Jonathan Yarmis is Doctor Disruptive

As is so often the case, the Wall Street conversation about Apple’s “miss” generally misses the bigger issues.  You know I have issues with Apple’s general approach to business and you might think therefore that I’m going to gloat about a 10% drop in their stock price.  If you thought that, you’d be wrong.  Not being an investor in Apple, the stock price doesn’t terribly impact me, probably you and really, the way they do business.  Apple’s stock price doesn’t really impact its business.  Sure, some employees might go work elsewhere if the stock doesn’t continue growing robustly though Apple has always been more of a “let’s change the world” kind of place.  It can influence their ability to buy other companies but really, with over $137 billion cash on hand — that’s greater than Vietnam’s GDP — financing acquisitions is the least of their problems.

So, what do I think is interesting here?

• Apple has always been a new hit kind of company.  Back in the late 80’s, my then-boss Doug Cayne, when talking about Apple, would talk about how much of their revenue was generated by products introduced in the last year.  (How quaint it seems that vendors actually generated considerable revenue from products that were over a year old.  Not in today’s world.) Thinking of it this way shows the problem starkly.  The iPhone was introduced in 2007, the iPad was introduced in 2010.  That’s an easy sequence to figure out.  Is there a new product coming in 2013 to reinvigorate growth.  (More on this in a bit.) In the absence of this new product, it’s somehow not surprising that slowing momentum in older products is impacting Apple’s results.
• Older products + greater competition = lower margins.  Even a “success” like the iPad Mini came at a hit to margins as at least some of those sales cannibalized higher margin big iPad sales.  This is not yet an Apple strategy but rather just a result of aging product mix.  If Apple introduces lower-priced iPhones, then we’ll know they’re pursuing a lower margin strategy.  Until then, I view this as just a product mix and age issue.
• Those who are against a lower margin strategy miss an important point.  Apple’s revenues and margins are not exclusively from their hardware sales.  Not remotely.  Via the iPhone Store, Apple gains considerable, and highly profitable, follow-on revenue for every device sold.  The whole ecosystem produces one of those virtuous cycles for which this industry is legendary.  If I have one regret, as an Android user, it’s that application developers for the most part favor the Apple platform first with Android typically a second, and sometimes distant second, platform.  Given the fact that Android unit volumes are greater than iOS, why is this?  It’s because iPhone users are much more likely to buy applications and services than Android users, who are overall at the lower end of the economic spectrum.  If Apple doesn’t play at lower ends, at some point Android’s growing market share will result in a shift in application developer priorities and thus it’s prudent for Apple to move downmarket.
• An interesting way for Apple to play in this space would be for it to start supporting non-Apple devices.  Apple today offers certain software products for Windows (e.g., iTunes).  At what point to they consider it lucrative and important to support Android? Increasing the urgency for this are the inroads Google’s making onto the iOS platform.  I don’t need to point out the whole maps disaster and YouTube on iOS is a major player.  (Psy’s Gangnam Style video alone generated $8 million in revenue for Google.)  Thus, from a defensive and offensive position, I think we’ll see Apple begin to embrace Android to bound the competitive threat.
• More importantly, the telecom industry has talked for some years now about “the next billion.”  Growth in this industry is going to come from emerging markets which have two important characteristics:  with lower GDPs, they’re much more price-sensitive and they’re often going to be users whose only computing device is their phone, unlike the Western world, where we typically have at least one computer to go along with our phone (and MP3 player and camera).  Despite my recent note about the single converged device, this new market may not have the money for multiple devices and thus the phone is it.  Growth is coming in this market.  It’s prudent for Apple to play in it to cement leadership in a post-PC world.
• Overlooked in Apple’s financials is the fact that they as much as anyone are being impacted by this post-PC world.  Mac sales were down over 20%.  That Innovator’s Dilemma is a tough mistress.
• Back to the new product question, this is a fascinating topic on which to ruminate.  It’s also difficult. Who before the iPhone and iPad predicted that Apple was going to revolutionize those categories?  So what’s next?  Conventional wisdom for some time has said an Apple TV is next.  Not the existing Apple TV small box.  I have a Samsung SmartTV, a Tivo and a Roku and all of those demonstrate both the opportunity and challenge for Apple.  The existing Apple TV box is not materially different than any of those, not enough to be the ground-breaker that saves the company.  And merely building those into the TV box itself is not the answer either.  Here’s actually where Apple may miss Steve Jobs.    Jobs had a great record in beating industry executives into submission around the iPod (music labels), iPhone (carriers, starting with AT&T) and, to a lesser extent, iPad (content providers).  The video (TV and movie) industry saw what happened to those others and was ready, willing and, so far, able to resist Apple.  To redefine the viewing experience, Apple needs their cooperation and so far that hasn’t been forthcoming.  Could Jobs have convinced some operator, network and/or studio to capitulate?  I guess we’ll never know.
• So, if Apple TV isn’t the 2013 savior for growth and increased power, what’s left?  If Apple’s going to surprise us, I would expect it would relate to something around the living room.  The TV is just one part of a broader home ecosystem that includes entertainment, environmentals, games and more.  Existing systems right now are insanely expensive and massively compromised.  Apple alumni are already showing what’s possible in the space — the NEST thermostat, which Apple is already selling.  Apple has the vision, the human factors, the gadgets and the resources to nail this one.  If I were advising Apple, I’d say own the home before you go about redefining the TV.  It’s the classic market for Apple.  Lots of people have been dabbling in it for years, with terrible implementations.  Apple can swoop in and everyone will laud them for inventing yet another market. </end sarcasm>  But seriously, doesn’t this scream Apple?  No more talk of the Xbox being Microsoft’s trojan horse in the home.  It’s Apple’s market to own.

There you have it.  Ignore the stock market reaction.  Apple had an amazing quarter by the standards of anything other than Apple’s previous quarters.  But there are big questions for Apple going forward.

• What’s its “next billion” strategy?  Apple on Android?
• What’s its next big idea? Not the TV. The home.

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