Apple’s Weakest Link – Consumer Service Business Wins on Volume; Expensive iPhone Not Helpful

Apple’s Weakest Link – Consumer Service Business Wins on Volume; Expensive iPhone Not Helpful

Apple is a company that differentiates on hardware within exclusive software. What makes Apple so unique is narrowing, and I expect the core feature differences to disappear by 2021, essentially two iPhone evolutions away. Android devices are very close. You may even argue that we are already there.

Every fashionista passes because it is a trend: spending $1,000 on a mass market phone will not work if there are good alternatives at $700. The finite hardware maturity improvement will catch up with Apple. Since it cannot claim it has the exclusivity to software innovation with Google Pixel and Samsung Galaxy coming along, not many will spend $1,000 for a phone. The major down-projection of iPhone X sales is a testament that others are rising even as Apple innovates. As uniquely Apple, the company deflected the problem to China last night.

Apple CEO Tim Cook released a statement, warning investors Wednesday that the company is lowering expectations for its first quarter 2019 performance: “While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China. In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.”

If you are an Apple investor, do not fall for that explanation above. Yes, Apple has a very big problem in its business model: you are transforming into a service company, and at the same time you want to stay premium on your hardware, restricting volume..

Simply, the company is making it clear that its future is going to include services. So, if you hold Apple stocks because of iPhones and iPads, you may have to reconsider. By dropping the disclosure, Apple wants investors to focus on its revenue bottomline and not the number of devices sold. As far as the company is concerned, if it can grow revenue through payment, apps, licensing, etc, investors should not overly care what is happening on hardware as the company transmutes into making services a key part of its future. Simply, Apple has gone Services.

As I have noted before, Apple needs to make very cheap iPhone so that more people can use its hardware to participate in the services. You do not expect to have huge volume when your hardware is very expensive. It is either you focus on selling expensive hardware or you expand access to improve the number of people that can participate in the services through affordable hardware. Apple has no service future if it plans to thrive in services with very expensive hardware like we have today. Simply, it needs a cheaper version!

Yet, Apple has to be very strategic in its pricing. My suggestion is this: increase the price of the highest version of iPhone to $1,200 and make it more premium. And then introduce a phone brand called Apple and make the price $350. Make the design of Apple (the phone brand) to be radically different so that you do not cannibalize the premium iPhone. By having these two brands, Apple can compete in both the upper and lower segments of the markets. We will have Apples in Nigeria while they will sell their iPhones in New York. This is similar to Toyota selling Lexus and Honda selling Acura.

Fortune in a newsletter captured these elements thus.

In a blab-fest worthy of Dr. Phil, Apple CEO Tim Cook issued a 1,370-word letter to investors about a surprise 5% revenue drop, then went on CNBC for another 15 minutes of excuse-making.

Instead of bringing in $91.5 billion in the holiday quarter, as Wall Street analysts expected, Apple’s revenue totaled just $84 billion. That’s down from an all-time record of $88.3 billion a year earlier. The main culprit was slipping sales in China, Cook said. Apple’s stock, already down 30% in the past three months, fell another 9% in morning trading on Thursday. That pushed Apple’s market cap below those of Amazon and Google. (It was already trailing Microsoft .) But Apple’s CEO said he remains “confident and excited” about Apple’s long-term future.

[…]

Recommended reads must start with Bloomberg columnist Shira Ovide, who chastises Cook for not warning investors years earlier about the forces conspiring to stall smartphone sales.

Apple would be fine but it needs to understand that services win on volume, and it is time it adjusts strategy to grow user base with cheaper devices. If not, the revenue will be dropping from here.

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