Apple CEO Tim Cook has promised investors he'll start delivering 'amazing' new products this fall... [+]
Investor Michael Obuchowski believes Apple is following through on the game plan dreamed up by former CEO Steve Jobs: Introduce a must-have gadget every three to four years that moves Apple into a new industry, and then update that device annually with just enough new features to convince the Apple faithful to trade up. Add lower-cost models and distribution partners over time.
If Apple sticks to the plan, CEO Tim Cook will unveil sleeker, colorful new versions of the iPhone at the company’s Cupertino, California, headquarters tomorrow. He’s also expected to add a low-cost iPhone for cost-conscious buyers — especially those in emerging markets where there’s burgeoning demand —and finally announce a deal to sell the iPhone through China Mobile, the world’s biggest mobile carrier with some 700 million subscribers.
After that, Apple will likely update the iPad mini, finally fronting its smaller-sized tablet with a high-definition Retina display. It may also refresh Apple TV, revising the hardware for its set-top TV box sometime soon after updating the software. (It’s already been signing new distribution agreements for content that can be displayed through the device on high-def TVs.) And the company in June promised to ship the long-awaited update to its MacPro desktop computer for power users this year.
The timing’s also right for Cook to impress with a new category-defining gadget, given that it’s been more than three and a half years since Apple jump-started the tablet computer market with the iPad. That next new thing could be the iWatch, a smartwatch that ties into the iOS operating system software and iTunes ecosystem that helped popularize the iPhone and iPad. It may be a new smartTV, stepping into a market that Cook said last year “we have intense interest in.”
Or it may be something the Apple rumor sites haven’t glommed onto yet.
Whatever it is, Obuchowski says it’s got to be “amazing and magical” enough to quell critics who say Apple has lost its innovation edge in a post-Jobs world, and with enough mass market potential to move the needle at a company whose annual sales are expected to rise to $168.8 billion in 2013 from just over $108 billion two years ago. It’s also got to inspire new confidence in Cook, who celebrated his second anniversary as CEO last month.
“I don’t have evidence that they are broken yet,” says Obuchowski, a portfolio manager at North Shore Asset Management LLC in Cold Spring Harbor, New York. “If they introduce a new device as transformational as the iPhone and iPad was, everyone will love them again. It will take some time for competitors to develop something similar.”
Cook, who was hired by Jobs in 1998 as Apple’s operations chief, has pretty much spelled out the company’s rollout plan. He’s been telling investors for months to expect “amazing” new products in the fall and “across” 2014.
The ‘luxury of focus’
That makes tomorrow’s iPhone event the kick-off an innovation spree by which Cook will be judged a worthy successor to Steve Jobs — or not. Apple’s shares, which reached a record $702.10 in the week after the iPhone 5 was announced in September 2012, closed at $498.22 on Friday.
Toni Sacconaghi, who follows Apple as an analyst at Sanford C. Bernstein & Co., says he’s willing to give Cook the benefit of doubt for now. That’s because a lot of the product roadmap seen during Cook’s tenure as CEO so far was probably set two years ago by Jobs. “Much of the criticism Apple has received over the last year is around the concern about whether the company still has unique product innovation capability,” says Sacconaghi. “We can’t judge Cook’s ability to deliver on that for a few years.”
Apple investors, analysts and employees say Cook, who turns 53 on Nov. 1, is no Steve Jobs — and that’s not necessarily a bad thing. Jobs, who died in 2011, had a legendary ability to spot tech trends and drive his team to build elegant, easy-to-use devices consumers didn’t even know they wanted. He was also mercurial, impatient, demanding and an “intimidating force,” says Tim Bajarin, a longtime Apple analyst.
In comparison, Cook has made an effort to be more transparent about the company’s challenges, speaking out publicly about labor problems at its partners’ factories in China, apologizing for missteps in last year’s debut of Apple’s Maps app and also apologizing to consumers in China over the company’s warranty policies. Unlike Jobs, Cook meets with investors and financial analysts and has listened to their pleas for a share buyback and dividend program, neither of which may have happened under Jobs. Billionaire Carl Icahn, who last month disclosed he’d taken a big position in Apple, recently tweeted that he plans to have dinner with Cook this month to talk about the “magnitude” of a new buyback.
“Tim is the only one who could have stepped into the role as CEO and oversee operations and manage the company without any hiccups,” says Barajin. “Apple is not an easy company to understand and deal with it. It has its own culture and thinking, and since 1997, it’s been under the heavy hand of Steve Jobs. I can’t think of any other person, inside or out, who could have taken his place.”
