Concerns rise ahead of Apple's Q2 earnings

Cupertino's share price drops over 10 percent from all-time high, amid worries over its performance in mobile market and signs of shipment slowdown from chipmaker and telecom carriers.
Written by Ellyne Phneah, Contributor

Investor concerns rise as Apple losing market share in the mobile market and signs of shipment slowdown from chipmakers and telecom carriers, leading to a slide in stock price ahead of second quarter results. Market observers note that even though Cupertino has lost its "air of invincibility", it has not lost its shine entirely.

Ahead of its second-quarter earnings set to be announced on Wednesday, Cupertino's stock price dropped 10 percent to US$573 per share at the end of Friday from the all-time high of US$644 reached earlier in the month.

According to a report Sunday by The Globe and Mail, the drop signals investors' concerns over Apple's dominance in the mobile device market, amid signs from chipset makers and telecom carriers that phone shipments were slowing down. Smartphones powered by Google's Android operating system are increasingly taking a larger share of the overall market, even though Apple continues to reap the majority of handset profits.

According to Michael Walkley, Canaccord Genuity's technology analyst, iPhone sales market share had "modestly declined" in developed markets and this was expected to continue as Android competitors bring in new smartphones over the June and September quarters so consumers may start to hold off purchases in anticipation of the iPhone 5.

Innovation, invincibility touch lost along with Jobs
The investor concerns have also arisen during a new chapter for Apple--life after the death of Steve Jobs, its co-founder and former CEO, six months ago. Some analysts that ZDNet Asia spoke with had doubts over Cupertino's ability to keep its touch in bringing industry-changing innovative products.

Abihishek Chauhan, director of Asia-Pacific ICT Practice at Frost & Sullivan, remarked that this was expected because it was "extremely difficult, if not impossible" to replace the qualities possessed by the late Jobs.

Jobs could look at the big picture, think of the new product, micro-manage its execution to perfection and create a "jaw-dropping" device both in form and functionality, Chauhan explained. The "big innovation" capability of Cupertino had been dependent on one person, and not process-dependent, so the departure of Jobs would have this impact, he said.

"At the end of the day, consumers don't buy products based on a CEO performance, they buy on a product's merits and Apple clearly meets those expectations."
-- Michael Gartenberg,
Research Director,
Consumer Tech and Market, Gartner

Another market observer, Dan Olds, owner of Gabriel Consulting Group also observed Apple had lost its "air of invincibility. According to Olds, no business was able to dominate a segment forever and it would be inevitable that at some point, another company or group of companies will "dethrone" Apple.

"This doesn't and won't mean that Apple is doomed, it just means that they won't have the same market power that they have today," Olds said.

Shine still intact, Cook doing a good job
Analysts pointed to some positive signs from the company. Previously, Cupertino had been secretive and refused to engage questions on policy where people had reasonable criticisms, but current CEO Tim Cook--who took over in October 2011--had demonstrated that he was willing to make changes and it is a good direction to take, Jan Dawson, chief telecoms analyst of Ovum noted.

"More openness and a willingness to investigate labor practices in China, in particular, are very good early signs that this less appealing cultural aspects of Apple is starting to change," Dawson explained.

Michael Gartenberg, Gartner's research director of consumer technology and market, pointed out that Apple had not lost his shine, and their products would continue to sell well. For example, the recent iPad launch was a success with 3 million tablets with Apple still appealing to the hearts, minds and wallets of consumers, he pointed out.

"At the end of the day, consumers don't buy products based on a CEO performance, they buy on a product's merits and Apple clearly meets those expectations," said Gartenberg.

While Apple has not yet lost its shine, maintaining it over the next five years is going to be a challenge, Chauhan pointed out. It will be hard for Apple to maintain radical innovation because its most important products are still in growth phase, Chauhan explained.

Focus on innovation, brand name
To maintain its shine, Apple should widen the competitive advantages in its existing devices, such as the popularity of its app store, FaceTime and messaging platforms, Chauhan noted. These apps have a "network effect"--the attractiveness of these applications increasing with the number of users using them, he explained.

He warned that if any alternative app stores, or mobile-based video calling applications become more popular than those of Apple, Cupertino will be at a significant disadvantage.

Another important aspect is the company's brand name, which represents great design, best industry specifications, great build quality and security, along with extreme intuitiveness and ease-of-use, Chauhan added. Apple must be "fanatical" about continuing to provide the same to its customers, he surmised.

"Overall, if Apple manages to keep its 'network effect' advantage by creating a widely adopted cross-device platform, match or outdo its competitors and keep its brand image intact, it could continue to be the most valuable firm on the planet for years to come," he said.

Editorial standards