Apple in Search of the Next Big Innovation

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Today Apple released its Q2 2014 financials (the webcast quality was awful on apple.com. I could hear only every fourth word on my super high-speed Internet connection). Predictably, all the doomsayers are out in full swing. For weeks, why even months, we have analysts coming out with dire predictions on Apple’s declining iPad, iPhone sales and profitability. When the iPhone 5 was launched, critics said it marked the end of Apple’s innovation. Today’s results show that things are not as bad with Apple posting a quarterly revenue of $45.6 billion ($43.6 billion in Q2 2013) and quarterly net profit of $10.2 billion ($9.5 billion). iPhone sales were at 43.7 million, beating market estimates of 37.7 million for the quarter.

The guidance for Q3 does not seem so positive though. I do believe that Apple got away with no new product innovations this quarter and the analyst claims are not entirely unsubstantiated. However, exactly when we would see a visible decline in growth if Apple maintains the same pace of innovation is debatable.

Keeping revenues and profitability aside, the real question here is, can a company continue to sustain being an innovator? Apple was no ordinary innovator, but was very disruptive in each of its new markets, whether it was the phone, the tablet, music player or digital music distribution. The rules of play for each of these industries changed after Apple’s entry. The closest comparison I could think of is what Google did to search, email and to some extent the mobile OS market.

Apple’s Shifting Customer Base

I want to cite an example from a workshop that I attended a long time back, on what kind of customers that innovative companies typically want to go after:

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Picture Courtesy: IDEO
The bell curve is where the extreme users are. However, the classic problem Apple faces today is that this bell curve is not a constant. It is dynamic, it shifts. Customers change and so do their choices. Understanding the pace of shift and addressing it is easier said than done. Jobs was a master of that art.
I have heard arguments that people have had ‘too much of Apple’ products. I don’t think that is true. They have had too much of the ‘same’ Apple products. Innovation on the iPhone slowed down after the 4S. It declined dramatically with the 5C where Apple’s value proposition was the different color themes of the plastic casing. The novelty of the iPad is wearing off as larger-screen smartphones are invading its space. Different form factors and retina display may no longer be enough to save a quarter.
Samsung and the Culture of Commoditization
The Samsung price-value differentiation is resonating among younger customers even in developed countries such as the US where Apple has more than 40% share of the smartphone market. Samsung is seeing a high growth trajectory among the more price-sensitive emerging markets such as India, the second largest for smartphones after China, commanding ~45% market share while Apple gets bundled in the ‘Others’ category. In China, Apple’s iPhone sales have not been too encouraging and its huge subsidies are impacting the carrier, China Mobile, according to Bloomberg. Apple’s answer to Samsung’s commoditization of the market was the 5C, which did not resonate well with people like me who believe that Apple is sacrificing its uniqueness and brand value for market share at the lower end of the value chain.
What Next for Apple?
Where would the company go from here? Is it going to be the thinner, larger-screen iPhones that will bring new growth? Would product extensions be enough to avoid the imminent plateauing of growth in sales and profitability? I don’t think so. 
Will it be the elusive iWatch?   The company needs to come out with something that is disruptively innovative and neither of these two impress me as even innovative. There have been few speculations on what else it could be, Apple entering the health & fitness market and the world of television. I am still skeptical. If people like us could second-guess it, it wouldn’t really be ground-breaking and disruptive, would it?
These are the moments when I, and I bet Apple too, miss Jobs the most.

 

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