Cook is also viewed as being less confrontational and more collaborative with his senior leadership team. That Executive Team, or ET, has changed under his tenure. Last year, Cook ousted Scott Forstall, Apple’s unpopular software chief, over the Maps app and named another longtime executive, Craig Federighi, in his place. He fired retail chief John Browett after less than a year and has assumed responsibility for Apple’s retail stores himself until a replacement is named. Cook also expanded the duties of hardware design chief Jony Ive to include oversight of software. The new iOS 7, to ship shortly, will be the first program showing off Ive’s touch.
Unlike Jobs, Cook is a delegator, Reuters said in a profile last month that described Apple’s chief as a spreadsheet-loving workaholic whose calm demeanor belies his reputation as a tough manager. Though he guards his privacy, he’s often spotted around his hometown of Palo Alto, California, driving his Audi and sitting by himself at the local Starbuck’s in the early morning with an iPad in hand.
“He’s very even tempered. He’s very deliberate. He’s much more inclusive in terms of soliciting opinion. He’s more responsive to criticism. I think those are generally good attributes,” says Sacconaghi. “ He doesn’t have the force of personality or the vision that were Steve’s capabilities, but he’s a much more a traditional CEO in terms of being more focused on financial results and creating a culture where employees will be excited. Steve spent less time on that because Steve was a creative genius and less of a CEO.”
“The only knock is that he’s not bringing out new products fast enough,” says Bajarin. “To be fair, Jobs wasn’t ever in a hurry to bring out new products. We used to complain about that with him too.”
Critics who’ve been calling on Cook and Apple’s board to step up the pace of innovation so and offer more products faster to compete against Samsung, Google, Amazon and others rivals may be missing the mark, Sacconaghi says. Apple built its success on about 25 product SKUs that drive $150 billion of revenue, compared to a company like IBM, which has tens of thousands of products SKUs. “What Apple does is pick opportunities very, very carefully. It’s the luxury of focus. They are able to dedicate extreme amounts of talent and extreme amounts of financial resources to making products great. They make few relatively large bets. They can invest a lot.”
“As an investor, I’d rather wait for something that is extremely spectacular than two products that are mediocre,” Sacconaghi adds. “A more scattershot approach would not be helpful.”
‘Wow Factor’
From a financial perspective, Sacconaghi considers the low-cost iPhone — dubbed the iPhone 5cby Apple watchers — to be one of the next big things since it could be a major boon to Apple’s sales and help stem market share losses to Samsung. Apple also has lots of new category opportunities to pick from, with his top bet on a “truly converged device where a tablet and notebook are merged into one, obviating the need for either one.”
Gene Munster of Piper Jaffray is expecting updates to the iPad in September, a TV announcement in late 2013, and an iWatch and larger-screen iPhone in mid-2014. Brian White of Cantor Fitzgerald said “after a year to forget, Apple is poised for liftoff” with an iTV and iWatch in the works. Ben Reitzes of Barclay’s Capital is looking for a phablet – a combination tablet and smartphone — and a convertible device that merges a notebook and tablet.
“2014 could be a better year for Apple in terms of ‘wow factor,’” Reitzes says.
As for this week’s iPhone launch, Apple is expected to introduce a new version of the iPhone, nicknamed by the press as the iPhone 5S, with a faster Apple-designed A7 processor, better camera and, possibly, a fingerprint sensor that uses the AuthenTec technology the company acquired last year. It is expected to be available in black/slate, silver/white and white/gold models in a metal shell.
The iPhone 5c, which could sell for less than $400 without a two-year wireless service contract, will reportedly sport a polycarbonate shell, have lower assembly costs, include Apple’s A6 processor, and be available in a variety of bright colors.
Apple could sell as many as 10 million of the new iPhones in 10 days following tomorrow’s introduction, says Andy Hargreaves at Pacific Crest. That’s good news for Apple investors since the iPhone is the company’s biggest moneymaker at more than half of sales. Apple’s fiscal year closes at the end of September and if some of the phones ship on Sept. 20, as rumored, that would lift 2013 revenue.
Obuchowski is going to wait and see before deciding whether Steve Jobs’ game plan will continue to work in a world where everyone from Amazon to Google to Samsung is doing their best to chip away at Apple’s biggest markets. “The world is changing around them and they have to probably find a way to evolve faster,” he says. “If I’m correct about their cycle, the devices they come up better be really amazing and magical. If they’re not magical, this entire idea of Apple running the way it has always been running goes down in flames.”
Note: I will be live blogging from Apple's event tomorrow starting at 10 am California time. You can find my posts here.
