Apple feels the tech transition heat

The blind spot in most Apple analysis has always been the notion that it is a hardware company.

Apple, iPhone, Mac, iOS, market, Services, Supreme Court
REUTERS/Stephen Lam

Supplier rumor combined with Apple’s decision to stop revealing iPhone sales data may have hurt the company’s notional market cap a little, but company watchers should think a little more deeply.

Is it business as usual?

Numerous data points ostensibly emerging from inside the Apple supply chain seem to claim the company’s iPhone sales aren’t hitting targets.

Analysts were disappointed with iPhone sales figures (46.89 million vs. predicted 47.5 million), they were delighted with company revenues, and Goldman Sachs cut its Apple price targets three times.

Goldman Sachs analyst Rod Hall warned clients Apple may have “miscalculated” with the iPhone XR, citing weakness in demand in China and a stronger U.S. dollar as contributory factors to perceived weak sales.

To be fair, iPhone XR enjoyed only a few hours of sales in the period.

But is this an Apple problem or an industry malaise?

Think local, act global

I think it’s the latter, as global instability in some of the world’s biggest markets is changing consumer purchasing patterns even while the increasingly high prices of smartphones and an increasingly saturated market means many of us now plan to hold onto our devices for longer.

(Apple knows this, too, which is why iOS 12 supports devices as old as the iPhone 5S.)

There’s evidence (of sorts) to support this.

Analyst firms Strategy Analytics and IDC data both characterized global smartphone shipments as falling for four consecutive quarters. Within this, Samsung has declined while Chinese manufactures Xiaomi, Huawei, and Oppo have increased market share. Apple has stood relatively still, which suggests its highly satisfied customer base will take a little convincing to move.

The rub is that while Xiaomi’s most recently disclosed results showed good health, analysts remain concerned that in order for the Chinese firm to maintain momentum, it must introduce premium devices and take aim at new markets.

(Apple’s seeming failure to so far expand its reach in key markets India and Brazil is also regarded to be a weakness by Wall Street.)

The bigger picture

Beyond a certain point, these are not Apple’s problems.

The current U.S. administration’s tariff-based trade war against China and its recently launched campaign to persuade its allies to avoid using devices from Huawei probably are.

With the vast majority of smartphones (and most other devices) worldwide now manufactured in or by firms based in China, increased tension is highly likely to create big problems for the entire tech industry.

That much-reviled and repudiated Bloomberg story concerning Apple servers theoretically hacked by China should be seen through this lens.

It’s arguable that the recent sell-off across technology stocks is more a reflection of these wider tensions. It may not be solely attributable to investor sentiment in response to Apple’s well-executed strategy to increase both the cost and the quality of its devices while also generating 17 percent of its revenues through its rapidly expanding Services segment.

Apple’s decision to focus on Services may also prove a shrewd move in the event hardware sales or supplies are impacted by any increase in international tensions.

After all, you can access these services on older Apple devices, devices that are already light years ahead of their competition, particularly those of its products that use its powerful A-series chips.

When it comes to services, Apple may still be damaged by this case, which I think potentially damages its margins in this segment.

Apple is a software company

The blind spot in most Apple analysis has always been the notion that it is a hardware company.

It isn’t.

It’s a software company that happens to make the hardware its software runs on.

Applications, services, developer tools, and operating systems are all fundamental to the company’s success. The move to adopt Unix, NeXT and the introduction of OS X were fundamental building blocks upon which, brick by brick, it has since built its future.

More recently we see it moving to design, develop, and manufacture an increasing number of the most essential hardware components it uses inside these devices.

Indeed, at this point the company seems to have taken control of a huge chunk of the most essential components used across its existing devices. And in each case, that control means the company now has the opportunity to create unique new product families based on its own software and those components.

What devices can you imagine that need lightweight but powerful graphics, application, security, or machine-learning chips?

Apple now owns some primary technologies on which to build the software to make these as-yet unknown machines run.

Smartphones are great. Everyone's got one. What’s next?

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