It’s curious how the public’s expectations surrounding Apple events have progressively and imperceptibly been dampened with each Apple keynote since the announcement of the iPad. There’s also a feeling that Apple has increasingly fallen behind its peers by adopting an overly conservative strategy to new devices. In short, in a world where VR devices from crowd-funded start-ups are dominating tech headlines, we no longer expect disruptive technology from Apple.
So it’s with this theme in mind that last night’s announcement of a range of new iPhones (including a phablet sized model), as well as a “smartwatch” fits into what will become an increasingly familiar media chorus in the upcoming months and years: Apple is no longer a trend-setter, Apple is playing catch-up.
You’ll probably be at least vaguely aware of the significant amount of traction that phablets have garnered, being marketed as a “midpoint” device sitting between 7 inch tablets and smartphones. It’s a device that has sold particularly well in Asian markets, to Apple’s detriment and to Samsung and others’ advantage (Samsung has aggressively pushed the Galaxy Note as a flagship model alongside the S series in Asia).
So-called “smartwatches” too were first pushed aggressively in East Asian markets, largely by Korean manufacturers, though in spite of huge marketing campaigns they were accompanied by a resounding lack of success in terms of sales, both in Asian markets and, later, Western markets. Correspondingly, there’s a sense of “been there, done that” to anyone familiar with the reception of the Samsung Galaxy Gear.
Apple will of course attempt to assure audiences (and investors) that the technical superiority of their product will deliver success where Samsung and others failed, but I think this fails to grasp the fact that the shallow market reception of the Gear was because of its perceived superfluousness, not any technical deficiency. Unfortunately, much of the positive press surrounding the “wearables” concept (a meaningless term) has rubbed off on wristwatches, with many press outlets treating the concept of smartwatches something that merely needs to be refined by a combination of intuitive design and clever marketing before it can find success.
Doubtlessly Apple’s own analysts and marketers have taken stock of this, but if they expect to sell in excess of a million units in the first quarter of next year then it’s likely they’ll be looking at a significant quarterly forecasted earnings shortfall. The simple fact is that in a climate of declining high-end smartphone sales, there’s no reason to not expect a repeat of the Galaxy Gear’s lacklustre reception.
This isn’t the place for a lengthy detailing attempt to value Apple’s intrinsic assets, but there is a wider point to be made.
Whilst Apple has vertically-integration in terms of hardware design (their mobile device’s SoC’s are designed in-house), there’s no corresponding vertical integration in terms of manufacturing and assembly. Instead its supply-chain is dominated by third parties with whom they place orders for what they need – this essentially means Apple is by definition less capable of the sort of grand strategy highly integrated chaebols and keiretsus are capable of, it also increases Apple’s exposure to disruptions in this supply chain. Apple is ultimately more fragmented and has a greater dependency on OEMs.
There’s a broader, macroeconomic point to be made here too, that a good portion of the value-add of Apple’s products takes place outside the United States. It’s no secret that decades of outsourcing has moved not just assembly, but many high-end manufacturing processes elsewhere, two key base component examples include semiconductor grade silicon and top-quality transistors.
Bullish investors maintain this is all ultimately irrelevant as Apple’s value is focused around intangible assets, most importantly the Apple brand itself, but to orientate your business strategy around brand value when you’re ostensibly a device manufacturer is a recipe for long-term failure. Brands are of course uniquely exposed to that most volatile of markets, fashion.
In spite of this, it’s not all doom and gloom for Apple. There remains no other significant player in the mobile market who design mobile software as intuitively, or who package OEM phones with apps that are as relevant. As a result there are no other device manufacturers in the smartphone and tablet space who meld hardware and software as well and there’s little on the horizon to suggest this will change in the short-term. In the long-term however, that particular clock is ticking, and Cook and others at Apple know it.