Is Apple Losing It? – Part II

My last column on Apple’s current troubles generated a good deal of harsh feedback – and that’s OK. But the evidence for troubles in Appleland is building.

By Craig Mathias on Mon, 01/14/13 - 10:23am.

My posting of late October on Apple's pre-announcement of the new iMac produced the kind of criticism that  one must expect these days, having a tone that would frighten the thin-skinned right off the Web. My skin is rather quite the opposite, and, as an analyst, it's my job to predict the future, not state the obvious today. And, as the future often takes a while to get here, such predictions can look, um, flawed in the interim.

Or not. Here we are, just a couple of months later, and Apple appears to be dealing with more self-inflicted wounds. There are credible reports this morning that Apple has dramatically scaled back orders for components for the iPhone 5. Dramatic in this case means, by the way, by half. That's serious trouble.

I'm not one to spread rumors, but it appears that this story, among others, does indeed represent reality. But how could this happen? Before we go too far with the Tim-Cook-is-no-Steve-Jobs analysis, let's agree that that such is indeed true, but largely irrelevant. Apple has painted itself into a corner by focusing only on high-margin, high-cost products, akin to the strategy applied by sellers of high-end home entertainment systems, automobiles, kitchen appliances, and whatever. This is exactly the Steve Jobs strategy - sell value, and that's a good thing. But as the high-end saturates, and, in terms of smartphones in established economies, we're rapidly getting to that point, what should a supplier in that space do? Building lower-end products might cannibalize sales of the cash cows, and the resulting lower overall margins could drag down the stock price. Losing it, indeed.

Well, the stock in this case is already going lower, well off its $700 high of last year and down about $20 as I write this. As I've often said, if one doesn't eat one's own children, the market will. And it's pretty clear that the iPhone end of the business requires adjustment - and soon. The Android competition is fierce; as I wrote in the Network World 2012 Holiday Gift Guide, the Samsung Galaxy S III is, IMHO, superior to the iPhone in a number of dimensions and Android really is an excellent OS with no real compromises over iOS. There has been talk of a lower-priced iPhone model, and I think this is a very reasonable strategy to address emerging markets. But what features one might leave out would be hard to know. Think about this - Apple gets a great price on those cool retina displays it just cut back on because it buys so many of them. So that cutting back, coupled with perhaps using a cheaper screen for lower-end models, might therefore be self-defeating. Easy answer? Not here.

I'd even go so far as to offer that the situation might not be all that different had Steve Jobs pursued a western-medicine solution to his illness and survived to continue to lead the firm. My personal belief is that Apple must do everything it can to defend the premium brand it has built. This includes improvement in managing demand (especially goegrpahically), broadening existing product lines (lower prices need not imply lower quality, and lower margins do not necessarily mean less revenue or even less profit), pursuing complementary product lines, adding complementary service offerings, and cutting costs. Bad press doesn't help, but it's certainly not fatal here. Apple, at day's end, is a business like any other. There's no magic here. And, while they've got a lot of work to do if they are to avoid really losing it, I think they can.


About Nearpoints

Mathias is a principal at , a wireless advisory firm in Ashland, Mass.

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