The urgent question in the wake of Apple’s (AAPL) 10% fall on Thursday is how much of its troubles are self-inflicted versus a broader industry problem.
The answer is a little bit of both.
Apple has some serious thinking to do about how it has handled the iPhone the last couple of years. But it also finds itself at a moment in time when growth in the enabling technology of computing has slowed in many respects. That’s not Apple’s fault, and it is a problem all its competitors face as well.
Apple CEO Tim Cook late Wednesday warned the company will miss its original revenue estimate for the fiscal first quarter ended last month by a cool $ 7 billion.
Cook attributed the shortfall to a plethora of factors, foremost among them economic weakness in Asia-Pacific, something he and CFO Luca Maestri warned about during the fourth-quarter call on Nov. 1. The deterioration was worse than originally expected, he said.
But he also noted a number of trends specifically hurting iPhone sales, including the breakdown of carrier subsidies for handsets.
Among self-inflicted wounds, Apple has simply priced itself out of some segments of the market by raising the top end of the iPhone line to over $ 1,000. It’s no wonder many customers are opting to replace aging iPhone batteries at a new, lower price of $ 29, another factor cited by Cook for slower-than-expected upgrades.
High prices have compounded Apple’s problems in China, too.
“The iPhone trouble has been brewing for several years and has finally come to a head this quarter,” says Neil Mawston with Strategy Analytics. Apple’s market share in China dropped to 10% in Q4, Mawston expects, from 12% a year earlier.
Blame “expensive pricing, diminished operator subsidies, a local shift away from foreign brands, international trade wars, and a sharp economic slowdown that means consumers have less money to spend on gadgets,” says Mawston.
The bigger issue, and an issue for every consumer tech company, is that the cutting edge of hardware has gotten really difficult to produce and really expensive. Consumer technology is not at a standstill, but it faces a crisis of production and a crisis of vision. That has made it both hard to move more iPhone units and hard for Apple to broaden its revenue base beyond the device.
Take those spiffy “OLED” screens in the more expensive iPhone models. Samsung (SSNLF) , Apple’s arch-enemy, has been the sole supplier of the OLED panels. A lack of competition has made the component uneconomical for Apple and everyone else.
Other components, such as the fiber optics necessary for the “TrueDepth” camera on the front of the iPhone, require an army of vendors to produce and still they have been in short supply.
Meanwhile, the next wave of cellular networks, 5G, is taking time to be deployed, with issues of spectrum allocation still an obstacle in some parts of the world. Even if it were ready today, the value proposition of 5G for the average phone buyer is unclear.
Apple’s not alone in having a hard time finding the New, New Thing. The big innovation a few years back was supposed to be virtual reality, such as that from Facebook’s (FB) Oculus unit. That turned out to be a commercial disaster.
There are things Apple can do immediately about its self-inflicted wounds. It should bring down the price of the iPhone. The company needs to stop passing along the cost of pricey OLED screens to the customer, a practice clearly evident in the fact that Apple’s gross profit has held up despite lower revenue.
Apple could also try to lead the way in 5G. That would involve ending its legal battle with Qualcomm (QCOM) , which used to be its cellular modem supplier. That battle has not helped either party. It’s time to patch things up and together think of ways to make 5G pay off for consumers.
None of those are problems that doom a company. Some may wish Apple had the vision of late CEO and co-founder Steve Jobs to move it forward, but in reality, Apple still innovates; it’s just that Wall Street’s expectations have risen faster.
Which brings us to one other problem Tim Cook has to reflect on. It’s very hard to believe that he didn’t have some idea of the shortfall coming when he told investors on that November call, one month into the quarter, that the outlook was very bright. That was the same call in which the company said that it would no longer report iPhone unit sales going forward. A number of securities lawsuits may emerge, as people ask what Cook knew and when he knew it.
That’s obviously not a tech problem, but it may be a candor problem.