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What’s eating Apple?

In a desperate attempt to wrest back smartphone market share, Research in Motion (RIM), has just launched its new operating system, Blackberry 10, along with new phone models.

Samsung is due to launch its latest Galaxy smartphone in March and the two events are firmly targeted at reducing the almost total success enjoyed by one company; Apple.

Apple (Computer) was formed in 1976 and is best known for its line of Mac computers, the iPod, the iPhone and the iPad, as well as its charismatic leader, Steve Jobs, who died in 2011. It was a company with an unsurpassed reputation for innovative, intuitive products that chimed with the public’s aspirations.

Its worldwide annual revenue in 2010 totaled $65 billion, growing to $156 billion in 2012. In the summer of 2011, Apple surpassed Exxon Mobil as the world’s most valuable company, a position the oil giant had held for six years, but in January, Apple’s stock price started to falter, with a 12% drop in one day, wiping $50bn from its market value and Exxon once again overtook Apple, with a market capitalisation of $417bn.

The reason for this was simple, Apple had missed its Christmas sales forecast of 50m iPhone units. It sold 47.8m (hardly shoddy) and despite revenue growth of 18%, year-on-year to $54.5bn, just below its forecast of $54.9bn, profits were flat at $13.1bn.

Momentum remained strong in the Americas, with revenues up 15% to $20bn, but there are signs that rivals, such as Samsung, may be gaining ground on Apple in recession-hit Europe, with lower priced handsets.

Well, this has got the technerati buzzing and predictions of Apple’s imminent demise abound. Apple’s shares have been mauled many times before, but always recovered, but there are two factors whetting the pessimists’ appetites.

Firstly, the death of Apple’s founder and creative driving force, Steve Jobs, whose iPhones and iPads still generate huge profits, whereas it is felt Tim Cook, his successor at the helm, has yet to prove himself capable of bringing new breakthrough products to market. Second; Apple’s fantastic profit margins attract lots of competitors looking for a share of the cash-filled pie.

Apple scoffs at reports that it has peaked, it focuses on fast-growing sectors, like smartphones and tablets, but there are signs that all is not well. Apart from persistent rumours of extensive child labour in its manufacturing process, it recently bungled the introduction of its new mapping application and there have been rumours in cuts in component orders for the iPhone 5.

However, Apple has new products and markets in development.

One likely gadget is a much cheaper iPhone, aimed at emerging markets, such as China, where the brand is much admired, but too expensive for mass market success. The company is playing down a cheaper phone, but it is apparently close to a distribution deal with China Mobile, a carrier with 700m subscribers.

Since the death of Jobs, Apple has concentrated on updating its existing products and analysts are looking for it to magic up some entirely new ones. Cook says television is an area of “intense interest” and has said that when he switches on his television, he feels like he has gone backwards in time by 20 or 30 years. This type of talk fuels speculation of an iTV later in 2013.

The idea could be that, controlled by iPads and iPhones, the TV becomes the hub of the home, monitoring washing machine cycles, becoming an interface for social media and delivering film and TV channels. This could boost the sale of its phones and tablets as people buy into Apple’s ‘ecosystem’ of linked devices and software.

The problem with modern technology is that what looks cutting edge today, tends to look tired and old tomorrow. I’m sure the world is ready to accept a computer on the lounge television, operated by peripherals, but the iTV is not a definite blockbuster; it will be expensive and broadcasters will not willingly supply content over the internet on demand, having seen how such a model destroyed music companies.

Samsung already sells smart TVs and the South Korean company is constantly creating groundbreaking products and Apple’s many legal battles with Samsung over smartphone patents makes it look like it is on the defensive.
Although Apple does re-invent and then polish its own wheels, it is probably not resting on its laurels. Its capital expenditure has soared to levels typically associated with massive manufacturers, much of it on equipment from suppliers, so it could have the edge in producing new products.

Even if Apple does make a cheaper iPhone, conquers China and successfully sells its smart TV, its shares are unlikely to regain last year’s peak. Competition in its core markets is tougher than ever and although Apple probably will not crumble, it has almost definitely peaked.

Nigel Phillips

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