On Friday, the Wall Street Journal published an excellent Q&A with Tim Cook, CEO of Apple. Cook was coming off his fiscal Q1 2014 earnings call, on which was savaged by investors. The stock fell immediately by 8% after Wall Street analysts began asking whether there was any growth left at Apple.
In the Journal’s Q&A, there’s a startling admission from Cook that — perhaps unsurprisingly — was not highlighted by the Apple fanboy tech blogs that generate so much interest around the company’s products.
Cook was asked about the companies revenues in various countries. And then he began talking about America (emphasis added):
North America was a challenge. We had no growth basically as you could see from our results and that of course pulls down the top line because the weight is so large.
“We had no growth.”
It’s an honest and forthright answer. But it’s also the kind of thing that CEOs tend not to say publicly, even if they are true. That is why it is so surprising, and why it’s even more surprising that the statement has gotten so little coverage. (Can you imagine what the headlines would be if Microsoft CEO Satya Nadella had said the same thing? “Microsoft is dead in America!” would be the mild version.)
There is some context here, of course. Apple has still shown robust growth worldwide, as this chart of its total revenues shows:
Cook put that growth in perspective. Basically, because Apple is so huge, it’s hard to continue producing amazing percentage leaps in growth even when you’re adding billions in sales every year:
Last year, we grew (revenue) by $US14 billion to $US15 billion. Yes, those percentages are smaller compared to a year earlier and two years earlier and so forth. But that doesn’t mean that you’re not a growth company. We were in hyper-growth, or whatever is above growth. We went from $US65 billion to over $US100 billion to $US150 billion to $US170 billion. These are historic, unprecedented numbers. I don’t know any companies adding growth at that level. So when you say $US14 billion to $US15 billion compared to those numbers, it’s clearly smaller and a smaller percentage, but, to put it in some context, that’s like adding three Fortune 500 companies in a year. I think that’s hard to say that’s not a growth company.
And yet, Apple’s growth in the U.S. — the world’s richest market — is threatened. Here’s what declining growth at Apple looks like in the form of iPhone sales …
… and iPad sales:
That is why Apple fans need to do some more serious thinking about the growth of Android. By some measures, Android’s share of the smartphone market has reached 80%. It may be the case that the phones running the Android operating system as not as slick as iPhone, and it may be that the amount of cool apps available for Android is fewer than those for Apple’s iOS system.
The market tends not to ignore 80% dominance for long. (You can debate just how dominant Android is in various countries. Here are some market share charts. But there is broad agreement that Android has more users in than Apple in huge stretches of the world.)
Cook, however, does not seem to be worried that Apple may get boxed in to a minority of high-end users, the way its Macs were in the 1980s and 1990s:
I look at the mobile phone market as having three kinds of phones: feature phones, smartphones that function as or are used as feature phones, and real smartphones. I care about the market share of the last one. I don’t care how many feature phones are sold. The more that are sold I look at as good because those are all potential future customers for real smartphones. The same thing goes for the second category. I’d like to convert as many of those as possible to real smartphones.
When Cook refers to “smartphones that function as or are used as feature phones” he appears to be referring to Android phones. We’ve noted repeatedly that Android users use the functionality of their phones a lot less than iPhone users do, which is one reason why app developers prefer to create stuff for iPhone.
But Apple fans ought to worry that Cook has a mistaken view of how powerful Android is. Android phones — particularly the high-end ones — can do 95% of what iPhones can do, at a fraction of the cost. There is a good chance that many of those users are simply never going to convert to Apple, for the same reason that Ford drivers never convert to Rolls Royce. Sure, a Rolls is nicer than a Ford. But both get from A to B equally fast, and the Ford does it cheaper.
This goes to the core of Apple’s growth problem. Growth has halted in North America, yet Apple does not see Android as a threat.
That’s a very optimistic view to take, because the price of that view being wrong will be very high indeed.
Postscript: Cook also made it obvious that Apple was working on at least one brand new product category. In recent years, Apple has gotten all its growth from simply inventing new products that didn’t exist before like the iPhone, the iPod and the iPad. So this entire debate may be moot — Apple may shrug at declining growth in mobile device sales the same way it shrugs at the dwindling desktop and laptop business, because in the future it will be generating its new sales from Apple TV or iWatch or some other amazing new gadget.
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