Here comes the iPhone apocalypse and the end of Apple as we know it

This week saw the end of Apple's 13-year meteoric rise, signalling once again the oncoming shift in the smartphone market. The next 10 years will be even more challenging as the company faces tough competition from Asia that will further erode its iPhone market share.
Written by Jason Perlow, Senior Contributing Writer

The Apple of tomorrow will not resemble the Apple of today.

This week, Apple released more detailed financials about the decline in its iPhone business and the end of its 13-year meteoric rise.

Now it looks like the meteor is heading right for them instead.

Despite the scary header graphic, this is not a Roland Emmerich-style movie plot line predicting total annihilation for the Cupertino, California-based company.

But it represents the harsh reality of what the company is going to face in maintaining market share for its traditional products over the next ten years and what will eventually motivate it to transcend its pure consumer electronics roots into something else entirely.

Apple of course has undergone these shifts and survived extinction events before. And it has weathered them well. For example, look at the Macintosh -- while it is a multi-billion dollar business in and of itself, it only represents 8.9 percent of the company's annual revenue today.

It once represented the majority of Apple's income, prior to the introduction of the iPod.

Today the Mac remains a luxury product, having to distinguish itself in an industry where all other PC companies have gone through a massive tectonic shift towards heavy commoditization and across-the-board sameness.

It doesn't occupy a leading position, but it's a healthy albeit relatively small business proportionally within the company.

Back in late March, when the original draft of this article was published, my ZDNet UK colleague Charles McLellan did a fantastic market analysis of how Apple sits with its emerging competition from China, Korea and other parts of Asia.

It paints a picture of an incredibly wealthy company sitting on hundreds of billions of dollars in cash assets, but growth in its core business of iPhone, which makes up 68 percent of its revenue, is slowing quickly and making significantly less headway year-over-year in various key developing markets, giving up increasingly more share to more price-aggressive Chinese products instead.

The giant engine of manufacturing that is China is going to unleash this commoditization effect on Apple's iPhone and iPad businesses as well. What it did to the PC industry before, China will do to what is Apple's core business today.

Like the PC industry before it, the smartphone/mobile device industry has become so mature that there isn't much new that can be done.

You can make enhancements to the speed and power efficiency of the overall semiconductor bill of materials, you can increase battery efficiency, you can make sharper displays. You can add faster and larger amounts of flash storage. You can incorporate better mobile broadband technology.

But all of these are regular spec upgrades; they aren't major changes to the overall paradigm.

This is not Apple's comfort zone, and it is not the arena they like to play in. In this commodity and supply chain sandbox with Chinese and Korean ODMs, Apple loses on the playground every time one of these battles occur.

It lost having to play this game in the PC industry, and it will lose having to play this game with the smartphone and mobile device industry. It's the same game.

This is not a unique cycle and it isn't uniquely an Apple problem either. The PC vendors that can still differentiate their products -- including Microsoft with its Surface and Apple with its Macbook Air -- are two examples of those that have some interesting value add to bring to an otherwise commodity-dominated industry.

You could say the same for Lenovo and Dell, and to a lesser extent even HP.

What Apple does do well is innovate with new products, and for a period of time generates intense brand loyalty with those products. The industry calls it the "Next Big Thing", I just call it an Apple Innovation Cycle.

Every 10 years or so they have to throw a baby out with the bathwater -- it's another reason why the company focuses so much on consumer electronics and not business. If they had to worry about compatibility and actual business support concerns when they throw a generation of tech in the garbage they would not be able to get away with the things that they do.

Apple does not play by the same rules the rest of the industry does. This is both an advantage and a disadvantage.

It's an advantage in that they don't have to engage in open enterprise warfare that the more general technology companies are constantly embroiled in. But it's also a disadvantage because they are very much consumer-oriented and that industry is constantly in a state of disruption.

What Apple has is its brand -- and customer loyalty to that brand. It sustains them, but it only lasts one innovation cycle at a time. An extinction event always comes at the end of that innovation cycle and they have to rebuild and re-grow the user base again.

