The Challenges and Opportunities for Apple in 2017

As we head into the new year, I want to embark on a series of posts outlining the key opportunities and challenges facing some of the big names in tech. I’ll continue this over the next few weeks. Given the wave of negativity surrounding Apple at the moment, I thought looking at the key opportunities and challenges the company faces would be a good place to start.

Opportunity

iPhone 8 Super Cycle – Especially in China
Our research indicated that, in developed markets in the West (in particular the US market), we would see a stronger than anticipated upgrade cycle. All the evidence in post-Q4 sales we have seen validates our research. With this research and data in hand, we modeled different scenarios going into 2017 with the iPhone 8 super cycle in mind. The last super cycle came with a form factor change from the 5s to the 6 and 6 Plus. Consensus thinking is the next major form factor change could be another such catalyst.

Remember, Apple’s two largest markets by installed base of iPhones is the US and China. These markets combined make up nearly half of the global iPhone installed base. When these markets move, iPhone sales spike. Notably, China has a larger iPhone installed base than the US and it is altogether possible a massive refresh cycle in China alone would spur a super cycle-like sales quarter. And we do believe there is significant pent up demand in China at the moment as a huge chunk of iPhone owners are waiting for something big to come in the iPhone 8.

Just looking at the data, Chinese consumers have been holding onto their iPhones longer and longer each year. A good chunk of the Chinese consumer base who jumped into the iPhone family with a 6/6 Plus is still holding onto their devices. The replacement cycle of iPhones went up around 10% from 2015 to 2016 and there is significant evidence Chinese consumers are holding onto their iPhones longer. Per my chart below from active device data in China, we are seeing, for the first time, a mix shift toward the 7 Plus and the reasons have given us a key insight into the Chinese consumer mindset regarding Apple. They will buy whatever is perceived as a significant innovation. It appears the camera in the 7 Plus was enough to cause a mix shift. Which leads me to believe a big form factor change, the addition of OLED, wireless charging, etc., will cause a huge sales cycle in China. Should these things come in the iPhone 8, expect Apple’s sales from China to be significant.

Not to downplay the iPhone 8 opportunity at a global level but we believe the biggest opportunity awaiting Apple in 2017 is the Chinese market with the iPhone 8.

iPad Continuing to eat into PC replacement sales
Articles came out, post-CES, claiming the PC is interesting again. These articles are not wrong. However, with as much press the PC is getting and even with as many interesting innovations coming to PCs from all vendors, our firm and many others are still anticipating -6% to -8% (with a bear case of -10%) decline in the category in 2017. Those forecasts take into account all the interesting things coming to PCs.

I am still bullish on iPad. Call me stubborn but I am. I maintain all these wonderful innovations coming to PCs still over serve the mainstream consumer’s needs. Yet, I acknowledge the mainstream consumer still wants/needs more than their smartphone for many tasks which fall into the productivity and creativity department. We believe, as consumers get more comfortable around viewing the iPad as a PC (notebook/desktop) replacement, the iPad becomes an attractive platform for them to choose for these tasks.

We have been counting sales of iPads as part of the PC category for years and now many other analyst firms are doing the same. Which means, should the iPad hit the opportunity with consumers we believe it is being positioned for, we will see Apple’s share of the PC market grow dramatically in 2017 or possibly 2018.

With Apple’s move to make the iPad more directly compete with PCs, we expect their iPad products in 2017 to continue to take aim at mainstream consumers considering a new laptop will consider the iPad instead. This is, I believe, the ultimate opportunity for the iPad.

Siri – Voice Assistants
Siri is, for Apple, both an opportunity and a challenge. I’ll focus on the opportunity here. Siri remains a strategically important factor in my analysis. It is the one major feature I believe will deepen consumer loyalty to Apple in perhaps unprecedented ways, which is saying something, given Apple’s customer loyalty today. Siri has the opportunity to become your ultimate helper. We use the word “assistant” but that seems too vague. Siri has the potential to become something closer to your secretary or your concierge. The true helper that helps you get things done, manage your life, learn new things, and more in even better ways than you do today. This is the upside and Apple understands this. As they did with last year at WWDC, I expect more advanced Siri APIs to show up this June at the developer event. As Apple gives third parties more hooks to use Siri and better serve the customers of their service, apps, and more, I think we will see Siri gain the trust of Apple customers. But that trust is not quite there yet, which is the root of the challenge.

