their peak. The response has been to offer a plethora of different options. There’s the iPad Pro, iPad and iPad Mini 4 in with at least 60 different memory, color and connectivity options. New versions of the MacBook Pro unveiled in November meanwhile helped the average price for the laptop range jump by almost $130 to $1,392. That boosted Mac revenue growth to 14 percent in the most recent quarter, the fastest pace in more than two years.
Apple gets almost two-thirds of its revenue from the iPhone, compared with 39 percent in 2010. However, those sales come from 58 different iterations of the device now, up from five flavors in 2010.
And changes in iPhone designs are generating new revenue. While the iPhone 7, introduced in September, represented a modest upgrade to its predecessor, it included two significant changes. First, Apple scrapped the 3.5 millimeter headphone jack, an audio staple since the 1950s. Second, the 5.5-inch screen iPhone 7 Plus incorporated an improved dual-camera system that set it apart from the cheaper 4.7-inch screen model, the first time Apple had changed anything beyond memory and screen size between the two handsets.
Scrapping the headphone jack encouraged more customers to buy the compatible AirPod headphones, adding to Apple’s Other Products revenue, BTIG’s Piecyk said. Offering a dual camera meanwhile attracted more customers to the larger 7 Plus, helping Apple increase the average sales price for iPhones. That kept revenue from that line growing slightly.
“This is the first year that we have a unique feature on the 7 Plus that is not in the 7 and obviously customers are very interested in that feature,” Chief Financial Officer Luca Maestri said in a May 2 interview. “We are seeing more interest in the market for larger displays.”
Clever incremental iterations and additions to the hardware portfolio should keep growth ticking over for the time being, and investors expect the next iPhone will sell well. Longer term, there’s no substitute for entirely new categories, and Apple has yet to deliver a major automotive innovation, radical new TV experience, or augmented reality products.
While investors wait, the Services business has been the most consistent bright spot over the past year. Here too, Apple is growing the product palette. In 2010, there was iTunes, the App Store, Podcasts and iBooks. Now there’s Apple Music, iCloud, HealthKit, Apple Maps and a dozen more contributing to a virtuous cycle. Every time Apple sells an iPhone to a new customer, the company secures a potential new services subscriber. Each new sign-up makes it more likely that a user will again opt for an iPhone when the time comes to upgrade.
Services revenue rose 18 percent in the recent quarter, and Cook expects the business will double in size by 2020 from last year’s $24 billion. This could help keep profit margins high even with the introduction of the iPhone 8, since services revenue is more profitable.
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While hopes are high for iPhone 8 sales, the recent jump in Apple shares was driven by “greater belief in the company’s franchise value,” UBS analyst Steven Milunovich wrote in a recent note titled “Ecosystem Growth Suggests Antifragility.”