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Saturday, October 17, 2015

Apple has Peaked

Many speculators have gone broke predicting the downfall of Apple, now the largest company in the world.  It seems to hit home run after home run and just keeps growing.  I could be wrong, but I think Apple is finally hitting its peak.  Of course it is not going away.  It will continue to thrive as a successful company.  Its years of amazing growth, however, may be over.

Apple has thrived by putting out new devices every year that amaze and astound.  It has built a large fan base.  But you are only as good as your latest device.  The new iPhone 6s is nice, but not an amazing leap forward.  In a few ways it is a step backwards: slightly thicker than its predecessor and a smaller battery.  But that's not the real problem.

Apple phones have gained market share in recent years.  Apple's decision to make larger screens on the iPhone 6 caused many consumers to turn back to Apple, abandoning the Samsung Galaxy, which as I have commented in an earlier post, seems focused on becoming a mere clone of the iPhone.  But this trend is going to change soon, not because of any problems with the new 6S, which has received relatively good reviews.

Portable devices have been through several years of revolutionary change.  Improvements going forward are likely to be evolutionary rather than revolutionary.  As a result, other companies are producing similar devices at lower cost.  Price is going to be Apple's Achilles heal.

Major phone companies are doing away with subsidized phones.  Customers are going to face sticker shock when they have to put out $750 for a new base model iPhone ($850 if you want enough drive space to save pictures on your phone) then start paying for monthly service.  Apple has tried to soften the sticker shock by offering payment plans for new phone purchases.  But will it be enough? Customers did not mind shelling out an extra $200 for a subsidized iPhone, especially when a top Android cost the same.  But Android phones under competition are likely to fall greatly in price, while Apple will try to maintain its high prices.

Over the next few years, iPhones will become more of a premium device for high end users.  It will likely settle into a 20-25% market share for people willing to pay a premium, compared to 43% of the smartphone market today.  Worldwide today, Apple holds only about 13% of the smartphone market. That will likely drop below 10%. Android will continue to dominate the rest of the market.  This gives Android a major benefit over Apple as App makers focus on the larger audience and begin to neglect Apple.  This cycle of fewer users leading to fewer apps leading to still fewer users is hard to break once started.  Eventually Apple will become a small niche player in mobile devices much like it did with its Macs once MS Windows took over the world.

Apple could focus on cutting costs and remaining competitive, but that is not the Apple way.  In fact, it really is not was Apple consumers want.  The Apple 5c was meant to be a lower cost, slightly lower quality Apple phone.  It failed miserably because Apple consumers want the very best.  They do not want compromise.

By contrast, Android comes on hundreds of different devices made by dozens of different companies. By sheer numbers, innovation and advancement is more likely to show up in these devices.  At the same time, effective competition will be able to find the best way to cut costs while maintaining performance in this highly competitive market.

Perhaps if Steve Jobs was still churning out miracle devices, this might be avoided.  But alas Tim Cook is no Steve Jobs.  New Apple presentations, like Apple TV and the Apple Watch have received relatively tepid reviews.  They are not the game-changers Apple might have once hoped.  No, price will have a much larger impact on future sales, and that is not an area where Apple can compete.

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