Diversify to Survive: Apple on the Defensive

Diversify to Survive: Apple on the Defensive ( 01-Aug-2016)

by James Hayward

While Apple’s profits have hit record levels recently, the writing has been on the wall as the competition from Asia in particular begins to produce much improved products at lower prices.  With Apple’s quarterly profits and revenues down, the change in strategy at their primary market matures is becoming less subtle. They need to find the next iPhone, meaning the next big thing. They won’t mind whether it’s a car, a medical device, a wearable, a service, or one of those Jobsian products that we don’t know that we want yet. They will get there, but expect a bumpy ride along the way.

You don’t break the quarterly record for profit from a single company by blowing it all on R&D, but with the purse so big, the strings are now being loosened. Apple’s R&D spending hit 6% of revenue in Q2 2016, equating to a forecasted annual spend of around $14bn in 2016. By the end of the year, this will correspond to an order of magnitude increase in R&D budget during the 6-year Tim Cook era so far, growing above revenue at over 40% each year. Contrast this with the 6 previous years (2004-2010) under Steve Jobs, which saw just 24% CAGR in R&D spend.

 

Diversify to Survive: Apple on the Defensive

R&D spending at Apple, showing the change as the markets evolved, as well as the change between the Steve Jobs and Tim Cook eras

Source: IDTechEx

 

This strategy is nothing particularly innovative, yet along with the infamous secrecy, it fuels an impressive rumor mill about what will come next. Whether it be their automotive division, a virtual reality product, freshly stoked ambitions on augmented reality, a greater focus on services, or even links to some activity in smart textiles, the world waits and second guesses. The next huge breakthrough is not going to come from R&D funding alone (e.g. check in with Volkswagen or Intel, #1 and #3 for 2015 R&D spend respectively), but when other analysts tout a company as the “most innovative” in the world, the world watches and waits not-so-patiently to be impressed.

The writing is on the wall within the mobile phone hardware market. The dominant iPhone has now formally lost ground to its rivals, albeit in the trailing edge of the usual product cycle. In the hardware, the core of their product portfolio has become broader, safer and, thanks to fierce competition, less unique. Incremental gains remain the order of business in the short-medium term, so as prices fall, these changes will be increasingly weak ammunition when defending their famously high ASP.

For example, perhaps the most significant rumored change for the new iPhone, due later this year, is the loss of the headphone jack. Here they would be a first to move, but it remains a defensive one. It provides a welcome boost for new custom headphones options, as well as helping their own premium market-leading adopted whiz-kid: Beats Electronics. Other rumors: the large OLED display, the extra emphasis on the camera, etc. Apple as a follower? Nothing new.

 

What this means for the Watch?

While the Apple Watch remains the undisputed champion of the world of smartwatches, it can hardly be called a heavyweight. Back in January IDTechEx Research forecasted there to be around 8.7 million units in the first year which, despite being one of the lowest estimates out there at the time, appears to still be slightly high. In 2016 sales have slumped, and while new versions of WatchOS have ironed out some early creases, they won’t do much to the bottom line.

The issues are as old as the consumer smartwatch discussion itself; can we optimize fashion vs function vs battery life? Can we find a good product business model somewhere between the 2-3 year planned obsolescence model from portable consumer electronics and the lifetime ownership model in Swiss watches? Can we build a platform that will have a lasting widespread use, considering that nearly all of the functions today are already accessible via a phone (which, most smartwatches still rely on)?

The future is uncertain, and following many discussions with various leading companies throughout our research, our most recent wearable technology forecast is the first that I’ve seen to describe a negative revenue growth for smartwatches within five years (or at least, smartwatches as we know them today, defined as “mobile phone accessories”).

However, in our most recent report on the subject, we describe a future standalone personal (wearable) communication device, or “Personal Hub”, as an evolution of the smartphone. We introduce this as a direct evolution of the smartphone can take over many of the core functions of the mobile phone, and deliver them in a more efficient form factor with a new user interface (based more heavily on voice, motion, etc.). 

Article Source : https://www.computer.org

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