Has Apple lost its ability to innovate?

When Steve Jobs rejoined Apple Inc in 1997, having previously been ousted from the company, the firm was 90 days away from bankruptcy and, having suffered more than $1bn in losses in the last four quarters, its prospects were dim. On January 27 2015 Apple made history by reporting a profit of $18bn and became the first company worth $700bn. But as iPhone sales carry it into the history books, it has also become a company that seemingly favour iteration over innovation.

The US technology giant netted its profit, up by 37 percent, in its first fiscal quarter and sold 74.5 million iPhones in the three months to December, up by 30 percent. This growth was fuelled by record revenue from the performance of the App store as well as sales from the Mac and the iPhone, the latter of which sold 34,000 devices an hour from October to December. Apple’s impressive results caused their shares to rise by more than 5 percent but were met with a storm of questions regarding the future of such a successful global company and how long it can continue its winning streak.

Apple’s potential Achilles’ heel lies not with its ability to create a successful product, but with its ability to create a product that can top their past feats

Toni Sacconaghi, Senior Analyst at Bernstein Research, estimated in a data report that ‘iPhone contributed 100 percent of revenue growth in Q4 and has contributed ~ 105 percent of revenue growth over the last 12 months’. There is growing belief that Apple’s growth may be too reliant on the iPhone’s seven-year production line, to the point where it is driving a significant amount of the company’s revenue growth. In terms of creating a truly innovative product Apple is lagging behind companies such as Samsung who led phablets to the market. Apple appears to be taking fewer risks by focusing on reaping rewards from the iPhone 6 and 6 Plus and prioritising margins, which were 39.9 percent in their fourth quarter, over innovation.

Apple is cashing in on the success of the newest iPhone models in the growing Chinese market. Research from Canalys has shown a huge popularity of the iPhone 6 and 6 Plus in China led Apple to take first place in the Chinese smartphone market. It overtook locally produced Xiaomi for the first time despite the average selling price of an Apple handset being almost double that of its nearest competitors. Historically sales in China have been weak but were up 70 percent year on year and came in at $16.1bn after Apple released their new bigger screened smartphone model and launched a deal in December to access China Mobile’s estimated 760 million subscribers. According to research by Kantar Worldpanel ComTech one-quarter of Chinese consumers who purchased an iPhone, in Apple’s financially successful quarter, were acquiring their first smartphone compared to 16.5 percent for the same period in 2013, this shows a wealth of untapped potential in the oriental market where Apple are likely to continue to see a surge in iPhone sales as phablet popularity grows.

The results for the first quarter of 2015 showed that Apple sold 74.5 million iPhones, 21.4 million iPads and 5.52 million Macs. These numbers show a substantial increase year on year but the noticeable slump in iPad sales continued to disappoint, falling 22 percent in 2014 from a year earlier. The iPad, Apple’s latest innovative product, was labelled groundbreaking at the time of release in 2010, but with sales falling it is unlikely the release of the iPad Air 2 will create as much hype among consumers who seem increasingly drawn to phablets. Apple has yet to convince consumers that their iPads need replacing more than every three years and, with sales expected to slow this year, the product doesn’t yet generate a fan base to rival that of the iPhone. Speaking to The New Economy, Kerem Arsal, Senior Analyst at Analysys Mason, said: “Apple knows that the iPad is suffering both from a cannibalisation from PCs and phablets, and from a lack of end-user incentive to replace the product – for good and bad reasons – and it will be paying a lot of attention to this product in 2015 to ignite a new spark like iPhone 6 did for its predecessor.”

The thinner, lighter and bigger screened iPhone 6 acts as an answer to phablet users who love Apple products. The new device gives consumers exactly what they want and its huge profits have somewhat lessened the fall of the iPad. But there is growing concern that Apple will not see a similar rush to purchase the next upgrade as the iPhone increases in size and closes the gap between the size of tablet displays. The iPhone’s improved attributes have won a religious following and record-breaking sales but the device seems to be as thin and as light as it can possibly get. While sales are booming there is an inevitable limit to the success Apple can achieve from the product, and the consumer will soon start to look for the next best thing.

In an interview with The Australian Financial Review Nolan Bushnell, Founder of Atari, said: “I think Apple has a dreadful problem. There is a thing called the ‘innovator’s bonus’ where you can get an extraordinary margin based on your innovation. Even though the fast followers can match your features, you get known for being the innovator, so your brand has a better image. That bonus used to have a half-life of about eight years. I think that has now shrunk to four at most. If they don’t continue with some remarkable innovation, then pretty soon their ability to charge premium prices for their products will go away.” Bushnell believes this innovator’s bonus could see the tech company crash back down to earth.

Apple currently takes 93 percent of the profits in the smartphone industry and iPhone sales show there is still room for further growth but the company’s upcoming releases may have a tough time competing. The Apple Watch, the company’s first brand new product since the iPad, is due to be released in April and its launch will be a deciding point in the future of Apple’s innovative streak. Apple needs it to be a success to boost the company’s third quarter, which will not benefit from Christmas or the Chinese New Year but Sacconaghi added that Bernstein Research see the Apple Watch being ‘only a modest contributor’ to revenue growth’. Writing for M&C Saatchi Mobile, James Ellis, mobile strategist said: “Despite the optimism and promise it has shown, the market for a digital watch may be limited. Some forecasts estimate 30 million units sold in the first year – quite limited demand when contrasted with the iPhone.”

Apple’s potential Achilles’ heel lies not with its ability to create a successful product, but with its ability to create a product that can top their past feats. Speaking to The New Economy, Mark Skilton, digital expert at PA Consulting Group, said: “iPhone 6 was an uncharacteristic strategy for Apple, emulating the Samsung phablet. The Asia market will continue to grow and the prediction is that Apple will continue for the next decade, expanding existing product lines to saturation point in these markets. With Apple product releases looking less innovative than in the past, the stock market is looking to the next 1 to 5 years.” The Apple that once revolutionised industries with its inventive technology appears to be buying time on the monumental popularity of the iPhone but, while annually iterating the same product with new updates and high price-tags may work in the short-term, this can very quickly become a long-term problem for a company that competes on serial innovation.