Challenges

HomeKit
In all honesty, HomeKit support is less further along than I anticipated. A key part of my analysis related to Apple revolves around them having one of the most desired, profitable, and important customer bases in the world. This reality has afforded them a number of structural advantages. Specifically, a robust third party software ecosystem creating unique, proprietary, and vastly better quality apps on iOS than on other smartphone platforms. A key assumption around HomeKit and smart connected appliances from third parties leveraged this viewpoint to conclude hardware companies would integrate HomeKit because they want to target customers who have money to spend on their products. This, however, is not happening at the pace I and many others expected. In fact, many of these vendors who used to be, or should clearly need to be Apple partners with HomeKit, are specifically not embracing HomeKit and instead supporting Google Home and Amazon Echo/Alexa.

All of this feels counter to logic. There are more iPhones in the market than Google Home or Amazon Echo by orders of magnitude. Yet the biggest names selling appliances, connected hardware for the home, etc., are not embracing HomeKit. This is troubling. Part of the issue relates to Apple’s requirements to be HomeKit capable which includes a hardware chip and participation in a particular security/privacy policy. Both things are good, since security and privacy will be essential to move the smart home into the mainstream. But, at the moment, it seems like vendors are not embracing HomeKit at the rate they are other ecosystems and Apple needs to work to change that trend.

We have a really long way to go in this space but these vendors don’t write their own software or manage their own cloud systems. This is where Amazon is seizing this opportunity and it will be interesting to see how they battle or support Apple with their own development of Alexa. I consider Amazon’s structural advantages in these areas to be a challenge for Apple.

Siri’s Challenges – Building Trust
During a round of qualitative interviews with about a dozen average consumers I spent time talking to, I heard the words “Siri is stupid” more times than I expected. Siri remains, by far, the most used voice assistant in the global market today but I’m not sure Siri has completely earned the trust of its users. Several folks in our interviews said they use Siri for some things like setting timers, reminders, etc. but then use Google voice search (via the app or web) when they need to find something out. There is no question Google search is better and I fear the main use case for voice assistants being a web search is not leaving the best first impression of Siri with its users.

As I noted in my article on AirPods, the criticism of Siri not always understanding you, or missing what you are saying, were greatly diminished with the AirPods thanks to better background noise cancellation and beam forming mics able to pick up my voice clearly. Even if we acknowledge some of the issues with Siri are not necessarily related to the backend technology but the microphone, or internet connections or some other variable, we can’t ignore that consumers see this as a failing and blame Apple or Siri and then are led to believe it isn’t good or doesn’t work as it should. It is the sentiment around consumers trusting Siri which is my biggest concern with the technology. I’m not sure consumers’ first impressions with Siri are what Apple wants or hoped for and it may be a case where having it in beta and putting it into consumers’ hands too early was a worse idea than waiting until it was absolutely ready. Only time will tell.

As we study this space over the next year, a major focus will be about sentiment and trust of these assistants. We want to learn which ones they tend to depend on more than others or in which situations than others, to get a better picture of how this may play out. But, right now, from data of customer satisfaction we have from a previous study, it seems the Amazon Echo and has higher customer satisfaction than Siri which gives Amazon the early edge in setting a better first impression.

I am not counting Apple out, not even close, but I do think some of the more negative first impressions Apple has had with Siri simply mean they have to work that much harder to establish trust and confidence that Siri is the assistant most worthy to add value to consumers’ lives.

All in all, Apple remains incredibly well positioned in many areas currently relevant as well as ones which will be relevant in the future. That does not mean they are not up against perhaps, more challenges than in previous years. It will make 2017 an interesting test for the company and their current leadership.

