Apple's bravado clouds the company's real challenges and The Verge's ability to read a 10-K

EDIT: Added gifs for clarity.

tl;dr: Apple is killing it financially and there's no reason to believe it won't be able to tackle future challenges as it has in the past by demolishing entire industries through pricing power, making deft market entries and enjoying outstanding operational stewardship.

'Can't innovate anymore, my ass': Apple's bravado clouds the company's real challenges is a piece on The Verge by Nilay Patel that talks about a sense of disappointment in Apple's recent product announcements.

I'd like to make a comment on what I thought was a particularly disappointing piece of faux-business/technology journalism. Read as an opinion piece, Nilay Patel is certainly entitled to publish despite the bravado of his own headline. However, there are a number of key datapoints that I'd like to surface to bring some colour and objectivity into the discussion of what challenges Apple may really face ahead. I'll do my best to avoid sounding haughty throughout but do excuse me in advance in case some of my turns of phrase are misconstrued. My focus is on objectivity not brand preference - I am a bigger fan of Apple as an exquisitely run corporation than I am a 'fan' of the brand (I do not even have an iPhone).

Now, Patel's observation that

Until the company can master data and services - a critical component of how things work in 2013 - all that's left for Apple is how things look and feel.

seems reasonable. I am sure that there are good reasons why Apple should focus more on providing high levels of data services, which are not their core competence and as long as end-consumers focus more strongly on data services this will certainly become a problem for the company in the long run, assuming it doesn't invest to improve its competence in this area.

That said, I have an issue with this sentence:

Apple's stock hasn't slid because it's been putting out uninspired hardware - it's slid because the company hasn't been able to enter any major new product categories in years

I believe there are a number of key issues with this thesis, namely:

  1. Apple has entered major new product categories in the past few years and very successfully at that
  2. Apple's existing lines of business have premiumised incredibly fast providing the company with unmatched pricing power
  3. Operationally, Apple is exquisitely run, at least from a financial perspective

I am not qualified enough to speculate as to why the stock price has slid.

Tmotw_medium

I believe, rather, that the business strategy that Apple is employing works incredibly well in a number of technology product segments where intense competition is driving prices downward very quickly. These three points make Apple a formidable company and a great investment - in principle, 1. does not usually go hand-in-hand with 2. and 3. Apple enters product segments like a growth company but it strategises like a mature company which is a very powerful combination.

Major new product categories

This graph from Wikipedia illustrates Apple's non-Mac hardware launches since 2001.

5sk9u8x_medium

From the Apple I to the PowerBook, Apple spent 14 years developing its desktop line of business, reaching multiple price points and product categories in one broader segment. PowerBook to iPod took them 10 years, again deepening the range of premium price points they could cover in a range of different desktop and portable computer formats. iPod to iPhone took them 6 years, again deepening the range of premium price points. iPhone to iPad took them a mere 3 years and the same picture repeats.

Every launch is faster and their economies of scale for product development and manufacturing must reach such staggering proportions that they can enter a completely new product category and very quickly find a range of declinations of the product that can let their premium price points sink into for various end-consumers.

iPad 1 was three years ago. Yes, that's a lifetime in internet time. Yes, the picture has not repeated as in the past (iWatch should have launched a year and a half-ago following the previous trend). But get this - in iPhones and iPads, Apple has absolutely exploded. Perhaps Apple would have excited growth investors if they had launched Apple Glass or something in mid-2012. But there's still no end in sight for developing the iPhone and iPad businesses. These units are absolutely staggering and much more so when you consider how much consumers are paying for it.

Apple is already inching down the smartphone declinations by selling older iPhone versions at lower price points. I would not be at all surprised to see a low-cost iPhone launch eventually at a much lower price (but still Premium for the sub-segment).

To put into perspective how much cash they can still juice out of the iPhone and iPad (but especially the iPhone), just look at this fucking graph:

Ogadd84_medium

El2kr_medium

iPod and Mac

One product category that might seem to give Nilay's statement some credence is the case of the iPod. Average Sale Prices have just about halved since introduction and volumes are seeing steady declines despite innovations like iPod Touch that have staved off total volume collapse. Unit sales are back below 2006 levels and all in all the chart looks like a classic product lifecycle model graph with introduction, explosion, maturity and decline in the space of 10 years (pretty damn fast).

Here's something interesting though.

Izigfdb_medium

What the iPod essentially did was kick-start Mac sales that have held a remarkable portion of their ASP value across 11 years of declining prices in the rest of the industry.

And to be clear, Apple transformed the iPod into a $1B dollar brand in net sales in two years. That's motherfucking pricing power right there. Consumers could, and did, buy shitty USB sticks with headphone ports but for 6 full years they kept on buying HDDs with headphones and an Apple logo because of the brand equity.

While the sliding ASP might well indicate the contrary, the fact is that now you can get a premium product mp3 player at most price levels, ranging from the iPod Shuffle to the Touch or the Classic, means that Apple is reaching a broader set of mp3 player declinations for different end-consumer preferences.

This is the model that I, personally at least, observe in Apple's product introductions, illustrated in full garish gradients and unreadable typography:

Ez2wnlp_medium

Elahw_medium

Financial Performance

Apple's financial performance over the past 12 years is nothing short of absolutely astounding. Not only have its top line sales completely exploded beyond what you thought could be possible for a business, but its COGS have grown at far slower rates and its Net Income grows consistently faster than its sales.

Krugia3_medium

In 2001, Apple made a net income loss of a piddling $25MM from a solid but unremarkable $4.5B in revenues. Today, it keeps $42 billion from an eye-watering $157 billion.

That revenue is some oil producer shit. Its gross and net margins today are 44% and 27% respectively which for highly competitive markets like the ones Apple participates is incredible. This is Lexus, Prada, Marlboro, Tag Heuer and Nespresso pricing power, not what you would expect for a market where everyone is fretting about emerging markets buying up bundles of silicon with Android operating systems at cost. It's the quintuple layered toilet paper in a world of single-ply that people all over the world are buying up because of a logo on the cellophane wrapper.

They have an incredible ability to keep manufacturing costs in check and overall efficiencies that shouldn't really exist in smartphones and laptops. Plus it has $121 billion dollars in cash to sit on if things go south next year and everyone in the world gets a brain aneurism and decides to stop climbing the iPhone adoption curve to buy a Samsung instead.

Look at this fucking graph!!

Khtndjs_medium

Keec8_medium

Will it face challenges in the future?

Yes! Of course it bloody well will. Technology changes fast. But Apple is a conglomerate of products in wildly different markets and has a demonstrable ability to premiumise anything it touches. Every time it enters a segment or outright creates one it premiumises the fuck out of it while still experiencing unbelievable volume growth. This is positively insane for a business.

Does it have to fix data services to remain competitive? In some of its markets, yes, probably. Lord knows its mapping services are a clusterfuck still. I didn't care much for the mapping API announcement considering it'll mean that now more of the apps on my iPad Mini will have the same useless maps for my part of Continental Europe. It'll have to figure out cloud services which are much more ethereal and tough than any of the existing products it has had to develop. This probably means investing in hiring new talent, some organisational changes, who knows. It'll take time, in the interval of which it may well enter totally unrelated markets and extract even more disposable income from consumers around the world. Yes, data services are a big and rightly important thing today but you can't make a Google in 3 years.

Or can you? If anyone can, it's Apple.

O8ia4_medium