There are a bunch of stories that signal the timing for an Apple shift in strategy. Some numbers from Apple tell that the 'next iPhone' has not materialized (iPad, Apple Watch) and the old businesses have more-or-less peaked (Mac, iPod) and now we are possibly on the verge of 'Peak iPhone'. If the iPhone business also stops growing in unit sales - I do not mean grow market share in iPhones, that stopped several years ago (and this blog was the first to point it out) but I mean, actual UNIT sales of iPhone will ALSO peak at some point in the future (or may have just now peaked). That too is inevitable, only a question of time. The iPhone is a premium phone brand, it will not be sold to everybody with a phone: it is too expensive for that. It means, literally, that there will have to be a limit to annual unit sales, that the iPhone can achieve. And we are now close to that final limit. I personally don't think they've yet hit the absolute peak iPhone but they well might have. And even if they still manage to grow this year vs last, then very soon, possibly next year already they will stop growing and indeed, we would have reached peak iPhone. But even if Apple is able to magically create five years more of tiny growth per year vs last, they will hit their peak in the coming years. That is inevitable. Peak iPhone is imminent.
Then Apple needs one of four things. It needs to either grow the iPhone into where the market has grown (lower cost iPhones, that could cannibalize iPhone sales, revenues and profits); or invent a 'new iPhone' type of product category (I advocated for the iCamera to be that). Or they have to adjust their strategy from pursuing unit sales to pursuing higher revenues from the same sales (raising prices - this usually means lowered sales, however). Or fourth - they could change their strategy from pursuing unit sales, to pursuing increased profits. Make more profits per device sold. Then even as their overall market has stopped growing, they could still bring more value to shareholders, by delivering better profits. Bearing in mind, that Apple is already the most profitable company that has ever existed in human history, this would be quite a thing haha, but that is the fourth option. These are not 'mutually exclusive' options, Apple could try more than one of those simultaenously, of course.
Now the immediate next step from Apple seems to be breaking the $1,000 price barrier for the iPhone (ie option 3, raising revenues without increasing unit sales). Note, this also is a strategy that was first offered on this blog (at least, first that included any scientific analysis ie offering the current handset price pyramid, and ilustrating that strategically, it was possible for a premium handset maker like Apple, to raise their prices. In other words, that I felt there was a market segment of consumers who would be willing to pay up to $1,000 for a new iPhone, when new iPhones back then cost about $600 a piece - excluding the handset subsidy of a 2 year contract of course. All prices that I talk about on this blog are the real price, not the fake subsidised price distortion that is still in use in some countries like the USA). So yes, sorry about that, you can blame this blog for at least partly contributing to the direction that we suddenly got a few years ago, when top-end phones started to be priced at ever higher levels... So in terms of this 'strategy' of suddenly 'alarmingly' high prices for iPhones, yes, this blog argued that strategy first (at least first, when supported by current market data of handset prices). If Apple do now release an iPhone 8 at the 999 dollar or above price, then yes, this blog has once again, predicted correctly the direction of Apple's iPhone strategy's near future. So what are you thinking next, oh Sage Tomi? Haha. Lets take a lesson from history. A painful one.
WHEN YOU ONLY HAVE A HAMMER
So, first the warning. If the only tool you have is a hammer, you tend to see every problem as a nail. My background was strongly influenced by my last full-time employment at Nokia HQ (I left 16 years go) Yes, I've been a consultant, analyst and author ever since, and worked with almost every player in the industry but in some ways, you can see throughout my writing, that Nokia plays a disproportionate part in all of my analysis. I tend to see lessons from Nokia in various developments we have in the industry. So just a word of warning to start off, I will yes, make a Nokia analogy here, and it may just be that I am foolish about now having that hammer and seeing any problem as 'Nokia happening again'. But don't worry, this is not about Stephen Elop the most incompetent lunatic CEO ever to run any company (and to destroy it). This is about the decade that came before Elop. This is a lesson for Apple of how Nokia approached a very similar situation in the same industry.
So you like Apple today? Biggest mobile company by revenues and profits. The most valuable company in its industry (actually, most valuable company of any time in any industry). Recently made a management change, its iconic CEO is now gone. The market share growth has stopped, stalled and turned into decline, but the company easily makes the biggest profits of any rival in its industry. Now consider Nokia only twelve years ago. Nokia was the world's largest mobile company by revenues and profits. It had the largest market share of all phones, but its market share had peaked. Its iconic CEO was scheduled to soon quit, and a successor was being groomed already. And Nokia announced that it will stop pursuing market share growth, it would shift to pursuing profit growth instead. And part of this shift, was to move from lower-cost 'featurephones' ie 'dumbphones' to the new highly-profitable 'smartphones'. Also Nokia wanted to sell its very low-profit networking unit (that part which today remains, as Nokia later was forced to sell its total handset business to Microsoft).