Published by

Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

20 thoughts on “The Challenges and Opportunities for Apple in 2017”

  1. “Call me stubborn but I am. I maintain all these wonderful innovations coming to PCs still over serve the mainstream consumer’s needs.”

    Worse. Stubbornly wrong, because…

    “We have been counting sales of iPads as part of the PC category for years and now many other analyst firms are doing the same.”

    How can the iPad be both a PC and a PC alternative as you’ve described?
    There are fundamental traits for the “P” in PC, the owner totally controls BOTH the data and what is done upon such data (programming). And yet, though other tablet platforms do indeed accommodate that, they are not even mentioned as PCs.

    Look, there may be “accounting reasons” for putting PCs and iPads together, but that’s just accounting, not reality. If a single PC remains in the world in a sea of iPads, that is a PC and the iPads are not.

    However you cut it an acoustic guitar is a distinct category from an electric guitar, which is distinct from an MP3 player which is distinct from a radio. Let’s count radios as musical instruments…

    Next, analysts decide whether Pluto is a planet (without redefining what it is)…

    1. To be fair, he doesn’t ever use the word “alternative”. But it is an alternative to the traditional form factors of both the desktop and laptop PC. So is a laptop not also an alternative to a desktop? And what if I put a pick-up in that acoustic and play it like Monte Montgomery? They are both still guitars. So if I’m counting guitars, I’ll count all that. There is no obfuscation going on here by the author, mostly a pedantic reader.

      Joe

      1. In a sense he does, and I agree with him on that point. When iPads are required because PCs were oversold indicates the iPad as the alternative.
        My issue is counting radios as musical instruments…
        It would be misleading to do so, just because they play music.
        I’m sure, you especially, can appreciate that.

        1. I’m not going to belabor the point we keep chasing in circles with you, but your comparison is inherently false. All metaphors and analogies break down at some point, but yours doesn’t work because it doesn’t even start at the same line. Try again. Or not.

          Joe

          1. Sorry Joe, my analogy is dead on.

            You no more control your data or the programs which execute it on your iPad any more than you can control the specific music coming out of your radio. The operative word is control, not whether you get music out of it.

            A radio puts out various stations which puts out curated playlists.
            An iPad runs programs curated by the play store.

            A musical instrument plays whatever the artist chooses to play.
            Changing pickups is immaterial, Who is controlling the music?

    2. Best to focus on use cases and what the end consumer does vs. nomenclature. We (industry analysts) have to worry about the bean counting. You guys don’t, so the best discussion will be around how regular consumers are using iPad’s the same way as they do PCs. And iPads increasingly encroach on those uses cases.

      1. I can tell you what the use case is with the iPad. The end user doesn’t control their machine. Not fully anyway. It’s more akin to being able to choose which channel rather that anything.

        An when you look at the end user, you look at it in the aggregate. That-is-not-personal. It’s the opposite of personal.

        I see the point for industry analysts to manage their information. It remains their problem, they don’t get to “just change the words”. Or you can, but then you must re-define the distinction.

        Words matter, especially if you seek the truth, not just beans. You run the risk of “spinning”. I don’t accuse you of this, I caution you.

        1. I think your missing what actually matters to an average consumer. Perhaps what you want from a PC is not what most poeple want. Our research shows continually how iPad is leveraging the mobile workflow from consumers and helping them do more than they ever did with their PCs. It is wrong to not include iPad in this discussion based on what it enables. You can hyper segment it all you want, and we often do for our clients, but the generalization of capabibilites is relevant.

          This is all moot BTW so not sure how its even helpful since it is irrelevant taxonomy. Consumers view iPads as PCs end of story.

          1. I am totally missing what makes an average consumer? There is no “average” person. Everyone is “personal” though. If the iPad were totally under user control, it would be a PC, as the Apple II and everything after it was. Until then, it is not.

