Are slow iPhone sales just a blip or is Apple starting to struggle?
Self-made billionaire investor Carl Icahn is known for his very vocal endorsements and criticisms of the world’s biggest public companies,ipad cables including Apple. Yet when he appeared on CNBC on Thursday, he wasn’t there to demand the company give shareholders dividends, as he’d been doing for years.
Instead, he said he was out. Icahn said he’d dumped every share he held in Apple, claiming he made a $2bn profit and was done with the company, citing concerns about how the Chinese government could block the company from that market. “You worry a little bit, and maybe more than a little, about China’s attitude,” Icahn said, warning of a “tsunami” of trouble.
Watching the broadcast was Dan Nathan, who runs the influential market analysis site Risk Reversal. “The jig is up for Apple,” Nathan said. “The big money’s known that for a while. But people love their iPhones so much, bluetooth keyboard case and the tech press are all fanboys, so people haven’t talked about it.”
Wednesday marked the end of an era in Cupertino as Apple reported its first ever drop in iPhone sales, sending the company’s stock down to about 30% off its all-time high in May 2015.
iPhone sales in China – a crucial market for Apple to continue growing – have plunged 26% as its economy stalls, with some reports indicating the Apple brand is losing prestige there. In the US, customers are upgrading their phones more slowly as the differences between generations, like the iPhone 6 to 6s, become more incremental.
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Those bullish on the company say that the slowdown is inevitable as the smartphone market matures, and that Apple will find another game-changing product. In the meantime, the business is good: Apple pulled in $50.6bn in revenue and $10.5bn in profits this quarter. And its CEO has won a high-profile public battle against the FBI over phone hacking, showing Silicon Valley’s unprecedented power.
“It was 30 years between the Macintosh and the iPhone,” said Jean-Louis Gassée, once an engineering head at Apple who shepherded the early Macintosh and now watches the company closely. “It takes time for these major waves.”
But in Silicon Valley, where the motto seems to be “innovate or die”, growth is everything. And critics argue that Apple, famous for its internal culture of aggression and secrecy, has lost its innovative edge.
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Analysts say the company has not had a distinct hit product in recent years. The company tightly guards its Apple Watch sales figures, but researchers see numbers slipping in favor of wearables that use Android software – made by Apple’s arch-rival Google.
Reviews of the new Retina MacBook were tepid. Tech news site the Verge liked the “beautiful” machine but found it slower, impractical and expensive, so the reviewer went back to his older Mac, while industry site The Loop described the company’s Apple Music service as a consumer “nightmare” because of technical and design problems. Despite criticism, Apple Music, has grown to 13 million subscribers, a bright spot in Apple’s recent financial results.
The most important issue facing Apple, analysts say, is how it can expand internationally. In China, the company’s most important new market, the number of people who can stretch for an aspirational product such as an iPhone has topped out, Nathan said. The average iPhone, without wireless service contracts, cost $687 in the last quarter of 2014, according to ABI Research and the Wall Street Journal – three times more expensive than an Android device, which typically sold for about $254 globally. But World Bank data from 2015 shows that in China the average income is $7,400 – meaning that an iPhone would cost the average Chinese person more than 10% of their annual salary.
“It’s an expensive phone,” Nathan said. “And the high end has become saturated.” Nathan said the best bet would be to expand into the lower end, which the company is doing somewhat with their new 4in iPhone SE. But a past effort at a bargain product, the colorful, plastic iPhone 5C, was widely seen as a flop. “That was three years ago, though,” Nathan said.
Tim Cook, who took over as CEO after the company’s iconic founder Steve Jobs died in 2011, is an expert in supply chains rather than product design. Where Jobs was obsessed with the product specs, Cook is more focused on spending projections, according to a rare authorized profile in Bloomberg News that sought to prove the new CEO wasn’t just “Jobs’s logical, icy sidekick”.
On Wednesday, Cook said that broader market issues were causing the slow in growth, and recognizing that critics were worried about China, seemed to reference the notion that Apple was no longer Silicon Valley’s star. “[We] may not have the wind at our backs that we once did,” Cook said of the company’s efforts in China. “But it’s a lot more stable than what I think the common view of it is.”
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Ben Bajarin, an analyst at Creative Strategies technology market research firm, said there is little Apple could have done better given the broader smartphone market. The company is a victim of its own success, he argued. “There’s contentment with consumers at large who look at their phones and say, ‘You know, this thing’s pretty great, I don’t know if I need a new one,’” Bajarin said. “You’ve got to give someone a reason to buy a new device.”
Bajarin thinks the market overreacted to the iPhone sales numbers, since the company sold as many phones as it had said it would this quarter. “It wasn’t a surprise. They came in just above the bottom end of their own guidance,” Bajarin said. “All of this now is just about managing Wall Street.”
The company, with its $233bn in cash, has been been using that money to buy back its own stock and pay shareholder dividends to encourage investors. “Apple has the ability to be patient because of that money, but everyone will say they also have the ability to be complacent,” Bajarin said. “But I don’t think that’s their plan.”
The command and control that reigns at Apple is not necessarily working in its favor anymore.
Jean-Louis Gassée, former Apple engineer and investor
“Nobody believes they’ll be like, ‘yeah, that’s it, we rode the smartphones and we’re done’,” he added. “They’re out looking for the next thing right now.”
Others argue, though, that Apple’s culture has become uniquely problematic and is getting in the way of innovation. Tim Kuppler, who advises corporations on better workplace environments through the firm Human Synergistics, is working on a study of 30 tech company’s cultures.
“If you’re at Apple, there’s so much secrecy, you can’t bring your 100% because there are certain things you can’t even talk about,” Kuppler said. “It’s very difficult in that environment for people to live up to their potential. You’ve got chains on; you’re riding the brake. That’s very different now at places like Google that are more achievement oriented.”
For Apple, issues with culture may be affecting recruitment and retention. The company recently lost the head of their electric car operation as well as a longtime designer who worked closely with design team chief Jony Ive.
There was an era in Silicon Valley when critics rarely voiced opinions on the unassailable Cupertino powerhouse, where strong hierarchies and control are woven into the corporate culture. Now sentiment in Silicon Valley seems to be turning against the company. Even on the quiet streets of Palo Alto, Cook runs into trouble.
“He was all by himself, and I gave him a 30-second harangue about the App Store,” said Gassée, who ran into Cook at a shopping mall earlier this year. “Growth hid a lot of shortcomings for Apple. When you grow fast you can be a little disheveled, dirty. Now Apple has to revisit what it’s lacking.”
Gassée, who left the company in 1990 and has since become an investor, said Apple’s culture of tight hierarchies and aggressive managers wasn’t working for them in the new modern climate: “The command and control that reigns at Apple is not necessarily working in its favor any more.”