Apple Death skull

Apple just had its biggest-ever quarter, with $US58 billion in revenues, up 7%. It booked $US170 billion in sales last year, up 9%.

Yet people are openly worrying that Apple has lost its way.

Apple has stopped growing in North America. The stock is down 7% from its recent highs (while the rest of the market moved up). Analysts are writing negative reports to their investors. There are doubts about whether Apple will deliver any new products — a watch? a TV? — this year beyond new iterations of the iPhone. And even those will likely be a catch-up models spurred by the success of rival, big-screen phones.

Apple hasn’t launched a truly new product format since founder Steve Jobs was alive, back in 2010. People are questioning whether CEO Tim Cook has the vision to keep Apple on its throne as the most innovative tech company on the planet.

Only fools bet against Apple, of course. We’re not saying that Apple is doomed. That idea is ridiculous: The company has a habit of succeeding where others fail.

But Apple also makes mistakes. This was the company that fired Steve Jobs. This is the company that lost the desktop war to Microsoft’s Windows. And on mobile devices, Apple has only a minority share while Google’s Android has become the phone for the masses.

So it’s worth asking, what would happen to Apple if everything that can go wrong, does go wrong?

Here’s the worst-case scenario.

What if iPhone growth has stopped?

IPhone Chart

iPhone is the major revenue engine of Apple. It generates 68% of the entire company’s profits. Yet sales are plateauing, particularly in the U.S. iPhone sales growth globally was less than 10% last quarter. It could be worse this quarter, according to analyst Brian Blair at Wedge Partners.

Blair’s theory is that the people who are buying iPhones now are simply replacing their old iPhones. Apple isn’t finding new iPhone customers.

Part of that is to do with the price. iPhones are consistently among the highest-priced phones you can buy. In Brazil, an iPhone costs the equivalent of more than a month’s wages for the average person. In India, an iPhone can cost the equivalent of more than two months’ income for the average person. (Apple has begun selling iPhone 4 there at a discount.) If all the planet’s rich people who want an iPhone now have one, who is left for Apple to sell to?

Smartphone prices are not moving in Apple’s favour.

$35 phone MWC
A $US35 Chinese smartphone. Nemo Incognito / Twitter

Over time, the cost of technology tends to come down. That’s why you can buy a laptop today for $US300 that has more computing power than a machine that cost thousands of dollars 10 years ago. The same thing is happening to smartphones.

We noted recently that the Chinese are selling Android knockoff smartphones for $US35. They are not the best phones in the world. But the majority of people do not need the best phone in the world. They just need a phone that covers the basics: Calls, text, photos, web and apps. Samsung, Apple’s main rival, sells high-end models like the Galaxy S4 and the Note 3 that rival iPhones in price. But it also sells cut-price models. You can get a Samsung Blaze 4G for about $US90.

Apple, which needs to keep its high profit margins in order to maintain its stock price, has no discount phone play. Apple believes that best gadgets always win. But we may be moving into a world where cheap-good-enough gadgets win. It’s a market that the company is just completely missing.

Apple has stumbled when it comes to pricing strategy.

Iphone 5c iphone 5s stacked on top of each other
The incorrectly priced iPhone 5C. William Wei, Business Insider

It’s the entry-level problem every business school student has to solve, how do you match supply to demand at the highest price? Yet Apple failed this test recently with the iPhone 5C, which has had low sales. At first, people thought the 5C would be a discount version of the iPhone — a cheap-but-good Apple for the masses that came in a cheerful plastic case. But the 5C was priced at $US700 in China. It was sold (including a wireless service contract) for just $100 less than the iPhone 5S in the U.S. — making it a bad deal in most consumers’ eyes. Might as well pay the $US100 premium and get the best phone, most buyers decided. Walmart ended up virtually giving away the 5C.

At the same time, Apple has under-supplied the iPhone 5S, which on average gets Apple close to $US700 in revenue per unit (without contract). There was some sort of complication regarding supply of the 5S to Apple’s sales channels. The company mentioned it specifically in its last earnings call. And at the phone’s launch, Apple appeared to wildly under-estimate the desire for gold iPhones in Asia. It is, of course, not a secret that gold is a favoured symbol in Asia.

Pricing to match supply and demand is “Business 101” stuff. Yet Apple is getting the prices wrong on its most important product.

Apple could lose the tablet war.

IPad Apps

In Q4, Apple’s iPad market share declined from 38.2% to 33.8% of all sales. Samsung’s, though still smaller, went up nearly 6 points in the same period. Why can’t Apple grow its share of the market if it makes the best tabs?