            Consumers are wrong. They have the right to be wrong. I do hold people in the tech sphere to a higher standard, especially those who’s opinions are to be counted on. Or should I say, accounted on…? 😉

          2. What does it matter? I don’t see how any of this is relevant. Consumers don’t make these kind of distinctions. They just look at what serves them, and I’m simply saying consumers will continue to see iPad as a device that serves them like the PC did, or even more.

          3. We clearly don’t disagree that many consumers see the iPad (and other mobile devices) doing for them what the PC did. We agree on that, but apples are apples and oranges are oranges. We should not be perpetuating inaccuracies.

            Control of one’s machine is a very important distinction among devices, in the case of the PC it is it’s very reason to exist.

            Consumers don’t rule the world. They don’t even rule themselves. Consumers don’t define math or science or medicine or engineering or…tech either.

  2. Separate reply to a separate part of the article.

    “Part of the issue relates to Apple’s requirements to be HomeKit capable which includes a hardware chip and participation in a particular security/privacy policy.”

    Both are good, as you state. Why would someone choose not to partner? I can think of one huge reason why… having requirements imposed upon them by a singular authority without recourse it the first place.

    It’s like selling your wares through Walmart (or other too large partner). They can make you, or they can break you. Walmart singularly almost bankrupted Vlasic pickles. They also exhert undue influence in design, quality, and supply chain. That works for some, not others, but there are legitimate reasons not to do it, as there are legitimate reasons for doing it.

  3. The biggest problem with Homekit is that almost all of the potential partners are reliant on volume and simplicity of scale. Home security companies, for instance, don’t sell a different product to at different price points, they sell you more or less of the same system to accommodate the price points. Plus there are two distinct markets in security—service companies like FrontPoint or ADT (who don’t make their own products, but sell other’s and make their money from the monitoring services) and the DIY who don’t pay monthly service charges for monitoring.

    Just to focus on the security market a bit (because this seems the most likely point of entry into home automation for the average mortal) there is no systemic benefit to integrate Homekit. I tried to get Frontpoint to integrate Homekit, but they are reliant on the hardware maker they sell. The GE system is Z-Wave based, not OS based. And if you get their more advanced base system it is Android based. I don’t see Apple and iOS ever being able to wedge into either type of system and both are the predominate systems on the market. I know. I’ve looked for Homekit systems and monitoring services. They are non-existant.

    And with the advent of internet and cloud pretty much any where, it is easier than ever to be a DIYer for home security. This could be a potential foot in the door for Apple, but the DIYer is usually trying to _save_ money, not spend more. One would have to be pretty deep in the Apple well to decide Homekit was worth the money. But since most DIYers have a tinkering mentality already, Apple doesn’t provide much benefit to that type of user.

    However, it seems Honeywell has a new system, Lyric, that seems promising. It incorporates Homekit, has decent security cameras available as part of the system, and can be integrated into partnered monitoring services. If I can use a Honeywell smart thermostat with that system, then I may have finally found my unicorn system!

    Joe

  4. The edge I think Amazon has over Homekit is that Alexa is accessible for mere mortals on the user side. Homekit, I think, is suffering because they are trying to create a brand that appeals to both developers and the user. That is very un-Apple like. Even when Homekit first came out it was never clear to me as a user how this thing works, or even what exactly it is. Alexa is clear as a bell right out of the gate.

    Google Home has an edge simply because of the ubiquity or Android. There is AI benefit to that, I’m sure.

    Joe

  5. One point that I feel you may have missed out is iPads in enterprise. Tim Cook has mentioned that iPad sales to enterprise have risen sharply (I recall it was something like 40% YoY).

    I realize that iPad sales to enterprise may still be quite low, but do you think there will be a meaningful contribution in 2017?

    1. I do, but I also think the Mac is a strong contendor in enterprise. While I believe the iPad servers consumers who need/use a PC well, I’m not sure the same is true of most enterprise workers. At least yet. So iPad is being used in contexts in enterprise where PCs are not or never could be, like with highly mobile workers. Where for consumers it can serve as a replacement and even perhaps a big upgrade from their current PC.

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