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Monday, November 30, 2015

Is Apple losing the plot?


Angry investors and bad press have done Apple much damage. Can CEO Tim Cook do anything to pump some pride into what was until recently a mammoth $658 billion-worth corporation? By Steven Philip Warner
STEVEN PHILIP WARNER | Issue Dated: November 30, -0001, New Delhi
Tags : Apple | Steve jobs | Google | Tim Cook | iPhone |

Five months into his tenure at Apple, Tim Cook invited a select group of Apple’s shareholders at the company’s conference center at 4 Infinite Loop building. The idea was to get those investors to understand the company and its new CEO better. In their few and many years as Apple investors, the shareholders had never believed, seen or heard of a calm Apple CEO. Jobs wouldn’t have bothered to entertain a lot of dozen-odd investors, out on a ‘bus tour’ of Apple’s campus. That summer (in August), Apple became the world’s most valuable public company ever (with an m-cap of $623 billion), beating the previous best of $620 billion set by Microsoft in 1999. But that’s when the dream ended.

The past half-a-year has earned Cook a bad name. Today, Apple is battling where it used to crush.

Disappointing reviews of its new launches – MacBook, Siri, Apple iMap – and some grossly misguided HR strategies (like the hiring of John Browett as Head of Apple’s Retail business and his firing in 9 months flat, and the firing and rehiring of Scott Forstall, the man behind the Siri and iMaps fiascos and one who was responsible for failing to make the iOS 5 and iOS 6 seem upgrades to the previous iOS versions) have weighed heavy on Apple’s stock price.

Cook is trying hard to regain lost ground. What is not true is that Apple is dying soon. Each day of his tenure, Cook has added $117.33 million to Apple’s m-cap. In the six quarters gone by, the company has reported a growth in its quarterly revenues and earnings on a y-o-y basis. The topline achieved in the most recent quarter ($54.51 billion; Q1, 2013) was the highest ever in the history of the company. In his year as CEO (FY2012), Apple’s revenues grew 44.58% y-o-y to touch $158.51 billion. Good numbers.

Cook realises that he has made mistakes. If the Siri and Apple Maps were jokes, the launch of the more expensive, thinner iMac, and the iCloud (that works only as well as Maps does) are areas where Cook will have to reinvent.

The form factor and lack of innovation with the iOS 6 introduced on the iPhone 5 and the hardware of the iPhone 5 are two other chapters from which he could dig out a lesson or two. Cook needs to understand that on the OS front, it has to fight with open source forms. One bomb is Android. So what should Cook do? In more ways than one, under Cook, Apple needs to open up. Within 12 months of his becoming CEO, Cook launched the 7.9-inch iPad mini that was 33% smaller and priced about 25-40% less than the iPad. Result? In Q1, 2013, the iPad mini outsold the original tablet 3:1. Today, tablets contribute to 20% of the company’s topline. The same magic needs to be repeated for the iPhone. This needs introduction of larger screen phones and lower-priced models that would give the company more market power in fast growing telecom markets like China and India. There is more to the introduction of the low-priced iPhone – a move that would prove beneficial for Cook and the Apple stock. The low end iPhones that Apple would deliver would call for margins of about 38%. That would be lower than the current 50%-levels that this category contributes, but would have dual benefits of making the company competitive in a tough environment and not dilute earnings at the same time. The right thing for Cook to do would be to introduce such a mid-range quality product at the $320-$340 price range (a low-cost 3G device, with at least 8GB of memory and a hardware similar to the iPhone 5). The low-end iPhone would be an indication if his claim is true.

Additionally, such an introduction would give rivals sleepless nights. As per Credit Suisse, this introduction would also help the iOS capture 40% share in the $300-$400 market. If Cook delivers the low-priced handset soon, when Gartner comes out with its market share findings in Q4, 2013, Apple’s share amongst smartphones will read between 24-28% (currently 20.9%).

In December last, of the 60-plus analysts covering Apple, only one rated Apple’s stock ‘Short Sell’ (as per Bloomberg data). Cook knows that most in the investor community believe it when they hear the sky is falling. It’s over $400 billion-plus in value he puts to risk each time. Cook cannot underestimate competition from Samsung – which is the smartphone leader today and threatens Apple’s dominance in smartphones. Its Galaxy S IIs, S IIIs and the newly launched S4 and the Notepads are ways for the users to consume larger screen phones. Apple could also replicate the Note’s multi-window home screen. It has been Samsung’s best user interface to date. It wouldn’t hurt Apple.

On the OS front, there is much work to be done still. Working along the lines of offering fresh user interface skins with each OS released, offering services web apps (to users who want to access Facebook or Amazon, or YouTube, rather than having to get into the App Store each time), or even doing something similar to Microsoft’s Live Tiles interface (that provides updates from web services to users without bothering to open apps) could be a start. Cook has to self-disrupt the closed world of iApps to an extent.

Finally, there is a big PR problem that Cook has to deal with. And it all starts with flamers and fanboys offerings concerns about Apple’s lack of innovation. At present, Apple spends the least on R&D and absolute terms amongst all bluechip Silicon Valley giants. It spent 2.2% of its topline on R&D in FY2012, as compared to Google, Cisco, Microsoft & Oracle – all of whom spent in excess of 10% of their revenues on R&D. Cook could divert a couple of billion dollars more into his labs and avoid another Maps or Siri debacle.

Cook's top job will be to not change Jobs' Apple while changing all that is necessary. It is time his company stock starts the upward travel. Buyers, investors, insiders and press cameras are waiting for that smile that they once saw in 2007 – when the world saw the legendary iPhone for the first time. Problem is – Apple may not be able to replicate that magic again. Not in the near future.

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Issue Dated: Apr 27, 2014