Why Apple must look beyond iPhones

Apple has reported a record-breaking quarter but its shares have taken a tumble. Making money from smartphones is getting harder.

Apple has reported a record-breaking quarter, not that anyone cares given the tumble Apple's shares have taken after the results were announced. Evidently selling 51 million iPhones just isn’t good enough anymore.

But it all boils down to perspective – 51 million is still an astounding number of smartphones to sell, just not enough to keep the punters happy.

This was the first full quarter that both the iPhone 5S and 5C were available during the crucial holiday sales period. That’s typically Apple’s best quarter and despite the colourful iPhone 5C and the bells and whistles attached to the 5S, sales haven’t managed to hit the 55 million mark analysts had earmarked for the quarter.

But is this a case of unrealistic expectations, which some would say has become Apple’s cross to bear, or another demonstration of Apple’s waning primacy in the devices space?

Competition and inertia

Some of the inertia is simply a result of greater competition in the market, with Samsung and a bevy of Chinese vendors muscling in.

The latest data from research firm Strategy Analytics highlights how the competitive pressures for Apple have never been greater.

According to the research, global mobile phone shipments grew five per cent annually to reach a record 1.7 billion units in 2013, with Samsung continuing to grow at Apple’s expense. 

The South Korean giant shipped a record 451.7 million mobile phones worldwide to grab a 27 per cent market share, while Apple shipped 153.4 million mobile phones worldwide in 2013. It’s another record for Apple but the rate of growth has moderated from 46 per cent in 2012 to just 13 percent during 2013.

In between, there’s Huawei, ZTE and LG Electronics, all of which are selling more smartphones. 

The second-tier smartphone brands didn’t matter not that long ago but Apple’s lack of presence in the segment is starting to make a dent in the overall picture.

It’s a problem that both Apple and Samsung need to tackle but the iPhone sales aren’t the only issue for Apple. Its quarterly guidance was also below par – $US43 billion compared to analyst expectations of $45.74 billion for next quarter. This could also explain why Apple’s stock has slumped eight per cent post announcement.

The high-margin era is fading

Apple’s fundamentals are robust but it can do very little to quell its detractors without the introduction of new product lines.  

These new products are unlikely to be worthwhile if they are just pure devices. So an iWatch might grab the headlines, if and when it’s released, but the enthusiasm will be short-lived. Rejigging the basic iPhone with added features and more screen real estate can also provide temporary lifts but making money off hardware is getting tougher.

As the latest smartphone shipment figures from IDC suggest, volumes are up but the two heavyweights – Samsung and Apple – are starting to run out of headroom.

Top Five Smartphone Vendors, Shipments, and Market Share, 2013 (Units in Millions) 

Vendor

2013 Shipment Volumes

2013 Market Share

2012 Shipment Volumes

2012 Market Share

Year-over-Year Change

Samsung

313.9

31.3%

219.7

30.3%

42.9%

Apple

153.4

15.3%

135.9

18.7%

12.9%

Huawei

48.8

4.9%

29.1

4.0%

67.5%

LG

47.7

4.8%

26.3

3.6%

81.1%

Lenovo

45.5

4.5%

23.7

3.3%

91.7%

Others

394.9

39.3%

290.5

40.1%

35.9%

Total

1,004.2

100.0%

725.3

100.0%

38.4%

Source: IDC Worldwide Mobile Phone Tracker, January 27, 2014

The era of high-margin, flagship smartphone sales isn’t quite over but the action has shifted away from the premium to the low-end segment of the market. That’s where the action is but it’s a space that Apple won’t enter.

With 63 per cent of Apple revenues coming from international sales, it’s making a sustained effort to broaden the revenue base towards emerging markets. But that doesn’t mean it’s going to drop its premium label.

Warwick Business School Professor of Strategy Loizos Heracleous says that Apple will continue to be seen as a premium player in smartphones, at least in the medium term.

“On its current trajectory the features, design, quality, marketing, integrated ecosystem and pricing of its products are all geared towards this premium image,” Professor Heracleous says.

The reason Apple can afford to do this is because of its unswerving faith in its design, innovation and ecosystem creation prowess.

Well, the innovation bit might be a touch debatable because we have seen very little of it in recent years.

Having said that, perhaps one of the reasons we aren’t seeing a lot of innovation is because Apple simply doesn’t see the need for it, not in hardware anyway.

Professor Heracleous adds that while the competitive pressures are on the rise, Apple’s key strength lies beyond its hardware.

“Imitating its hardware is not enough for competitors to pose a substantial threat in this regard, there is a lot more that makes Apple products highly desirable.”

Where's the next product coming from?

The real innovation from Apple is unlikely to come from hardware. One of Apple’s fastest growing streams of revenue is its media/iTunes-related services and the recent speculation on its plans to take on PayPal in the mobile-payments space is just the kind of initiative that we might start hearing a lot more about.  

A service designed to leverage off the vast amount of consumer data the Apple ecosystem holds could provide Apple a new avenue for revenue growth, especially at a time when the hardware side of things have seemingly become stagnant.

Merging the credit card data with the physical reach of Apple’s suite of mobile devices provides Apple the platform to launch a payments service of considerable scale.

With the latest iPhone boasting a fingerprint scanner, the biometric security feature when combined with the iBeacon, an indoor positioning system that can notify nearby iOS 7 devices of each other’s presence, Apple has all the ingredients it needs to create a viable competitor to the likes of PayPal.

Maintaining the astronomical growth rates of the past looks to be a difficult task for Apple, but the competitive advantages of operational efficiency and a fully-realised ecosystem provides it a substantial cushion in the near to medium term.