Apple haters have been sounding the alarm for a decade, but this time the bad news is real.

Mitch Wagner, Executive Editor, Light Reading

January 4, 2019

6 Min Read
Apple Really Is in Trouble This Time

Apple haters love to predict the company's demise. Several times a year for more than a decade, skeptics have declared that Apple has lost its mojo, the company is failing, it has forgotten how to innovate, it's on the way out.

The haters are at again, following Wednesday's announcement from Apple Inc. (Nasdaq: AAPL) CEO Tim Cook. But this time it's different. This time, Apple really is in trouble. (See iPhone Upset Leads to Apple Crumble.)

One of the primary goals for any public company is to keep investors informed -- particularly of bad news. And Apple has failed in that responsibility.

Worse for Apple: its business challenges aren't going away.

Apple on Wednesday announced a significant shortfall in its holiday iPhone sales, expecting revenues of $84 billion for the quarter ending in December, down from previous expectations of $89-$93 billion. (See Apple Delivers Post-Holiday Turkey, Lowers Revenue Guidance.)

Apple has two problems here: failure to communicate expectations, and failure to innovate.

Failure to communicate
On communicating expectations: China's slowdown has been a long time coming, and Apple hasn't been paying attention, notes Bloomberg's Shira Ovide. On Wednesday, Cook blamed Apple's shortfall largely on slowness in China for the second half of the year. US President Donald Trump imposed tariffs on China in July, after months of threats. These problems were already boiling two months ago when Cook said China business was "very strong."

"Apple failed in the No. 1 mission of being a public company: being honest with investors about its business," Ovide says. "The company simply denied the reality that was staring it in the face, until denial was no longer an option."

Cook should not have been surprised by weak China sales. He should not have allowed investors to be surprised.

This is an area where Cook suffers by comparison to his predecessor, Steve Jobs, who was a genius at communicating with Wall Street -- particularly when he had bad news to deliver, says Apple blogger John Gruber. "Jobs's arrogance got him into trouble at times, but at other times it was his saving grace," says Gruber. Cook's "genuine and inherent humility holds Apple back on days like today. Apple needed less 'I'm sorry, let me explain' and more 'F*** you, this is bull****, let me explain'." (Only Gruber doesn't use asterisks.) Gruber thinks Apple's quarterly problem is a glitch, driven by problems in China that affect everyone. The iPhone itself is strong, says Gruber.

Here, Gruber falls down. iPhone sales have been essentially flat for 18 months, with Apple offsetting the trend with higher average iPhone sales prices, Ovide notes; that strategy wasn't going to last forever. Smartphone sales overall were down for four consecutive quarters in the third quarter of 2018, according to IDC. The smartphone market is a victim of its own success; consumers are happy with the phones they have and are in no hurry to upgrade. The iPhone accounts for 60% of Apple's business; if the smartphone market is in trouble, then so is Apple.

Next page: Apple can still innovate, but not in ways that matter

Here we come to Apple's second problem: It's lost its innovation mojo.

It's been accepted wisdom among Apple's critics that the company lost its ability to innovate when Steve Jobs died; critics didn't even wait for Jobs to get cold in the ground before asserting that.

To some extent, that criticism is unfair. Apple continued to innovate after Jobs's death.

The problem is that Apple's post-Jobs innovations, while great, have failed to propel the kind of growth that Jobs's innovations delivered.

Innovation is Apple's business model. Apple sells innovation the way Starbucks sells coffee. When Apple has saturated a market, it moves on to a new one. It takes an existing, niche market and blows the doors off it.

Or, at least, that's what it did under Jobs.

Apple's formula for innovation is to look for existing products that are good ideas, badly implemented, and re-invent those product categories, turning the niche into big business. Apple did it with MP3 players, smartphones, and twice with the PC.

But since the iPhone, Apple has failed in that formula. Or, to be more precise, Apple has been only partly successful. Apple applied its formula to the tablet, smartwatch and wireless earbuds. From a technology perspective, Apple has been wildly successful; the iPad, Apple Watch and AirPods are great products, better than the competition. But those markets have turned out to be small, insufficient to sustain long-term growth.

Apple is also turning to cloud-based services, but it faces stiff competition there, from Netflix, Amazon and others.

What now?
Apple has two options here for success, and both look pretty unlikely: The first is to convince Wall Street to accept that Apple is a mature company. It's just going to continue to crank out smartphones for an ever-more-saturated market, and Wall Street will have to learn to accept thinner margins and diminished returns. That'll be a tough message to sell.

The second option is that Apple needs to pull off a miracle again, and once again invent a new market. Apple is dabbling in augmented reality and is rumored to be looking into smart cars. Maybe one of those -- or something else -- will take off like the iPhone did?

If Apple doesn't right its course, its downturn will have knock-on effects in other sectors. Service providers look to smartphone sales to generate revenue and increase network demand; as smartphones cool down, so might the already troubled service provider business.

The emerging 5G wireless networking standard could go either way on this. Either 5G will enable apps that re-ignite demand for a new generation of smartphones, or lackluster demand for smartphones will cool down demand for 5G. Ask us again in two years how that turns out.

Apple's slowdown could have damaging effects for its customers too. Until now, investors have given Apple management a free hand, because Apple delivers profits for those investors. If the money well stops gushing, investors could become more demanding. That never ends well for customers -- or, in a few years, for the company itself.

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— Mitch Wagner Follow me on Twitter Visit my LinkedIn profile Follow me on Facebook Executive Editor, Light Reading

About the Author(s)

Mitch Wagner

Executive Editor, Light Reading

San Diego-based Mitch Wagner is many things. As well as being "our guy" on the West Coast (of the US, not Scotland, or anywhere else with indifferent meteorological conditions), he's a husband (to his wife), dissatisfied Democrat, American (so he could be President some day), nonobservant Jew, and science fiction fan. Not necessarily in that order.

He's also one half of a special duo, along with Minnie, who is the co-habitor of the West Coast Bureau and Light Reading's primary chewer of sticks, though she is not the only one on the team who regularly munches on bark.

Wagner, whose previous positions include Editor-in-Chief at Internet Evolution and Executive Editor at InformationWeek, will be responsible for tracking and reporting on developments in Silicon Valley and other US West Coast hotspots of communications technology innovation.

Beats: Software-defined networking (SDN), network functions virtualization (NFV), IP networking, and colored foods (such as 'green rice').

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