Is Apple Losing It? - Part III

Let's turn to the real problem here – Apple's had a run of great products, but what will they do for an encore?

OK, so the stock market really has very little do with reality on a day-to-day basis. And the precipitous fall in Apple's share price yesterday has a lot more to do with Apple coming in just a tiny bit short on financial results vs. analyst estimates than it does relative to overall financial performance, which remains excellent. The problem, then, one might conclude, has more to do with mis-set expectations (including those looking forward) than any fundamental flaw in the business plan. At, what, 7X EPS, and with the overall consumer (Apple's #1 target market) economy improving, and with a mountain of cash, Apple's clearly a buy, right?

I'm not a financial analyst, but I think, based on that reasoning, they just might be. On the other hand, a very clear and, I think, appropriate criticism that has been leveled at the firm is that meaningful, differentiating innovation appears to be slowing if not lacking altogether. Innovation is what drives valuation in high tech (just look at Microsoft if you want to see one possible outcome here; that stock has done nothing for 10 years!), and I think it's fair to say that recent product announcements have been small and incremental - a slimmer iMac, an iPad with a new connector, a slightly faster processor here, a little bigger or smaller screen there. Apple's product line is really quite compact, and the company must therefore keep each and every product in tip-top condition relative to the competition and especially customer expectations.

Of course, many of Apple's customers will buy whatever Apple decides to ship. I'm one of them. I just bought a new Mac Mini - Farpoint Group will remain a Mac shop until LibreOffice or OpenOffice or whatever that is can really replace Microsoft Office, or until we move entirely to the cloud, which could happen with (gulp) Office 365 and some assurance that the associated cloud security meets our standards and policies. I'd be perfectly happy with a Galaxy S III in place of the iPhone 5 I normally use (I got the iPhone because of fundamental compatibility with the Mac; as the latest version of iTunes refuses to sync the two over USB, perhaps my faith was misplaced). The Nexus 7 tablet is superb. I'm not a fan of iOS, considering it to be a sandboxed toy and not a real, business-class OS. Jeez, if Apple isn't making me happy, what's going on here?

The answer is that Apple will continue to move away from computers appropriate for business and towards appliances suitable for consumers. That's where the margins and easy sales are - iPhone margins, for example, are much greater than those for the Mac. Incremental enhancements are in fact often all that's required when one has the best consumer marketing organization in the business (they could indeed sell ice to Eskimos, and iOS-equipped space heaters in Hell, as the sayings kind of go), and they have the retail-oriented distribution channels suitable for bringing even more consumer products to market. I can see them selling not only a line of TVs (yes, more than one) with iOS built in, but also entire home entertainment, automation, energy management, and security systems and services, just to name a few possibilities. Coupling that with the media they already sell, and adding such elements as banking, insurance, and who knows what else, and you've got a rival, in concept and on a slightly different playing field, to Amazon itself - big-dog dominance regardless.

So, relative to now, Apple is indeed screwing up. But, in the long run, it won't matter. The company will play an even larger role in the lives of consumers - and globally - over the next few years. I can even see the day when the Mac disappears, replaced by iOS clients accessing an Apple-provisioned cloud-based everything. Yes, they are losing it. What most people have yet to understand, though, is that what they are losing is baggage that they, from a purely financial perspective, really don't need.

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