What is the next big thing from Apple; everyone is predicting something “huge.”

 

AspenCore Media’s Special Project on Apple’s $1 trillion climb
takes a look back at Apple’s business, its strategy to go vertical,
and  its supply chain.

By Bolaji Ojo, Editorial Director at ASPENCORE Media

Steve Jobs is gone,
but Apple Inc. is still
riding high. Sales of the consumer electronics company are set to reach a
staggering $263 billion in fiscal 2018 — up 144% from $108 billion in 2011, the
year that Jobs died. Apple’s $1 trillion-plus market capitalization has woven
its story into the fabric of global business history. Pull any strands of the
Apple saga, though, and they all lead back to its better-known founder.

What
is Apple without Steve Jobs? The market wants to know. Apple, under current CEO
Timothy Cook, has only partially answered the question. Apple, they’ve shown,
can become even greater than its founding partners ever thought, and the
company’s enormous profits indicate that the current executive team knows how
to run a smooth engineering and supply chain marvel. However, the iPhone, iPad,
Mac, iTunes, and “other services” fueling Apple’s massive sales and huge stock
valuation all hark back to the Steve Jobs days.

So
the market waits. Consumers, institutional investors, regular Anne and Joe
stockholders, contractors, component suppliers, software developers, and
everyone else in Apple’s huge universe are watching and waiting. We all want to
know what non-Jobs inspired “new thing” Apple will create and make an instant
success. Everyone wants to believe that the company has an incredible and
unique innovative spirit.

It
may be a long wait. Or it may happen tomorrow. Few people outside of Apple’s
management know enough about the “secret projects” that the company is believed
to be working on to authoritatively announce them. Apple engineers and senior
software employees — we think — have bits and pieces of the information, but
putting these together to form a complete picture is quite difficult. What
everyone agrees on, though, is that “the next Big Thing from Apple will be
huge.”

Why?
Because investors and suppliers do not want an end to the Apple story. Everyone
wants and expects the company to continue to grow at breakneck speed. And
herein lies the greatest challenge that Apple faces, masked by its $1 trillion
market capitalization achievement. Apple is at a crossroads today: It is
growing, but the biggest sales spurts on a percentage basis are in services rather
than the iPhone.

The
iPhone remains a compelling purchase for many consumers, but there are ominous
signs that the product is flagging. Annual shipment has been wobbly, zigzagging
depending upon what buyers think of new iterations of the iPhone. In response,
Apple is focusing on getting buyers to pay more for each unit, turning
invariably into a sort of entrepreneurial magician.

The next big thing
A cottage industry of
experts, analysts, and enthusiasts has sprung up around the core question of
what Apple will roll out in future, each group vying to divine what that next
“Big Thing” from the company would be. What, they ask, will Apple do for an
encore?

It’s
a fair question. But before hazarding a guess, let’s do the numbers.
Analysts estimate that Apple’s revenue will
top $263 billion in fiscal 2018, up about 15% from $229 billion in the prior
year. To put these numbers into perspective, consider this: In fiscal 2008,
Apple’s revenue was a mere $32 billion. iPhone sales of $1.84 billion accounted
for less than 6% of Apple’s revenue that year. At the time, Apple was
essentially a PC ($14 billion, or 44%, of sales) and iPod ($9.2 billion, or
28%) manufacturer.

In
2008, Apple was betting that its future success would be anchored in the
iPhone. It was a well-placed wager. By 2017, the iPhone was contributing 62% of
Apple’s revenue, while PCs represented 11% and iPads 8%. Services, Apple’s
fastest-growing division, contributed $30 billion, or 13%, of sales. (More on
this critical Apple business later.) What happened to the iPod, the contributor
of nearly one-third of revenue from just nine years earlier? iPod sales were so
minuscule in 2017 — for a company of Apple’s size — that they were folded into
a group of “other products” that include Apple Watch, TV, Beats products, and
third-party accessories.

The lesson from this
for anyone trying to figure out Apple’s future product direction is quite
simple: Look at the trending numbers. Whatever is going up represents future
growth, and whatever isn’t will remain a stable but possibly not a major
contributor to sales. Where does the iPhone sit in this classification? The
numbers foretell what will happen to this device. Unit shipment is still
rising, albeit with occasional dips, but the overall growth rate has crawled to
single-digit levels. Perhaps fiscal 2018 will be different, but the trendline
is clear: iPhone shipment growth rate will continue to decline.

