Apple looks to put down roots for the next decade

October 29, 2013 8:39 am

Apple looks to put down roots for the next decade

By Tim Bradshaw in San Francisco

Exactly a year ago Tim Cook stamped his mark on the company he inherited from Steve Jobs – after less than 18 months as its full-time chief executive, he instituted thebiggest reorganisation to Apple’s executive ranks in years. Out went Scott Forstall, a loyal Jobs ally who had headed iOS, and John Browett, retail chief. Up stepped Sir Jonathan Ive to oversee design in both software and hardware; Craig Federighi to become head of iPhone, iPad and Mac software; and Eddy Cue, who added the troubled Maps and Siri voice assistant to his responsibilities as services chief.Apple pledged that the changes would “encourage even more collaboration” between its hardware, software and services teams.

The year that followed has seen Apple improve its product execution but only just begin to produce the more prolific innovations that Mr Cook vowed would flow from greater teamwork.

Ben Bajarin, analyst with Creative Strategies, points to promising signs in the iPhone and iPad’s 64-bit A7 chip and iOS 7 operating system. “The last year was about setting the foundation to build upon for the next decade plus,” he says.

The iPhone and iPad continue to sell in record numbers and remain among the best-selling devices in their categories. Apple sold 33.8m iPhones in the three months to the end of September, including less than two weeks of its latest devices. That compares favourably with Samsung’s flagship Galaxy S4, which has shipped 40m units in six months.

But Apple’s overall market share is shrinking thanks to the vast array of competing devices from Samsung and other rivals, critics say, and it is taking its toll on growth.

Monday’s financial results for its fiscal 2013 year showed an 11 per cent year-on-year decline in net profits, compared with 61 per cent growth the previous year. Annual revenue growth has slowed from 45 per cent in 2012 to just 9 per cent.

Wall Street analysts say, however, that Apple is turning a corner, and predict growth will resume next year. UBS forecasts that Apple will return to double-digit earnings growth from the March quarter, totalling 15 per cent for fiscal 2014, even though annual revenues are projected to be a more sluggish 7 per cent before rising to 10 per cent in 2015.

Much of that growth will come from newer international markets for Apple, such as India and China. The simultaneous launch of the latest generation of iPhones and iPads in more than 20 countries, including China – now Apple’s second-largest market – is a testament to the operational expertise in Mr Cook’s team.

“For a company this size, execution is first about making the products people want to buy and are able to buy, [then] communicating why people should buy it and making enough of that product while they still want to buy it,” says Walt Piecyk, analyst at BTIG Research. “Given the compression of more products during the launch they are clearly doing a good job on the latter part of that.”

But some Apple employees are starting to grumble that, under Mr Cook, the company is putting too much emphasis on operations and not enough on innovation.

The innovation question will continue to hang over Apple until it enters a new product category – something Wall Street’s growth forecasts assume it will do next year.

Upgrades to the iPhone 5s, including a 64-bit chip and an extra processor to handle motion data, pave the way for an iWatch or new in-car features, while Silicon Valley and Wall Street whisper about Apple’s purported plans to revolutionise television.

As usual, Mr Cook gave little away on Monday’s conference call with analysts.

[With the iWatch and TV] it’s much less clear there is a $200m-a-year market that can add another leg to the stool. TV is a 1 per cent margin business. They can’t do something fundamentally different with the hardware like they did with an iPhone

– Benedict Evans, Enders Analysis

“In terms of new product categories, if you look at the skills that Apple has with hardware, software and services and an incredible app ecosystem, this set of things is very unique,” he told an analyst, when pressed about Apple’s pace of innovation.

“We obviously believe that we can use our skills in building other great products that represent areas where we do not participate today. We are pretty confident about that.”

However, some analysts are less confident about whether anything else can succeed on the scale of the iPhone.

“Smartphones are the one device that everyone will own. How many other devices like that are there and what will they be?” asks Tim Bajarin of Creative Strategies, a technology consultancy.

He says there is a “systematic problem” with the idea that Apple might launch a fitness device or television: many of their functions are being absorbed into the smartphones and tablets that Apple already produces.

Benedict Evans of Enders Analysis says: “Clearly Apple has moved out of one growth phase.” With the iWatch and TV, “it’s much less clear there is a $200m-a-year market that can add another leg to the stool”.

“TV is a 1 per cent margin business,” Mr Evans says. “They can’t do something fundamentally different with the hardware like they did with an iPhone.”

Mr Cook could face similar questions in an all-hands meeting that he is holding on Tuesday morning, according to an internal memo leaked to Apple blog 9to5Mac .

However, another radical executive shake-up seems unlikely just 12 months after the last one.

Sir Jonathan’s iOS 7 redesign has been adopted by almost two-thirds of all iPhone and iPad owners, an endorsement of his first foray into software design. Craig Federighi’s leadership of Apple’s software has seen it consolidate its strength in hardware bybundling iWork and iLife suites free with new iPhones and iPads, to fend off competition from Microsoft’s Surface tablet.

And despite some complaints from customers that the quality of Apple’s cloud services – such as Maps and Siri – lag behind its hardware and software, Eddy Cue’s iTunes and App Store empire is now the fastest-growing revenue line at Apple, up 22 per cent to $4.3bn in the most recent quarter.

“Apple’s business has never been stronger,” Mr Cook is said to have written in the memo, before echoing his call from a year ago: “I’m extremely proud of the collaboration going on across the company and everything we’ve accomplished as result of this great team effort.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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