Apple just booked its biggest ever quarter, with revenues of $76 billion (£52.4 billion). Profits were $18.4 billion — the most of any company, ever.
It also sold 74.7 million iPhones — another record. The company could not be in better shape.
And yet Apple is a troubled beast:
- Investors have driven AAPL stock down 28% over the last 12 months, from $133 to $96.
- CEO Tim Cook admitted on his last earnings call that iPhone sales are about to go into decline.
- iPhone lost market share in every major global market except one last quarter.
- Other major products like iPads and Macs are already in decline.
- And Wall Street analysts are wondering whether the upcoming iPhone 7 will fail to move the needle. “Although we do expect growth in 2017, we do not expect a major iPhone 7 bounce-back,” analysts Tavis C. McCourt and Mike Koban at Raymond James said recently.
The fear is that Apple is at its peak, and the only way from here is down.
Of course, only idiots bet against Apple. The company has a history of confounding its critics by emerging from brief troughs with renewed growth and exciting products. (Just look what didn’t happen the last time we examined the worst-case scenario for Apple!)
Nonetheless, it’s worth asking: What would happen to Apple if everything that can go wrong does go wrong?
Here’s the worst-case scenario.
Apple's most famous fans are Walt Mossberg of The Verge, John Gruber of Daring Fireball and Jim Dalrymple of The Loop. They all believe the quality of Apple's software is in decline. Too many bugs and too many slow-loading programmes, they say. Apple's internal corporate mantra is 'It just works!,' a phrase Steve Jobs used to describe the way Apple products functioned simply and intuitively. Yet some services like -- iTunes, Apple Music, and iCloud for Web -- are harder to use, and more complicated.
It's rare to see the loudest choirboys in the Apple fanboy army all singing the same song like this.
Other tech companies have been down this road before: Their product portfolio expands to offer a wider range of more complicated products. And their best executives get spread thinner between them. As they rack up sales, and become bigger, these mini-empires within Apple find it harder and harder to move quickly.
Apple is the iPhone company. 68% of Apple's revenue comes from iPhone sales. If iPhone declines, Apple declines -- and iPhone is already in decline. All we're talking about now is the scale of the decline. If iPhone declined by 10%, say, it would wipe $5 billion off Apple's topline.
iPad and Macbook unit sales declined by 25% and 4%, respectively, last quarter.
Apple can launch new products of course, like the watch. But Apple Watch hasn't lit the sky on fire, yet. Apple TV is still a tiny part of the entire business. And the Apple Car is years away from launch.
It's going to be tough.
Time was, everyone expected that iPhone sales would take a breather when the company released an 'S' update model rather than a new one with a new number. By contrast, new number models -- iPhone 4, 5 and 6 -- were all huge, physical updates to the device, and the sales followed. So expectations should be high for iPhone 7.
But this time, people are worrying that iPhone 7 will not be new enough to spur new sales.
Leaks are suggesting the new phone will look a lot like the old iPhone 6S. And some analysts believe the sales bump from iPhone 6 was so big that iPhone 7 won't be able to match it. Apple has nowhere to go in terms of new screen sizes. It could copy Samsung and introduce a curved screen edge or a stylus ... but that doesn't seem to be on the cards.
The iPhone is becoming like the iPad -- so well-made that people don't need to replace them very often
Part of the danger for Apple comes from its success: iPhones these days are so well made that they continue functioning for years after their 'natural' lives are over.
If you own an iPhone 6 you probably didn't feel much need to upgrade to iPhone 6S and you could probably forgo iPhone 7 missing out on too much. A massive 60% of Apple customers have not upgraded into an iPhone 6, the company said.
You see people still using iPhones 4S, 5, and 5S, every day.
A source at Apple told Business Insider that it's relatively common for customers to walk into the store carrying an original iPhone from 2007 (although staffers do gather around in curiosity when that happens).
The iPad has the same 'problem': It lasts a long time. People don't need a new one. They're great products ... but they hurt future sales.
Apple's software problems wouldn't be such a big deal if the hardware it sits on was growing in sales. But now iPhone, iPad and Macbook are all in decline, in terms of units sold, and because Apple's software is proprietary to Apple, a decline in hardware means a decline in software.
