Apple posted its first profit decline in a decade this week, but the electronics giant still beat expectations despite a perceived lack of innovation. Ian Fogg, IHS Electronics & Media Senior Principle Analyst, looks at how Apple’s results demonstrate where it has sustainable differentiation from competitors, and what this means for the future of ‘iDevices’.
This year increasingly appears to be characterised by a holding action for Apple in new product innovation. Having revamped its tablets, iPod, iPhone and Mac form factors and industrial designs late last year — essentially Apple’s complete hardware product range — Apple is now content to run with those products in the market without launching new models in any of its main product categories.
Apple is able to pursue such a strategy of going for months without major new product launches because it has assets that deliver Apple sustainable differentiation in the market. Hence, Apple’s “holding action” is still delivering great results with iPhone and iPad shipments only a fraction down from the record breaking final quarter of 2012.
3 Themes
On the earnings call three themes became clear in Apple’s explanation of its performance and overall strategic position:
There were repeated statements that the company has a strong belief in its new product pipeline. This has been a chief concern in the post-Jobs era. Of course, Apple can’t discuss these innovations yet, so it’s impossible to judge their real strength unless more prototype Phones or other Apple-brand wearable devices are left in Bay area bars.
Major new Apple products will launch in the autumn and throughout all of 2014. This implies there will not be large innovative launches this summer and any launches will be minor product refreshes. However, Apple will likely announce new iOS and possible OS X software at WWDC in June ahead of autumn hardware announcements.
Apple is showing a strategic willingness to sacrifice margin for long term profitability. This is the correct approach to take for both smartphones and tablets because both remain growth markets that are yet to mature. The better Apple can establish itself in those markets as they boom, the stronger will be Apple’s position in the long run. Apple has historically made extremely good profits on every device sold but two product categories in particular had reduced average selling prices that CEO Tim Cook picked out; the now two year old iPhone 4 and the newer iPad Mini
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Cook confirmed that the decline in average selling price on the iPhone line was due to both a shift in the mix of models shipped to the lower end iPhone 4 model and efforts by Apple to enhance its affordability in select markets globally.The iPhone 5 sold strongly however, indicating that like other smartphone competitors, mid-portfolio products find it harder to establish an identity and sell in as great a volume as the aspirational premium model or the entry level affordable aspirational smartphone.
More strategically, the mix of iPads has shifted towards the lower cost iPad mini. More than half of iPads shipped in the ‘Mini’ form factor, which Cook stated had significantly lower margins than is typical for Apple’s product lines. The tablet market is even less mature than the the smartphone market and therefore Apple is entirely correct to take a longer view of the potential for Apple success.”
Apple’s Assets for the future
IHS believes Apple has four assets that will deliver sustainable differentiation in the future, notably:
• High quality software expertise and assets. Both Mac OS X and iOS are unique Apple assets that are based on millions of people years of efforts. It took Apple five years to evolve the NEXT OS to release a feature complete version of OS X. The iOS development cycle was a similar length. Few companies have the engineers and existing software to develop such a platform. And, unlike some of Apple’s competitors e.g. BlackBerry or Nokia, Apple is able to take computer-quality software and trickle down features to its mobile devices as it has done with iMovie, iPhoto or iWork.
• Strong customer relationships. Apple now has over 300m users for its iCloud services. And, at the end of 2012 it had 435m Apple accounts with credit cards attached. These accounts enable Apple to cross-sell services and hardware and enable an ongoing direct communication with their current customers.
• Strong industry relationships in countries all over the world. Similarly, Apple’s App Store and iTunes music and video stores are filled with the products of the relationships that Apple has nurtured with content owners, retailers, banks, software developers and every other participant in the Apple ecosystem. The volume and quality of these relationships in countries all over the world present a major barrier to competitors seeking to replicate them. Apple’s iPhone’s ability to help mobile operators acquire new customers has also placed Apple as a must-have brand for carriers’ handset portfolio.
• Brand. The Apple brand is now truly global with success as far afield as China, Japan, South America and the US. For example, Apple revenues in Greater China grew 20% compared with Q1 2012. Apple is an aspirational brand and that’s taken time to build.
Apple remains in a strong market position in all of its main product categories. These results demonstrate that worsening perceptions of Apple’s prospect in the financial community and in the media are not having an adverse effect on Apple hardware shipments.”
A link to the report can be found here
By Ian Fogg
IHS Electronics & Media Senior Principle Analyst
http://www.ihs.com/