Tablet share losses, coupled with smartphone share losses, are a serious issue for Apple even if total unit and dollar sales continue to grow. Tech companies can only be successful in the long run if everyone wants to use their products. Think of it this way: BlackBerry phones were a good product, and they still have loyal fans. But not enough people use them anymore, and even BlackBerry fans have transitioned to new smartphones. No company wants to be the BlackBerry of tablets.

Apple may miss the big era of growth in apps.

Cover App For Android

Let’s assume Apple sticks with its strategy of selling high-profit, best-in-class phones, and leaves Android to serve the 80% of the world that wants a good phone at a fraction of the price. App developers — who currently favour Apple’s iOS over Android as an app launch platform — may decide to make Android their primary platform. Android already offers more total apps than Apple’s App Store.

In apps, user-base size is key. The app with the most users wins. That’s why Facebook bought WhatsApp, with its 450 million users. It’s why Facebook CEO Mark Zuckerberg wants to provide free wireless service to developing countries. (Conversely, it’s also why Twitter’s stock tanked recently when it revealed that user growth was not strong.) Being able to dominate the mobile user base is key to the vast majority of app developers. And it is the richness of the app environment that makes phones fun — not their underlying operating system.

But Apple has ceded entire countries — like Spain — to Android. That could leave developers with a stark question in the coming years: what’s the point of launching an app on a platform that most people don’t use?

What if CEO Tim Cook is not the man for the job?

Tim Cook
Apple CEO Tim Cook Getty Images, Justin Sullivan

To be absolutely clear, Tim Cook has done a heck of a job since he took over after the death of Steve Jobs in 2011. You don’t get to $US170 billion in revenue by being incompetent.

But as we noted recently, there has now been a three-year quiet period at Apple instead of the big, bold acquisitions and product launches that make a company sizzle. Apple, recently, has been dependent on product updates and upgrades rather than new launches.

There has been innovation under Cook. The Touch ID fingerprint security feature is going to revolutionise mobile e-commerce. Apple rolled out a new desktop operating system, Mavericks, and gave it away for free. But these developments — while valuable — also feel incremental.

Where is the big vision? Where is the big bet? Cook may be a good CEO. He might not be the great CEO Apple needs.

We might not want an iWatch.

Apple iWatch concept design
A concept design for an iWatch. Federico Ciccarese

There is a longstanding rumour that Apple is working on a big, bold new product bet: the iWatch. It would be a smart watch that competes with Fitbit and the Samsung Gear.

But do people really want a watch that has some but not all of the advantages of a phone? When mobile phones took off, people started abandoning their old wristwatches. Do consumers really want to put them back on again? One Wall Street analyst says demand will not be strong enough: “Frankly, we just couldn’t quite bring ourselves to use smart watches or TVs as reasons to raise numbers — nor were we fully convinced that these products could move the needle like new categories did in the old days.”

Apple may not know what it is doing in healthcare.

Doctor surgeon surgery scrubs

In December, Apple executives met with the FDA to discuss tech-based health applications. The rumour is that the iWatch might have health diagnostic capabilities, like heart-rate measurement. It is trendy in Silicon Valley right now to suggest that tech is the innovative panacea that can fix healthcare. The health business is sclerotic, hidebound by government regulations and tired monopolies. Tech can bring the disruption this market needs, this logic says.

But medical devices are highly regulated for a reason. They have to be both effective and safe, and the law prevents companies from marketing them unless you can demonstrate to a degree of clinical statistical significance that that’s so. This process is cumbersome, but it has saved us from the era of snake-oil salesmen and quacks who prayed upon the sick until the mid-1930s, when the FDA was founded.

Apple has no experience navigating the FDA’s process. And as another tech company, 23andMe, recently discovered, it’s harder than it looks. That’s why companies like J&J and Pfizer — not tech companies — continue to dominate healthcare across the decades.

Apple TV may be a myth.

Itv appletv apple tv tim cook

The really exciting rumour about Apple is that the company is developing a TV that will change the way we watch broadcast television, cable and online video. In our dreams, this TV has a fantastic screen, amazing audio, and a beautifully designed user interface. It can switch seamlessly between apps like Netflix and YouTube, and regular scheduled TV.

It’s not a technological challenge — that is well within Apple’s capabilities. The problem is the TV business itself: Studios closely guard the rights to their shows. There is a reason HBO’s best stuff will never appear on Netflix. There is a reason Fox has threatened to stop broadcasting over the air completely if Aereo wins the court case broadcasters brought against the company. And there is a reason that TV shows rarely show up in full on YouTube — studios and networks know that if they keep those shows for themselves, we’ll all be forced to pay to see them. On cable.