Apple is in the opposite universe to Google (and its parent, Alphabet). Google makes hardly any hardware products and its software is designed to run on anyone's system. Google doesn't care whether a device is the best-selling iPhone or the worst Chinese Android: Gmail, YouTube and search work on them all, the same way.
iPhone 6 looked like a game-changer: It's new, bigger screen wiped out whatever advantage Android phablets had enjoyed over the previous two years. Apple began stealing significant share from Android.
But Android is back! iPhone 6S wasn't a big deal for Android, and Apple lost share to Android in every major market except one, according to Kantar. Broadly, Android retains 80% of the market for smartphones worldwide, and Apple has about 15% on its iOS system.
If iPhone 7 doesn't create a new sales surge, it might leave the door open for further gains by Android.
For years, Samsung has played second fiddle to Apple in terms of product design. But Samsung's last three major phones -- the Galaxy S6, S6 Edge, and the Note 5 -- were widely regarded as being more beautiful than the iPhone 6 line. Samsung learned its lesson, ditched the plastic, and started making phones with all-metal bodies. (It has also dialed down the amount of promotional bloatware on each new phone.)
Samsung has 'leapfrogged' Apple in terms of hardware design, my colleague Steve Kovach says.
Now we're hearing that the new iPhone 7 is going to look a lot like iPhone 6S, which looked a lot like iPhone 6. Yawn. That might be a mistake: Consumers might drift away from Apple if the new phones are the same as the old. People feel less pressure to upgrade if their old phone is indistinguishable from the new one.
This chart from Jackdaw Research of Samsung's mobile phone revenues show the company might be -- just might be -- turning a corner.
Samsung won rave reviews for its expensive Galaxy S6, S6 Edge and Note 5 phones. Google's Nexus phones are cheaper but they are still high-end purchases, and they have high-end specs.
But they are costly, and until recently price competition from cheap Android-makers eroded their sales. If Samsung and Google can build on Android's resilience to market share erosion from Apple, and if they can provide products that do not leave people wishing they spent a little more for an iPhone, then 'high-end Android' might provide some uncomfortable competition for Apple.
Google Play currently delivers twice the number of app downloads that Apple's App Store does, according to this chart from App Annie, the app store data company.
Apps in the App Store still deliver more revenue. In fact, Apple widened its lead on that metric. But what happens as the Android system -- 80% of users -- matures? Can Apple really always deliver more app revenue in total than Google Play, if it only has 15% of users?
If it ever became the case that Google Play offered developers equal or more revenue than App Store, then the tide would change among developers. Why prioritise the less lucrative platform, even if it has high-end users, when it also has fewer users?
If Apple Watch 2 isn't the best product we've ever seen, then the entire Watch business might turn out to be like the iPod -- a nice device that people liked at the time, but a footnote in the grand scheme of things.
Apple doesn't disclose Watch sales, which suggests they are modest. It's still the No.1 smartwatch on the planet. But that's still not enough for Apple. The company is so big, that being No.1 in a small category isn't much use.
Cars are hard to make. Just ask Elon Musk at Tesla. That company makes great, smart, electric cars. Yet it can only turn out about 50,000 cars a year. And Tesla only does one thing -- cars.
Is Apple really able to reinvent this wheel, on the scale required?
Apple has about $200 billion in cash and marketable securities (ie stocks and bonds) on its balance sheet. And about $200 billion in reserves on Apple's balance sheet are parked in non-US foreign countries. Apple cannot bring it back without paying US taxes. And many countries, including those in Europe, have reached very lenient corporate tax deals with Apple.
Governments, of course, are always strapped for cash, especially in a no-growth, deflationary world. Taxpayers are generally not happy that American companies pay tiny rates of tax.
So it would not take much for a few governments to decide that yes, actually, Apple really ought to start paying taxes the way everyone else does. At that point, Apple's cash situation becomes a lot tighter.
So that's the worst-case scenario. But everything we know about Apple suggests the opposite will happen: iPhone 7 will ignite sales, the company will continue to churn out new products, and Apple will go from strength to strength. Apple always attracts haters when iPhone sales take a breather.
Even Apple's 'failures' are huge successes: the Watch is No.1 in its category. Apple Music gained half as many subscribers as Spotify in just a few months. iTunes still has the biggest collection of music and video titles, and it performs flawlessly.
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