THE FINANCIAL PAGE EYING APPLE
BY JAMES SUROWIECKI
MARCH 4, 2013
APPLE; SAMSUNG; TABLETS; TECHNOLOGY; PETER MISEK; SMARTPHONES; BIZPAGES
Not long ago, Apple was almost universally venerated. It was the most profitable tech company in the world, and commentators predicted that it might be the first trillion-dollar company in U.S. history. What a difference a few months make. Since September, the stock has tumbled thirty-five per cent, losing more than two hundred billion dollars from its market cap. January’s earnings report disappointed investors, and analysts are cutting earnings estimates. Now there’s a deluge of forecasts stating that Apple is “in big trouble,” “losing its cool,” and just plain “doomed.” And it’s not only pundits: the activist hedge-fund manager David Einhorn has capitalized on the crisis by pushing the company to hand over its giant cash reserves to shareholders.
So why the sudden fall from grace? There were a few missteps: a tepid launch for the iPhone 5, followed by the Maps fiasco. And Steve Jobs’s absence is obviously preying on people’s minds. But there’s a more concrete reason: Apple’s competitors are finally doing a better job of making the kinds of phones that customers want. The most notable of these is an oversized phone dubbed “the phablet”—Samsung’s Galaxy Note is the leader in the category. The phablet is bigger than a traditional phone, smaller than a tablet, and as ungainly as its name—too big to fit comfortably in your pocket and cumbersome for making calls. In the U.S., the phablet is still very much a niche product, but overseas, particularly in Asia, sales exploded in the second half of last year. And, unfortunately for Apple, there is no iPhablet. The analyst Peter Misek, a managing director at Jefferies & Company, told me that he had been an Apple optimist until last fall. “We assumed, as Apple did, that a buyer of a smartphone would also be a buyer of a tablet, so you’d have one device for mobility and one for surfing the Net,” he said. “But what we’re finding is that, especially in lower-income areas, people can’t or don’t want to buy both. So they’re buying the one device that combines the two.” This means that phablets are eating away at both iPhone and iPad sales. And Misek’s research suggests that Apple won’t be able to release a phablet until next year.
The bigger concern behind the phablet phenomenon is that Apple may be losing ground in the global market. In the U.S., where the company is dominant, more than fifty per cent of consumers already have a smartphone, so being a big player in emerging markets is crucial to keeping profits rolling in. That’s where Apple has some handicaps: it doesn’t have a phablet and it doesn’t have a low-cost version of the iPhone. Misek also points out that in much of the world iPhones aren’t as attractive an option as in America, because there isn’t as rich an ecosystem of content and apps surrounding them.
These are serious problems, and shareholders are undoubtedly in for a bumpier ride than they’re used to. Still, the company’s fundamentals are simply too good to justify panic. Its cash hoard is bigger than the market cap of almost every company in the S. & P. 500. It makes the world’s two best-selling phones. The U.S. market may be maturing, but it’s still immensely lucrative and far from tapped out, and Apple is the market leader in both smartphones and tablets. It’s also by far the biggest maker of tablets worldwide. Unlike its competitors, it also does an exceptionally good job of turning sales into profits: in 2012, according to one study, Apple accounted for sixty-nine per cent of all profits in the world mobile-phone market. That doesn’t sound like a company whose stock deserves to trade at a price-to-earnings ratio well below the market average.
Of course, to keep thriving, Apple has to keep innovating, and much of the anxiety about the company stems from a concern that it may finally be “hitting a wall” in that department. But, over the years, predictions that the great ideas engine was grinding to a halt have been surprisingly common. When Apple started opening retail stores, BusinessWeek ran with the headline “sorry, steve: here’s why apple stores won’t work.” The iPod was initially seen as just an overpriced MP3 player, and the iPad’s launch was greeted with a good deal of ridicule. And even when Jobs was running things there were recurrent complaints that Apple was “getting lazy.” Past performance is no guarantee of future results: just ask Motorola and BlackBerry. But the fact that Apple’s epitaph has been written before should make us skeptical of this most recent death knell. Failing to build a phablet or a cheap phone may well have been mistakes, but they’re fixable mistakes. Analysts are all but certain that Apple will bring out a cheaper iPhone this summer, and the company has already proved adept at starting with an expensive product and then making cheaper versions: think of the way the iPod gave birth to the Shuffle and the Nano, or the new iPad mini. More important, there is still plenty of new ground for the company to break. It’s widely thought that Apple’s next big move may be a television that’s fully integrated with its other devices—not just a new product but a new product category. Misek, though cautious about Apple’s future (he has a hold recommendation on the stock), thinks that such a product would lead consumers to lock themselves inside the walled garden of Apple products for years to come.
Over time, Apple has succeeded despite (or because of) its disregard for the conventional wisdom about what works in technology markets: it has built hardware and software, kept its platform closed, had long product cycles, and emphasized quality over price. It’s always been the proverbial bumblebee: it shouldn’t be able to fly but it does. A wobble in flight is all it takes for people to proclaim its inevitable crash. ♦