There is a core user base that buys Apple's products over and over again, but this base is not enough to keep the company's businesses afloat and growing given the commoditization effect that impacts the industry as a whole.

It's kind of like the people who buy Lexus or Mercedes, or VW or Honda cars again and again.

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Those are hardcore fans, But when Hyundai or another company makes a similar upper-end luxury sedan for $20K less (like it has done in the last five years or so) a good portion of that fan base jumps ship, and a lot of new folks who admired but could not afford those luxury brands decide to go with the Hyundai instead.

It's a case of simple economics driving purchasing decisions. And in most cases, it does trump brand identity -- and it also creates new brand identity for the competition by being identified as the vendor(s) with high quality but affordable alternatives to the innovator or established brand.

This is also known as the Pepsi vs. Coke story. Pepsi was once the value brand, many years ago.

Frequently the innovators or established brands have to react by creating SKUs that directly address the competition.

Apple doesn't do down market and it won't play that game. When it has, such as in the case of the iPhone 5C, it usually fails. So the proven thing for it to do is to move on instead.

The smartphone industry is going to be ceded to the Huaweis, the ZTEs and the Xiaomis of the world, the big commodity producers. Samsung will last a little bit longer in this space given the fact that it is a gigantic, vertically-integrated ODM. It doesn't just produce stuff for its own use, it produces components for everyone else.

But once all the main components can be manufactured in China itself -- the SoCs (semiconductors), the displays, the RAM, the flash, the batteries, everything, it's game over for Apple and Samsung.

Samsung, like Apple, will be relegated to producing high-end luxury goods in that space.

I don't know what that next innovation cycle is or what products are going to be produced by it. Some say TVs, some say cars. Some say Internet of Things. Some say Augmented and Virtual Reality. It could be all of that stuff.

We might not see what is going to be produced by that innovation cycle for a good five years. So to sustain what Apple has, they are going to have to stretch out their current cycle and try to bring value add to what they already have.

When you can no longer innovate on what goes into the bill of materials, the only thing left to innovate on is price (they won't do this) and value-added-services.

Ecosystem familiarity is often cited as the reason why Apple is able to retain customers throughout an innovation cycle for so long.

But if you think about the key content players whose services that are enjoyed on Apple's platform, Cupertino doesn't own them -- such as Netflix, Amazon, and Spotify. And they can just as easily be used on Android.

Perhaps the average iOS user has purchased a dozen apps, a bunch of in-app purchases that tie them to that platform and some iTunes music and movies. But it's not a big investment if you had to buy them again on another platform, especially one like Amazon's which works on any platform you happen to be using.

So Apple either has to make their content offerings so irresistible that you want to stay within that ecosystem, or they can put up walls that make it difficult to end-run them by restricting the consumption of someone else's content.

Apple has already done this to Amazon by forcing the online retail vendor to disable content purchases within their iOS apps (thus avoiding Apple's 30 percent cut). It could go even farther by prohibiting the consumption of externally purchased content at all, but that would almost certainly backfire and engender bad will among its customers.

No, Apple wouldn't do that. It reeks of desperation. In the Game of Services Apple is a small house anyway. Services currently account for only about 8 percent of their revenue, smaller than even their Mac business.

What I see happening over the next three to five years, before the company begins its next innovation cycle, is that the company is going to spend some of its $200 billion.

Not all of it, but some of it, and I think among the list of things the company is going to buy are going to be strategic purchases of content companies or the creation of iOS and Apple ecosystem-exclusive content itself, such as movies, television and music that you won't be able to buy anywhere else.

The value of their iPhone and iOS platform will not be so much the devices, or even their software, but what you can consume on them.

Until the Next Big Thing comes along. And as in previous innovation cycles, the Apple of tomorrow will not resemble the Apple of today.

Is Apple heading into another Innovation Cycle? Talk Back and Let Me Know.

This story, updated to reflect Apple's second-quarter earnings report, was first published March 25, 2016.

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