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Will Pokémon Go Offset 55% Plunge In Apple Watch Sales?

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Apple is still the world's most valuable company. But for how long?

It's due to report a 15% decline in sales and a 26% drop in profits on July 26. The nine-year old iPhone used to provide the lion's share of Apple's growth -- but Chinese rivals are snatching market share.

The one new product that Apple has introduced under CEO Tim Cook -- Apple Watch -- has been widely panned -- Apple cofounder, Steve Wozniak is not a fan. And its sales are down 55%.

The two biggest hopes for Apple bulls are that it will reveal better than expected results and forecasts on July 26 or that its 30% stake in Pokémon Go revenues will spur people to buy shares in a company that has lost its ability to innovate the way it did under Steve Jobs.

What that means is easy to say and hard to do -- attack large markets by offering consumers better-designed hardware; a great content ecosystem; and world-class retailing, advertising, and service backed by a low-cost supply chain.

Jobs innovated with the iPod, iPhone, and iPad. Since then, Apple's innovative fires have been extinguished.

Apple is already expected to report its second quarter in a row of declining revenues. According to Reuters, analysts estimate Apple's sales will be about $42 billion -- nearly $8 billion below the year before while reporting EPS of $1.38 -- a plunge from last year's $1.85.

iPhone purchases -- which accounted for 65% of Apple's revenues in the previous quarter -- are expected to total between 40 million and 43 million -- roughly 33% below the 61.2 million sold last year, according to Reuters.

China?

Since Apple has not been able to come up with a meaningful new product, the iPhone's future in China is a proxy for the future of Apple.

How so? Sales in Greater China -- the mainland, Taiwan and Hong Kong -- fell 26% in Apple's fiscal second quarter, accounting for much of Apple’s 13% revenue fall that quarter, according to Bloomberg.

But Cook blamed the fall on a stronger Hong Kong dollar -- which makes me think he is either in denial or not talking about the real reason behind the declining revenues.

And Apple's future in China looks bleak because local manufacturers are introducing good-enough smartphones at much lower prices.

As Bloomberg reported, Huawei offers a popular iPhone 6S-like handset priced at $300 -- 60% below Apple's price.

Huawei -- which sold 25% of smartphones in urban China between March and May 2016 -- has taken the market share lead from Apple according to a Kantar Group report. Guangdong Oppo Electronics enjoyed a four-fold increase in share to 8%.

To be sure, some think that when the iPhone 7 comes out, people in China who have downloaded apps from its app store will upgrade, noted Bloomberg.

But between the iPhone's gigantic price premium and the pride that Chinese people take in owning a locally-made product, hopes for an eventual revival of Chinese iPhone growth could be dashed.

Moreover, the Chinese government seems to be tilting the local playing field away from Apple. China shut down its iTunes Movies and iBooks services in April and Apple "recently lost a patent case against a little-known Chinese rival relating to the iPhone 6 and 6 Plus, along with a trademark dispute over the use of the word ‘IPHONE’ on leather goods," according to Bloomberg.

Apple Watch?

Can Apple Watch save Apple's day?

Over the last few years, I've asked about 400 students whether they own or would buy an Apple Watch. While 399 stared at me as if I had four eyes protruding from my forehead, I have seen only one on the wrist of any of those students.

So it comes as no surprise that the broad category of smart watches has tumbled.

IDC reported that "worldwide shipments of Wi-Fi and Bluetooth connected timepieces fell by 32% in the second quarter of 2016 -- from 5.1 million to 3.5 million."

Despite its market leadership, Apple did much worse than the industry -- selling 55% fewer Apple Watches than the year before, according to IDC.

Apple does not publish its Watch revenues but in April 2016, the Wall Street Journal estimated that they totaled $6 billion -- 12 million watches sold in year one at $500 apiece.

But if you're looking for a silver lining, IDC believes that the market will pick up when people buy the next Watch version.

Pokémon Go?

Apple gets 30% of the revenues from Pokémon Go. Will that be enough to move the needle for Apple bulls?

While it's free to download, people can buy PokéCoins that let them "enhance" the game. The 100 Pokecoin pack goes for 99 cents at the iTunes store but if you want 14,500 that will set you back $99.99.

Needham & Co brokerage analyst Laura Martin wrote that these kinds of purchases could add up to $3 billion more in Apple revenue. When she wrote that note on July 20, Pokémon Go had 21 million users.

She argued that Candy Crush -- which generated more than $1 billion in revenue in 2013 and 2014 -- had a tenth the ratio of paid to total users as Pokémon Go does.

Ivan Lee -- who started Geomon-maker Loki Studios -- a Pokémon Go predecessor and sold it to Yahoo in 2013 -- thinks the craze will soon pass.

As he explained in a July 24 interview, "My current projection is that [Pokémon Go] will start falling off in a few months. As users level up, become satisfied with the Pokemon they have collected, and start seeing fewer and fewer new Pokemon, they will move on to the next hit game. How many people are still playing Words with Friends or Fruit Ninja today?"

Indeed Nintendo, whose stock doubled after Pokémon Go was released, suffered an 18% plunge in trading on July 25 after it announced that its share of the game's sales would be "limited," according to a press release.

Apple needs reinvention and without that, it won't remain the world's most valuable company for much longer.