Apple Has A Growth Problem And It Is Keeping Itself From The Solution
Apple has a growth problem. It narrowly avoided bankruptcy in 1996 by killing off most of its legacy products and launching the iMac (oh, and the $150M loan from Microsoft didn’t hurt either). The iMac and PowerBooks accounted for nearly all Apple’s revenue until the iPod. Within a few years of its launch, the iPod surpassed the Macs in terms of revenue. The third wave of growth was the iPhone which became Apple’s #1 product category by 2010.
Today, Apple’s problem is that iPhone sales have begun to slow and there is no 4th wave of new products to pick up the slack. The iPad has been quite successful but revenue peaked in 2012 and has been slowly retreating ever since. The Apple Watch and Beats product lines are nice editions but haven’t moved the revenue needle much.
Smartwatches may yet emerge as the next killer category for Apple, but it is far from a sure thing. Augmented Reality (AR) glasses and cars are two other possible product lines for Apple; however, each would take many, many years before generating significant sales.
So, what can Apple do in the short- to medium-term to drive sales growth?
Well, there is one other Apple product category that has shown some promise- iTunes, Software, and Services. Surprisingly it has been growing steadily at around 25% per year since its inception and is now Apple’s second leading contributor to revenue with over $24 billion in 2016.
The money from this segment is coming in from App Store sales (Apple keeps 30%) and downloads/subscriptions to music, TV, and movies.
There isn’t much more room for growth from Apps, Music, and Movies because either Apple already has a dominant position and/or the category is already mature.
TV is a possibility if Apple can cut the necessary deals with the content providers or distributors. Apple has tried earnestly yet failed with the content providers. The cable companies are consolidating, so unless Apple makes a massive acquisition of a cable giant, or perhaps buys DISH Network and builds it out, there’s not much chance to work with the content distributors.
All of this leaves one remaining possibility in the Software and Services space- Artificial Intelligence (AI). All of Apple’s competitors—Google, Microsoft, Facebook, Amazon—are investing heavily in this space, because the first to emerge victorious will likely become the world’s first Trillion dollar company.
Apple is rumored to be investing in AI as well; however, its efforts are hamstrung by its laudable stance on data privacy. You see, Apple is unique in that it doesn’t comb through its customers’ data. Instead, that data is either stored offline on the iPhone or is locked on an Apple server and Apple doesn’t have the key. In either case, Apple cannot and does not want to pry.
This is the reason why Apple was never able to capitalize on its early lead with Siri (which it acquired). Apple simply stopped feeding Siri data and so Cortana, Alexa, Google have all raced by.
Many in the industry including myself applaud Apple’s stance on privacy, but when it comes to AI and machine learning, success hinges on access to massive (and ever-growing) amounts of data. Unless Apple changes its policy on data privacy, it is hard to see how it will compete with the Big 4.
If Apple cannot, then I see nothing better for Apple than several more years of slowing hardware and iTunes sales. Apple’s luster would quickly fade, and the company would be relegated to the consumer electronics market while missing out entirely on the next big thing.
I’d hate to see that happen.