Android News : Apple's fourth-quarter earnings are the first sign of strategic weakness

Apple's fourth-quarter earnings are the first sign of strategic weakness

For any other tech company, Apple's Q4 results would be stellar. Instead, I see symptoms of the onset of possibly fatal sclerosis

Tim Cook: the Apple CEO's problem is less the products than the company's closed culture. Photograph: Eric Risberg/AP

First, a big disclosure: I own a lot of Apple stock, whereas I do not own stock in any of its major competitors. And, even worse, I own a Macintosh, an iPhone, and an iPad. I was a Wintel user for 20 years, but eventually, I gave up in disgust, and have never looked back. So, please feel free to regard what follows as either deluded or financially biased. But I think you'll see that I'm neither an Apple bigot nor an Apple booster.
Apple's quarterly earnings, just announced, have been the subject of speculation reaching into hysteria and chicanery. For any other company, the results would have been excellent, even stellar: revenues of $54.5bn, an 18% increase over the same quarter last year, and profits of $13.1bn. While profits were flat relative to the prior year, the same quarter in 2011 had 14 weeks, as opposed to 13 weeks in 2012, so results were actually better.
Still, investors were very disappointed – including myself. My own disappointment, however, is not principally financial, in the narrow sense. Rather, what bothers me is that Apple's financial shortfall comes from a clear refusal to recognize some very important realities.
What does this mean for Apple's prospects?
The company's future depends upon three very large, very separate questions: the size of its market opportunity; its implementation competence; and its large-scale strategic position.
The first question is often posed very skeptically: can a company this large continue to grow rapidly? Many observers assert that this simply isn't possible, and that Apple's markets must soon reach saturation. They're wrong. I realize that it is hard to believe, but in fact, Apple has enormous room to grow: it could reach $500bn (or more) in revenues quite easily, and rather soon.
Even Apple's existing markets – primarily, phones and tablets – are still only in the earliest stages of evolution. Only perhaps one third of the world's mobile phone users have ever owned a smartphone, and most of the installed base of smartphones is, or will soon be, entirely obsolete.
Twenty years from now, a smartphone with a fast broadband connection will be a necessity of life, replacing your keys, credit cards, identification, remote controls, cameras, GPS, and much else. These phones will also be far less expensive than today, and everyone will have one. Much the same will be true of tablets: if, as I and many others believe, tablets become as ubiquitous as the objects we still quaintly call "personal computers", then we're going to buy another billion of them, and then replace them a few times after that.
And then, there's also a billion televisions – if Apple enters that market – not to mention cloud services, watches and glasses and heads-up car displays and games and household control systems and personal robots … and five more things I can't think of right now. Twenty years from now, there will be consumer-usable, internet-connected stuff everywhere. I'm not sure I'll like that world, but I'm certain that it will be there.
But just because Apple could become by far the largest and most profitable company in the history of the world, dwarfing even Exxon, does not mean that it will become that company. Apple faces two major challenges: its ability to execute, and its large-scale, high level, strategic position.
As to the first – implementation capacity – I am rather sanguine. It is increasingly clear that, for better and/or worse, modern information technology makes it possible to manage organizations of extraordinary size and scope. Hon Tai Precision Industries (aka Foxconn), the Taiwan-headquartered company that is Apple's largest contract manufacturer, already has well over 1 million employees. Apple still has less than 100,000 employees, and half of those are in its stores, which are, by far, the most profitable retail operations in the world.
Most of Apple's operational metrics are outstanding: revenue per employee, etc. And whatever problems Apple has – I'll give you my list in a moment – I don't think that managerial competence is among them (at least, in the narrow sense). I listen to Apple's quarterly conference calls, and Tim Cook is one smart cookie.
But now we come, literally, to the $1tn question, about which I'm becoming highly skeptical. Apple is enmeshed in the highest-stakes strategic contest in economic history – one that makes the battle for control of the personal computer market, won by Microsoft and Intel three decades ago, seem nearly trivial. The new contest presently has three core participants – Apple, Google, and Samsung – and many secondary players. A few others, such as Amazon, aspire to first-tier status, whereas firms such as ARM, EBay, Netflix, and Square could dominate major specialized domains.
It is an extraordinarily complex, nuanced strategic game, though one in which most of the large incumbents – Intel, Microsoft, PC manufacturers, RIM, Nokia, Japanese electronics companies – can be ignored. Indeed, I will argue (in a later column) that Microsoft is terminal: it has cancer, heart disease, strokes, and Alzheimer's, while also being shot, knifed, and poisoned by skilled assassins. It is so over.
Google and Samsung, though, are a different story, and Apple is not doing everything right. To be sure, its products are gorgeous and cool and easy to use; it leaves manufacturing to others but is intimately knowledgeable about it; and Apple is highly disciplined about its architectures, so that it avoids the technical monstrosities that now cripple Microsoft.
But Apple is making huge mistakes – which could destroy it over time unless it corrects itself. The first is its failure, or refusal, to address low-price markets. While Apple's products are cool, there are billions of human beings who can't afford to, or simply don't, care about cool. Apple is dismissing those human beings, their needs, and the market they represent because they have the bad taste to be poor. That is arrogant, and in this case, it's also stupid.
Relatedly, Apple still refuses to distribute important elements of its technology on rival platforms, which prevents it from ever being able to offer ubiquitous, standardized inter-operability. Apple is in a war for platform control, and low-cost Android devices are dangerously close to setting standards, even on Apple's own devices (for exampe, Google maps, Google docs).
And finally, Apple's obsessive secrecy, and the insularity that inevitably comes with such secrecy, is also a huge mistake.
Long ago, I worked for IBM when it behaved similarly, and IBM's cult of secrecy contributed mightily to concealment and avoidance of unpleasant facts. If you don't talk to people, they don't talk to you; and then you don't learn.
Apple's underperformance this quarter is a symptom of these problems, rather than simply a matter of component prices or gross margins. Let's hope that they figure that out, because they still do some very cool stuff.
I'd like to hold on to my stock, too. But unless Apple changes, I don't think I should.

source : guardian.co.uk