Apple, 10 problems and a single solution

Tim Cook takes the technology empire into a price war, an unthinkable notion under Steve Jobs

An Apple Store in Chicago.
An Apple Store in Chicago.John Gress (REUTERS)

Suddenly, the Apple store resembles a Walmart. You can trade in your old smartphone for a 100-dollar coupon to purchase a new, state-of-the-art iPhone. Sales are trebling. The marketing campaign is taking place in India, but it represents a significant shift in a strict commercial policy: Apple is joining the price war.

On Thursday, the company had lost 44.8 percent of its September market value: shares were selling for 390 dollars after climbing to 705 dollars just six months ago. Back then, Tim Cook was introducing the iPhone 5 and selling more devices than ever during a memorable Christmas season. But since then, it’s all been bad news.

Apple’s providers report that orders have been declining. The US telephone operator Verizon says that new iPhone plans are down from 64 percent to 54 percent this quarter; the largest cellphone retailer reported a 35-percent drop in iPhone sales; Cirrus, which makes its sound chips, saw orders dwindle by 15 percent, and iTunes lost five market points to Amazon...

They are selling less, they are no longer the ones to start the rumors, they are not in the media spotlight as often, they keep issuing apologies, competitors are cropping up everywhere, response is no longer as quick as it used to be, and Wall Street sharks appear to be toying with Apple shares the way they once toyed with Spain or Italy’s risk premium. Apple has 10 problems and, according to investors, there is just one solution: for the company to come up with a magic, revolutionary new product like the iPod, the iPhone or the iPad.

1. Lower prices mean lower profits

Joining the price war seems like an inexcusable solution to revert this situation. In India, Apple is selling its iPhone 4 for 275 euros. Entering into some sort of coupon competition (Samsung has struck back with a similar scheme) would have been simply unthinkable back in Jobs’ time. Apple’s slogan “think different” implied paying a premium for an exclusive product. The firm’s financial health was based on this premise. There is no other company that earns so much with so little: upgrading from a 16-gigabyte iPad to a 32-gigabyte one, which costs Apple 17 dollars more, sets consumers back an additional 100 dollars. For every iPhone it sells, Apple’s profit margin is as much as 53 percent, while an iPad Mini “only” brings in a 40 percent margin, a figure that remains unrivaled in the market. Given these numbers, there is a logical resistance to joining any kind of price war. But right now there is no choice. Everything seems to indicate (Apple never talks about its projects) that the company will launch a cheap iPhone for Asia. The consulting firm Piper Jaffray holds that 75 million units will be sold in 2014...as long as the price remains below 300 dollars.

2. More devices mean more battlefronts

Product dispersion cannot be attributed to Cook. Jobs paved the way for it in 2007, when he eliminated the word “Computer” from the company’s name. Apple is a consumer electronics company, although it only makes five things. The classic computer is the least of them; the iMac, heir to that first Macintosh from 1984, will only represent two percent of company revenue. Sooner rather than later, new iPads and iPhones will come out, as well as an iWatch-iPod. Apple will also have to do something to revitalize its television tuner, since an actual television set does not seem to be in the pipeline.

3. Changes, too many changes

The pace of new devices is accelerating due to consumer demand, and most of all, to fierce competition. Every counterattack aimed at curtailing competitors adds new changes, and this creates a certain degree of unease among Apple clients, no doubt the most loyal consumer group on the face of the Earth... A product that is championed as revolutionary stops being so just three months later, because a better one takes its place (recall the iPad 3). This frustrates buyers. Maps get changed, plugs are changed, operating systems are altered so that some devices can no longer “talk” to other ones, and the company announces new products on non-traditional launch dates (most recently, an iPad with 128 gigabytes just in time for Valentine’s Day). What all this does is crack the company’s image of stability, bringing it closer to what Apple itself often criticizes: system fragmentation.

4. Rumors: from good news to dire tidings

Ah, how we long for the good old days when an Apple employee would accidentally leave behind a prototype of a new gadget on a bar counter! Whether accidental or not, the rumor campaigns always seemed programmed to create expectation around Jobs’ new show. But these days, the firm’s inner circle is a grapevine that nobody has any control over. Apple’s fabled secrecy used to set the pace for its product launches, and even for the rumors. No longer. A greater dependence on outside suppliers also helps create information leaks regarding new products – once unthinkable – and even about orders and sales figures, all of which results in stock market ups and downs.