Initially Nokia's strategy worked well. For a few years. It continued to make incredible profits, and through two world recessions, Nokia was the only full-portfolio handset manufacturer that was profitable in its handset unit in ever quarter. Every other full-portfolio handset maker rival of Nokia at that time - from Motorola to SonyEricsson to LG to Siemens to Samsung - reported losses in their handset unit, at some point in those world recessions (I am ignoring what back then were tiny specialist smartphone makers like HTC, Blackberry and Apple). But not Nokia. Nokia was SAFELY the most profitable of its industry. And even as Apple would climb to take third ranking in smartphone sales (and fourth place overall in total handset sales), and Apple prodcued bigger total profits in handsets vs Nokia, even then compared to ALL of its MAJOR rivals (full portfolio handset makers, those who made mass market dumbphones as well as the new modest-scale premium smartphones) ie Motorola, SonyEricsson, Samsung, LG etc - Nokia towered over all those with its profits. Only Apple - which soon would become the most profitable company in ANY industry - only Apple made bigger profits in selling only smartphones. Even then, Nokia sold more than twice as many total smartphones as Apple sold iPhones. So yeah, Nokia in purely 'smartphones' when measured against Apple - had fallen to second place in profits - but vastly outsold Apple in total smartphone units. This is not 'failure' at Nokia. While yes, Apple was besting Nokia in profits.
But now consider how the strategy went, and how the investors took this strategy. Initially, the investors loved it. Yes, their favorite tech brand (before Apple, Nokia was THE tech brand in the mobile sector. The nearest thing to a 'guaranteed' investment. Time and again, the Nokia share was split, and Nokia value just kept climbing and climbing, until it became the most valuable company in mobile, as well as the most valuable company in Europe. And Nokia could do now wrong. It had a conservative management, that always gave the truth on whatever was happening, good or bad. And it always was cautious in reporting what was coming up. Then in its quarterly results, it would tend to match or slightly beat what was the expectation. And if you invested in Nokia in the late 1990s or early 2000s, you could not fail. Any mid-term or long term investment in Nokia, as long as you only eliminated the regular cyclical down-turns of the economy - then Nokia was the best investment of the major tech brands you COULD make, in mobile (until Apple).
So Nokia overtook Motorola to become the largest handset maker in 1998. Then Nokia went on to own a third of the handset market, and then it came close to 40%. And then Nokia CEO (Jorma Ollila) announced that Nokia would not pursue market share anymore, but would pursue profit instead. And what happened after that? For the rest of Ollila's career as CEO, and all through the next CEO Olli-Pekka Kallasvuo, Nokia continued to be profitable in its handset division - in EVERY SINGLE QUARTER. Where all of its major rivals stumbled. Nokia continued to produce the biggest profits vs any other 'global major' brand in handsets, ie a full portolio handset maker - and Nokia which still of course sold more dumbphones than smartphones - was making bigger profits than most PURE SMARTPHONE makers like HTC or Blackberry. Only Apple with its iPhone, grew to make more profits as a pure smartphone maker.
But now, as Nokia was focused on profits, "not market share" - what happened to market share? It started to decline. And then EVERY QUARTER the market share number was down. There could be a tiny blip, one quarter, where it might tick up a bit, but then it was again down. While total REVENUES grew, and Nokia reported the best profits of the (full portfolio) handset peers, the market share news was 'negative' every single time Nokia was in the news. And that - inspite of good profits EVERY TIME - and often Nokia RECORD profits time and again - the market PERCEPTION changed from Nokia being a winner, to Nokia being in trouble and a loser.
Before Jorma Ollila's announcement of focusing on profits, there was no end to Nokia's share price growth. After that announcement, shortly thereafter comes the Nokia price peak and then it never recovered. The share price started to tumble, and then it tumbled, and then it tumbled and then the new CEO was replaced with another new (idiot) CEO and the Nokia share price started to collapse and it collapsed further and further. After a decade of astonishing growth, came nearly a decade of ever worse decline.
Does this sound familiar? Is Apple now telling us, we won't worry about unit growth or market share (anymore) and we will rather raise our prices sky-high and pursue high profits instead? There is no 'next iPhone product' to save Apple. The new iToys like Apple Watch are in fact, failures. And now the only way forward is to make bigger profits.
PARALLELS ARE VERY CLOSE
Apple is the most profitable company in mobile, which previously built its size in an adjacent tech field (computers). Nokia was the most profitable company in mobile, which previously built its size on an adjacent field (telecoms networking hardware). Apple has seen its market share peak. Nokia saw its market share peak. Apple is seen as invincible and unbeatable. Nokia was seen as invincible and unbeatable. Apple seems to be now shifting its focus from caring about unit growth, to only focusing on profits (the news is that the first run iPhones made at Foxconn will be less than in previous years, only 5 million units - this suggests that Apple may try to squeeze maximum profits out of a shrinking market). Nokia openly announced it was shifting from a unit growth/market share strategy to profit strategy.
