Apple Is Hard To Grow

It’s hard to grow a big company. By the law of large numbers, Apple finds it hard to sustain the same growth rate for its iPhone in 2019 as it saw in 2014, when the iPhone 6 and 6 Plus were released and became the best-selling iPhone models of all time, selling more than 220 millions units worldwide. Their successors, in comparison, the iPhone 7 and 7Plus, have sold less than 80 million units to date. It’s hard to know how many iPhone Xs and X Maxes are being sold today; Apple hasn’t disclosed sales volumes since the fourth quarter of last year, because “a unit of sale is less relevant for us today than it was in the past, given our breadth of our portfolio and the wider sales price dispersion within any given product line,” said Apple CFO Luca Maestri.

What is perhaps relevant is that global sales of all smartphones are declining after years of rapid growth. Where growth once was as high as 28% in 2014, it saw a decline of 2.7% in the first quarter of 2019. So it would not be a surprise that Apple reported declining profits and slowing revenue this Tuesday. That dimmed outlook could be especially troublesome, as it would drag down the P/E ratio in the long run, which measures the company’s current share price relative to its per-share earnings. This ratio serves as a gauge of investor confidence regarding the growth prospects of a firm. By that measure, Google is sitting at around 22, Microsoft at 30, Facebook at 23, and Amazon at an impressive 70. Apple’s lackluster 17 means that investors are willing to bet four times more on Amazon than on Apple for each dollar the two companies currently earn. Why is that? Why is Tim Cook less popular than Jeff Bezos on Wall Street?

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There are three types of innovation, and “not all innovations are created equal,” as Harvard Business School professor Clayton Christensen said. The most common kind of innovations is sustaining improvements to existing products, which target customers who demand better performance. A patent granted by the US Patent and Trademark Office early this year shows that Apple is developing a “variable response key and keyboard” that will alter the weight of individual keys depending on finger strength and typing speed. That’s a classic sustaining innovation. The same can be said for the iPhone X. Most users are simply trading up from iPhone 7 to get access to facial recognition and an OLED screen. Sustaining innovation is important to maintain existing market share, but it doesn’t generate new market growth.

In contrast, the first iPod, or for that matter, original iPhone, was a “market-creating innovation, catalyzing a new market for smartphones and corresponding apps.” It created a new group of consumers that didn’t exist before. Before she got her first iPhone, my mother loathed personal computers and rarely used any electronic gadgets at all. She had not been a customer of Sony, Nokia, or Blackberry. But Apple pulled her in.

The challenge for Apple in 2019 is not the fight for market share, but the need to unleash a new wave of growth. Hence the new emphasis on Apple’s video-streaming and music services. Yet Apple is late. Early players—from Netflix to Spotify—are software-based rather than device-driven, and have already built up formidable distribution channels, as well as highly sophisticated data analytics. Later players—from Disney+ to Amazon’s Prime Video—put emphasis on their own content libraries, while Apple is relying on its own devices to produce a slightly better customer experience, despite the fact that performance gaps in hardware, whether it’s made by Samsung or Huawei or Xiaomi, are closing.

In fact, that “one device” logic may well be Apple’s biggest impediment. For all that Apple’s service revenues had been on a healthy trajectory, they grew on the basis of the number of iPhones sold. Little wonder most of Apple’s innovations in 2019 were intended to strengthen the iPhone’s position. The announcement in March of the minimalist Apple card, whose “subtle off-white coloring” and “tasteful thickness” stood out, carried the promise of breakthrough features solidly tied to an iPhone with A.I. software that encourages users to avoid debt or to provide recommendations for paying it off quickly.

Then, last week, Apple paid $1 billion to acquire Intel’s smartphone chip business. What Apple wants is not the microprocessors inside the iPhone, but the 5G modem chip. This modem project has been languishing at Intel, and Apple is now resorting to bringing the project team over to Cupertino to hit refresh. Neither South Korea’s Samsung nor Taiwan’s Mediatek can meet Apple’s aggressive schedule. The only capable supplier at this stage is Qualcomm, whose relationship with Apple has dramatically deteriorated in recent months. Apple has no choice but to gamble that its own organizational environment will give the 2,200 to-be-acquired Intel engineers a better chance to succeed.

All these moves are understandable. Apple needs a game-changing feature to reclaim its smartphone market share, not only in the U.S., but also in its largest international market—China. Inside China, a player named Huawei remains resolute in launching its 5G handsets, with capabilities surpassing Samsung and MediaTek and control over practically everything surrounding 5G.

None of these initiatives addresses the fundamental inability of Apple to move beyond its “one device” logic. But maybe that’s too much to ask from Tim Cook. The CEO who turned Microsoft around wasn’t Bill Gate’s protégé Steve Ballmer, but the outside-insider Satya Nadella, who ditched the doctrine of selling software by putting cloud computing and subscription first. Michael Dell couldn’t turn his company around until he took Dell private, away from the glare of Wall Street. Only then could he let go of selling personal computers as top priority, but moving on to managing enterprise technologies like data warehouse and network traffic.

From this viewpoint, Apple’s long-term position looks all the more awkward, since its COO Jeff Williams, who stood behind Tim Cook, is also known for his “operations-heavy approach,” and is now positioned to take over as the next CEO. “He’s the closest thing at the company to Tim Cook, and you’ll get more of that,” Bloomberg quotes a former senior Apple executive saying. “If you think Cook is doing a good job, then it’s a good choice.” This Apple is not going to change anytime soon.