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Article / 10 September 2014 at 8:01 GMT

The night Apple became average

Head of Equity Strategy / Saxo Bank
Denmark
  • The new iPhone will keep Apple in motion, but it's no blockbuster
  • A high price and a long delay make the Apple Watch a non-factor
  • Apple has fundamentally outgrown its surging growth rates

By Peter Garnry

It is now day one following Apple's biggest production introduction in recent years. Here are my thoughts, which build on my initial reaction from last night.

The iPhone company

Apple's introduction of the iPhone 6 was well-anticipated and the release of differently sized variants was also expected, so no major surprises here. The new phone came with better battery life and larger screen sizes which will likely appeal to more consumers, but it will not fundamentally change the pressure from Google, Samsung and Xiaomi.

iPhone 6
The new iPhone might be hugely bigger, but it's not hugely better. Photo: Apple.com

Overall, these are good iterations on what is still the company's most successful product to date with $32.5 billion in sales in the fourth quarter of 2013. The iPhone represents about 52-57% of the company's total revenue depending on what quarter you look at. The new iPhone 6 will keep the motion going at Apple and sustain positive revenue growth, but it will likely not ignite double-digit growth rates again.

The release of the new phones also slashed the price of the iPhone 5C to zero (you will only pay for your mobile carrier, downloaded apps or other content from Apple) as a way to entice consumers at the lower end. The strategy is similar to what Volkswagen is doing with its Up! model — getting new customers into the brand without making any money on them and then hoping they will upgrade to more expensive models as their relationship to the company matures.  

Apply Pay lacks market power

Apple also introduced a new service that briefly had the share price flying. The company introduced Apple Pay as an easy way to pay for products and services by using the fingerprint screener on the new iPhones (it was introduced on the iPhone 5). The company had already partnered with the banks JPMorgan Chase, Bank of America and Citigroup, as well as the Visa, MasterCard and American Express card networks .

It is a genius product and something the newly connected world has been screaming for, but few would-be providers have come with the right solution. This, however, might be it. The problem is that the iPhone is down to only a 15% market share, setting the bar fairly low in terms of how much of the payment market Apple can get.

I foresee Google copying the whole concept for Android and rolling it out to its customers, who now represent the dominant share of the smartphone-possessing population. That will make all the difference in this market segment, and it could potentially be a huge money machine for Google. Again, it seems Apple may have made a mistake by sacrificing market share for profit. The balancing act between those two forces is thin. 

Apple Watch is irrelevant

Then came the big news that everyone had waited for: the Apple Watch. As I said on Saxo TV, I did not think they would introduce it as no photos had leaked (several photos of the iPhone 6 were leaked pre-release). So Apple somehow managed to keep it a secret. Impressive.

Apple Watch
The Apple Watch was a big surprise, but it will be a while 
before it arrives in customers' hands. Photo: Apple.com

In my opinion, though, there is nothing the watch can do that the iPhone cannot, except giving you real-time data on your health. But is that enough for consumers to pay the price Apple wants? Here, I am very critical, and that reaction is only intensified by the fact that the product will not be available before sometime next year. By that time, most consumers will have forgotten about the watch (unless Apple goes all-in on its marketing).

Was Newton right?

My general view is that Apple's problem is the same as Apple's status: it is the most valuable company in the world and makes the largest profit. To move the needle in a meaningful way, and to avoid seeing negative revenue growth, its new products are constantly required to be world-changing blockbusters in order to grab enough sales. More importantly, the pricing power has to be high or positive revenue could easily translate into declining operating profits and a falling share price.

No company in the world's history has sustained a powerful market position for decades on end. Either the competition catches up, technology changes or something else occurs to upset the apple cart. I am not betting on Apple's decline right away, but I believe growth is settling in the range of 5-9% per year and I am concerned whether they can sustain their profit margins — especially with Xiaomi on the horizon.

Newton said that what goes up must come down, and this will likely happen to Apple. But the trip downwards can last for a long time. IBM is evidence of that, as a company can reinvent itself over and over again.

Apple is no longer a stock I would overweight. On the other hand, I would not short it either. It will just be an average company (due to its size) and it should occupy exactly such a place in one's portfolio. The strongest prospects for future growth lie in biotechnology, robotics and automation, big data, solutions to our pollution problems, and other things of this nature. 

Apple is not likely to be the innovator in these areas.

-- Edited by Michael McKenna

Peter Garnry is head of equity strategy at Saxo Bank


5y
urielac urielac
I agree that they have become an "average" company and with all the phone sizes introduced it reminds me a bit of the early 90s when John Sculley and Jobs were clashing "two clashed over management styles and priorities, Jobs focusing on future innovation and Sculley more on current product lines and profitability." However at least apple will not have to bare the costs of being the first movers into a new category, which can be huge.... and they also get the learnings to improve the watch based on Samsungs experience. So it is a bit of a change in the competitive dynamics.

The only difference here is that the objective of getting the ex Burberry boss Angela Ahrendts was to enter the fashion industry. Angela will open for partnerships with different fashion brands and this means that the watch at some point can become a luxury brand.
5y
Steen Jakobsen Steen Jakobsen
Apple has been average for years - Asian market shares says that - Apple is now for grandfathers and wannabe's - Open platform is everything if you want to survive long term......
5y
CPolitis CPolitis
I will kindly disagree, Apple has never been a first mover in any product category.

It has historically waited for others to take the costs of developing the new market, and then it went in and designed a product that outclassed the competition.
The ipod was not the first digital mobile player and yet it was the first that worked really well, in a portable format.
In the same way the iphone was not the first smartphone, but it was the first that worked really well, even though it initially missed features that competing products had.
Apple's business model depends on creating an ecosystem of seamlessly integrating and working software and hardware, and that is why it can be profitable even though its products are not the first to market in any category.
5y
CPolitis CPolitis
The android competitors rely mostly on specs and that is why they are forced to produce new phones every 6 months. Apple's tik-tok product iteration process (intel does the same), enables it to update a product every year, while creating a new design every second, thus saving on new development costs
5y
peter peter
apple products are expensive, market is highly competitive, the profitability has to go down and android rules.
5y
Lanny Lanny
Yeah .. I keep reading these apple-doomsday stories - especially the "grandfather" parable: All my children and grand children are iThings owners, their schools require Apple computers and use iPads in the labs. Oh, yes, we have some Androids, too, we just don't know where we put them.

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