To make a truly great Apple TV, Apple would have to cut licensing deals with all the channels and studios — a huge task that’s nearly impossible to pull off.

There is no point in Apple selling a TV if there is nothing to watch on it, or if it is simply a more expensive version of a regular TV.

Meanwhile, Google is firing on all cylinders.

Boston Dynamics
One of Boston Dynamics’ military robots. Boston Dynamics

Google just bought a company that makes massive scary robots, Boston Dynamics. Google just bought Nest, a company that makes “internet of things” household products like really cool digital thermostats. (And they’re designed by the guy who designed Apple’s iPod.) Google is making Google Glass, an exciting line of smart spectacles. Google bought DeepMind, an artificial intelligence company.

What has Apple been up to recently?

Well, it bought Topsy, a Twitter analytics company. And an in-app ad management platform called Burstly … and … er …

The point here is not that these are bad companies. They are fine businesses. It’s just that the scale of Apple’s ambitions seems to be so much smaller than Google’s right now.

Nest tony fadell

AP Photo/Marcio Jose Sanchez
Tony Fadell

Apple’s single-biggest problem is retaining talent.

Tony Fadell, the godfather of the iPod — the device that paved the way for the iPhone — left Apple to start his own business, Nest. Google then bought Nest for$3.2 billion.

Working for Apple is no longer the dream for many of Silicon Valley’s brightest, youngest things. Why toil in obscurity at a giant corporation when you can get funding to build your own company?

Plus the hiring market is super-tight. Apple employees can name their price if they want to leave for another firm. Top Apple reporter/analyst John Gruber says talent retention is Apple’s single biggest problem: “”Apple employees are in high demand, pure and simple. That’s why retention is going to be such a tricky problem for the company.”

What if Samsung continues its relentless execution?

Samsung Galaxy Note 3 home screen

Before Apple launched the iPhone in 2007, Samsung was known for making some truly terrible feature phones. But in the last few years it has copied every trick in Apple’s book, and then some. Now, it makes smartphones that offer a genuine choice to high-end users. It is not at all clear that the iPhone 5S is the best phone on the market. Talk to people who use the Galaxy Note 3 or the Galaxy S4. They love their giant screens.

Oddly, in the large-screen format, Apple has fallen behind.

Meanwhile, Samsung has become so confident it is developing its own operating system and branching out into wearables and smartphones.

Samsung is often criticised for throwing a whole bunch of new products against the wall in the hopes that one will stick. But that strategy seems to be paying off. What if Apple loses its status as tech’s coolest company just as Samsung becomes a genuine competitive threat?

Treasury dollar

Gamma Man / flickr

Apple is investing in bonds rather than innovation.

The company announced a $US14 billion share buyback with its massive stash of cash, to boost its stock price.

Instead of investing in new tech, Apple is literally buying government bonds — $US50 billion in U.S. debt and foreign sovereign government debt.

A lot of people would rather see that money going toward buying new companies and technologies.

What if Apple is maturing into … Microsoft?

Bill gates and steve jobs
Steve Jobs and Microsoft founder Bill Gates. Screenshot/60 Minutes

Barclays analyst Ben Reitzes has recently been peddling the theory that Apple is no longer a growth company. Rather, it’s more like Microsoft — a giant tech colossus that makes a ton of different products and generates revenues partly because some of those products are genuinely useful but also from a sort of tech-version of rent-taking: its customer base is just so massive that it gets incremental sales from mere inertia, not game-changing new products.

Moving the needle in terms of new sales is incredibly hard. Because Apple is a ~$60 billion business, products that “merely” sell in the hundreds of millions no longer move the needle.

Apple is now so big that the law of big numbers is impinging upon it, and it gets harder and harder to find meaningful growth, Reitzes says:

We look at a valuation analogy vs. Microsoft from 2000 to about 2010 and see no precedent that large-size tech companies simply start to broadly outperform again after a tough year or two if the law of large numbers is catching up to them and margins have peaked.

Tim Cook

Justin Sullivan, Getty Images

The worst-case scenario isn’t that bad.

This, perhaps, is the most important thing: Even when Apple goes through one of its quiet periods, and the future contains a bunch of question marks, it’s still a pretty huge company. It has locked in the richest customers with the best phones and the highest-quality app environment. That set of network effects isn’t going to go away any time soon, even if Apple stumbles (as it appears to have done with the iPhone 5C).

And being the new Microsoft is no bad thing — that company also just booked a record year of revenues.