5. Apple no longer sets the agenda

Or maybe it does, but the competition reacts within weeks. Apple used to always catch its rivals off guard. As a matter of fact, it didn’t have any rivals. Its first “revolutionary” product, the iPod music player (2001), barely produced any reaction from major competitors (Microsoft launched Zune in 2006); in the case of the second revolution, the iPhone (2007), rival companies took two years to come up with a copy (Samsung Galaxy, 2009); as for the third breakthrough, the iPad (2010), a competing product was out just eight months later (the Samsung Galaxy Tab). If Apple comes out with an iWatch, Samsung has already warned that it has one of its own all ready to go. Meanwhile, this and other rivals keep making surprise announcements for new products such as the gigantic Galaxy Mega, a situation that takes media attention away from the Cupertino company, which once used to hog the headlines. Even worse, a notion begins to take shape: that other companies also know how to take risks. Innovation has ceased to be an Apple patent.

6. Lagging behind in a connected world

If the future is in the internet of all things, what role is there for a system that only talks to other devices of the same brand? It’s clear that what’s needed is an open

system where everything connects to everything else. Perhaps brands like Sony, LG or Samsung, which make cameras, refrigerators, washing machines and television sets, can try their hand at exclusivity, but without home appliances or cameras, it’s an uphill battle for Apple. iOS cannot compete with Android in this field.

7. We’re so sorry, again

The word “sorry” was never part of Apple’s lexicon, but now it is used routinely. And it’s not like there weren’t any mistakes. But if the sound was sketchy, it was the client’s fault for not knowing how to handle his cellphone, or if the flash had a violet tone, it was the user who didn’t know how to focus properly. Apple was infallible. Now, the company is more human, and it apologizes when it makes mistakes, but this also entails losing a certain aura of exquisiteness and quality. In less than a year, Cook has personally had to apologize for mistakes with the maps (true) and for mistreating Chinese consumers (not so true) at the suggestion of the Chinese government. The conclusion: Apple is vulnerable.

8. Either popular or exclusive

Apple always made money. That’s not the problem. It made money even when it only sold one type of computer and had three percent of the market share. Its triple revolution (iPod-iPhone-iPad) conferred consumer star status to a company that already had technological star status. It became the top global company in terms of share value. It also achieved global popularity, but a majority can never think different, as the slogan goes. By definition, being different means being in the minority. Nobody can presume to be both popular and exclusive at once. You’re either part of the masses or the elites. A choice must be made. It is very hard to handle both principles at the same time, like Armani does with Armani Basic. Perhaps unwittingly , the investment bank JP Morgan may have hit upon the solution. The only company to issue a favorable report on Apple last week notes that the firm has so much disposable cash that it could set up another parallel Apple. Hmmmm! Perhaps an Eco Apple?

9. The competition gets tougher

It’s not that the competition copied them – of course they did, after all Apple was the obvious model to follow. Leaders are always imitated. The problem arises when imitators stop imitating. Apple had its designs, its stores, its advertising, its products, and even its product boxes copied. That was a good sign. The bad sign is that there is evidence that other companies are now coming up with different models of their own.

10. One by one, Apple defeats them all

But it cannot defeat them all at once. And that is the situation right now. If Apple introduces more products, at different prices, it means it is competing with more firms. And it’s not used to that. It’s not ready for it, either. Apple could beat Samsung in the battle over the best-selling cellphone, and in fact it’s already winning, but it cannot simultaneously compete with companies making cellphones or tablets of similar quality but 70 percent cheaper, which is what Amazon is forcing it to do with its Kindle, or Google with its Nexus. It is literally impossible to compete at the higher end of the price spectrum with large profit margins and at the same time vie with companies that sell devices at a loss, which is Amazon’s tactic. Apple was used to selling few devices with large profit margins; Amazon would rather sell a lot of them at a loss as long as people buy its content.

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