So first, it is quite possible that Apple is able to grow its unit sales for Christmas and raise its prices for the iPhone 8 and get gargantuan profits while doing so. It is also possible that Apple has some wonderful features or new tricks they've prepared in secret for us, on the iPhone 8, that it becomes a massive hit phone. So say it cures cancer, has teleportation and time travel. That kind of things. But if the iPhone 8 is 'just another iPhone' - it IS facing ever stronger competition. Samsung for once is not stumbling with explod-a-fones. Huawei IS gaining on Apple. An ever more dangerous field of powerful rivals from Vivo to Xiaomi is joining the usual gang of LGs and Lenovos. Even Nokia is making a noisy come-back. If the iPhone 8 is 'only a regular' update, and not something spectacular to celebrate the 10 year anniversary of the iPhone, then this Christmas season for the iPhone could be far more challenging than usual. And that is BEFORE we consider the raising of the price.
I said when I told you that iPhones could raise their prices, that the optimal time to make that jump was, when the iPhone would do its phablet models. Not now. Today, if Apple does not have something CLEARLY SUPERIOR in the next iPhone, then a big jump in the price would seem like price-gouging. Being greedy. Milking the iSheep. And Apple could face some backlash. I am not suggesting that Apple FANs would stop buying their next iToy, obviously. They are safely brainwashed into the iCult. I mean the undecided consumers, that will make the difference between an ok Christmas 2017 for Apple or a great Christmas.
So if the iPhone 8 is not 'revolutionary' and radical and supremely desirable, but it suddenly jumps the prices up massively - then all economists suggest that it should mean lower sales (increased price = lower sale; reduced price = increased sale. Basic Economics 101). Now if the rumors are true (Foxconn gets reduced early orders for iPhone 8 and iPhone 8 price jumped to about $1,000 and also the rumored specs of the iPhone are true (nothing exciting coming) - then we could see a 'disappointing' Christmas Quarter for the iPhone - followed by an EVEN MORE disappointing FIRST Quarter 2018 (January-March quarter, calendar quarter, I am not talking of Apple fiscal quarters). Because First Quarter (Jan-Mar) is driven by Chinese gift-giving season. If the Chinese feel that hey, the iPhone is a rip-off, and far better phones are available - including their beloved Nokia - then many who otherwise were buying iPhones in the recent past, will suddenly abandon the iPhone for Chinese New Year gifts, and the China sales in early 2018 will be ALSO DISAPPOINTING.
And suddenly, Apple would have TWO CONSECUTIVE bad quarters of press. The market share is in decline, the unit sales are in decline, the quarter AND ANNUAL sales of iPhones fell - against most analysts' early predictions - and this all would create an echo chamber that suddenly spells 'doom' to Apple. While it generates obscene profits (remember, Nokia generated record profits too). Now what if some other player (Google, Facebook, Amazon) suddenly reports exciting growing profits and becomes the 'new tech darling'? Apple COULD see the same kind of decade-long decay and decline like Nokia did, where soon the shareholders will demand Tim Cook be replaced (because he is no Steve Jobs) and they start to demand ever more 'new strategies' that eventually in Nokia's case led to the hiring of madman Stephen Elop and his suicidal Windows strategy for Nokia.
THIS IS THE CERTAIN PART
Some of this is warning from history. History doesn't repeat itself, but it rhymes. Apple could 'do a Nokia' and I don't mean the death-of-Nokia like Elop, I mean the 'loss of trust' Nokia that was the years of Olli-Pekka Kallasvuo. Even as Kallasvuo precided over every single year a profitable Nokia, only one QUARTER did he see a quarterly loss, and that was not in the handset unit, that was in the networking unit (after it had bought Motorola's loss-making networking unit, and this during the worst economic recession in our lifetimes). So Apple could shift into a period where every year, and most quarters, Apple reports declining iPhone Unit Sales (and market share) with no 'next iPhone' success in sight. And while Apple also reports concurrently astronomical profits, the investors become ever more gloomy and alarmed, that the iPhone is heading towards the dangerous 10% market share level. And then old Apple investors remember the Mac vs Windows wars, and how Apple was on the brink of bankruptcy in 1997 yes literally only 20 years ago. They say that which goes up, must come down. It is far more likely that an Apple share value peak is upon us (soon) than somehow Apple ignores all economic history and lives in an alternate economy and just keeps breaking all the rules. If Apple openly, or just by its actions, shifts its strategy from pursuing unit sales growth and holding market share, to a declining unit sales and plunging market share (in a market that is still growing, mind you!) then I think it is inevitable that at some points, Apple investors will revolt and say, I don't want you to go to selling one iPhone that costs 50 Billion dollars, per year, to one silly mega-billionaire. I want Apple to be viable in the future and must go back to growing market share.
And THAT will be the death-nail. Because being a profitable niche-player is incompatible with being a mass market leader. If the investors accept the Apple new strategy, then that is ok. But they will be hearing perennial bad news, every single quarter, how Apple is down to 13% market share. And then down to 12% market share, oh, and Huawei is now number 2 and Apple fallen to number 3. And then Apple is down to 11% market share, and someone else, like Vivo or Xiaomi or Gionnee is now chasing Apple for that number 3 slot, and then Apple is at 10% market share and so forth. That to me, sounds like the malaise that hit Nokia in the late 2000s decade. Remember, Apple will not be number 1 to begin with. SAMSUNG will easily be the biggest smartphone maker - and Sammy will also be profitable almost any quarter that it just doesn't deploy pocket explosives to its customers. Some investors will hark to the days when the iPhone was larger than Samsung's smartphone biz (has happened in 2 quarters in the past 6 years) and now they observe that Samsung is more than twice the size of Apple and even Huawei is 30% bigger.... Then Apple reports numbers where the iPhone market share is at 9%....
I don't think this is a strategy that is long-term sustainable. I think it will doom Tim Cook. Now, many MANY things can happen in the interim. Imagine a 'new iPhone' product like what initially the iPad looked like and what many hoped the Apple Watch would be. Maybe something like the iCamera. And its possible Apple shifts to a 'broad portfolio' premium smartphone strategy, especially as they eye India - releasing lower cost iPhone models to hold onto more market share. Even then, they are a premium brand. They cannot get back to 20% market share. Huawei has the reach, but a far broader portfolio - it is only a matter of time when Huawei passes Apple for second place. And when THAT happens, I think the alarm sets in. That 'oh my gosh, Apple is not invincible' and then - the hope and hype built into years of iHysteria would come out, and Apple could see years of unending value decline.
And on that note... what ELSE could Apple possibly do? They have by far the world's largest consumer segment ever to go for a niche premium-priced product. Steve Jobs promised 10 million annual sales of iPhones. That was laughed at by most insiders of the industry as utterly poppycock (not me, this blog calculated how they could achieve exactly that in their first year). But look at Apple's enormous success. They now do 20 TIMES that level of sales in a year. A level which was seen as ridiculous as a goal, set by Steve Jobs ten years ago. What else COULD Apple do now? They have nowhere else to go? They can't turn the premium iPhone into a discount brand to compete with say Samsung in scale. Their ONLY way is to now secure the maximum possible profits out of this level of customers. But if Apple iPhone sales have now peaked and they start to raise prices - that is it. There will be no more organic growth left for the iPhone and iOS. That is then acknowledged also at Apple, if not explicitly, then implicitly by their actions at least.
Now just to remember. There was a time when TomTom was unassailable in GPS. Or when GoPro was the huge success in camera tech. Or when the iPod was the music player that could not be defeated. Microsoft, gosh Windows, was supposed to be such a powerful digital powerhouse it would never be toppled, yet Android took the (pocket) computer market as easily from MIcrosoft, as taking candy from a baby. (Granted, Steve Ballmer is a big baby). But just because RECENTLY Apple seems to be doing nothing wrong.. that is EXACTLY the same feeling we had of Nokia 12 years ago. And just 20 years ago, Apple was on the brink of bankruptcy. If Apple can sustain a passionate fan-base of iSheep who buy every iToy and stand in line for the whole night to get their next iFix, all is good. If Apple starts to push silly iFailures at those consumers (Apple Watch? Seriously?) how long will that passion remain? It will certainly stop GROWING. and if Apple's only response then, is to resort to ever more expensive iToys to keep profits growing - that means at some point, most sensible people will abandon the iTax and go to normally-priced better-value sensible products. But if the GROWTH ends, then magic of Apple seems to have burst, and that will be blamed on Tim Cook (and probably also on the price-gouging strategy too, especially if there are other devices coming like Apple Watch that seem only to be made to milk profits from iSheep).
I am not an investment advice blog .But for this blog article, I will be very 'liberal' in allowing discussions of profits and shareholder expectations into the comments (usually those topics are forbidden). Please readers, don't take advantage of this in today's evaluation talks. Limit your views to 'long term' investment views, not today's market status, ok?
Because of the lesson of Nokia, shifting from 'market share strategy' to 'profit maximising strategy' in this VERY same handset industry. And because of Apple apparently getting ready to try that same shift, I wanted to write this blog as a warning. I do think that would be short-termism and foolish and not sustainable. But I also think Apple will do that next. The signs strongly suggest it is what is coming from Apple in the coming months. What do you think? Lets talk in the comments.