 Apple Iphones

Apple iPhone performance (Source: Company
filings)

The
iPhone will remain Apple’s top revenue generator for many more years, but it
has today become a matured product. Apple will continue to invest a huge chunk
of its product development capital on the iPhone, but this will not
dramatically alter its profile. Competitors have largely caught up with the
iPhone innovations that roiled the market in its first years, which means that
price-sensitive buyers now have numerous compelling options. This is already
showing up in the margin pressures that Apple is facing.

Obviously,
based on the billions of dollars that it spends annually on R&D ($11 .6
billion in fiscal 2017), Apple has something up its sleeve. The market will not
settle for anything less than a “huge,” market disruptor, however. The
conventional wisdom about Apple goes thus: “Apple’s next Big Thing will be
huge. It will eclipse the iPhone, disrupt existing market, reshape the supply
chain, create a new set of multimillionaires, and help dispel the notion that
outstanding innovations died out with Jobs.”

Docking station?
So, shall we join the prognosticators? Absolutely. Observers think that Apple
can make quite a dent in several markets. They include autonomous driving and
artificial intelligence. In other words, the iPhone must either transform into
a trusted and critical aide in the evolving world or become obsolete. We
believe that the iPhone can do better. Anyone who sees it as a messaging and
“talk” product hasn’t quite seen the potential. The iPhone — and competing
devices — can become the host for multiple docking stations spread across
different markets — the Yin to their Yang.

How
will this work? Take the autonomous vehicle or any other variants of AI. What
all of these devices must have and need to offer, aside from the ability to be
aware of and responsiveness to the general environment, is user
differentiation. They must intuitively be able to know and comply with the
user’s personal preferences. In the future, this means that all AI products —
automobiles, homes, robots, etc. — will eventually become docking stations.
Each user virtually “drops” the control and data center into the docking
station, which proceeds to download or read the personal preferences to
customize the environment and overall user experience. Which currently
ubiquitous product can do this? The smartphone, or in the case of Apple, the
iPhone. That is one way to lengthen the iPhone’s reach and utility without
stressing on the hardware.

The
iPhone is already serving in this capacity, although at a rudimentary level. A
review of Apple’s current product line reveals what’s missing in its arsenal.
The company has or offers access to TV, music, computing, telephony, books,
health services, storage, photography, time management (scheduling), and
podcasts. In other words, Apple is already in most areas of human and
enterprise activities. Interestingly, most of these services can be accessed or
managed from a single device, the iPhone. Which makes the reference to the
iPhone as a smartphone a misnomer. Most people do more than talk or send
messages on their smartphones; banking, health checks, home management, travel
booking, product ordering, and a bunch of other activities are now done from
the handheld device and often on the go.

What
connects all of these services is communication access, which Apple, though a
major seller of mobile devices, does not offer. To increase its
sales-generating capacity, Apple can develop an even tighter relationship with
customers by offering wireless communication services or access. In this
scenario, the iPhone buying experience becomes unified with what telecom
service providers today offer: access. Each iPhone can be sold with a voice and
data access package, relieving customers of the headache of acquiring access
through service providers. What customers need is a phone and access bundle.

Will
service providers kick? Of course, but their anger will soon be dispelled.
Telecom providers are transforming themselves, but their biggest asset remains
the pipeline. Apple can offer this globally by simply buying access to telecom
pipelines, making service providers bandwidth wholesalers.

The future is services
This is where the “other services” segment of Apple’s income statement comes
in. In fiscal 2017, “Services” represented Apple’s fastest-growing business
unit, racking up sales of $30 billion, up 23% from $24.4 billion in the prior
fiscal year. In the June 2018 quarter, services notched the second-highest
year-over-year increase in the company’s portfolio. It grew 31%, exceeded only
by “other products,” which rose 37%. iPhone sales jumped 20% during the same
quarter, but unit shipments of the handset increased only 1%.

What’s
in Apple “services”? The future, I dare say. Remember that Steve Jobs’ goal in
starting Apple and upon his return was to make things “simple.” It’s a simple
strategy: Take complex products and make them easier for people to use. Apple
management now has an opportunity to extend that strategy beyond the hardware
world. A long line of consumer and enterprise activities remains complicated,
from production management to food ordering and health care. They don’t have to
be.

Contrary
to what some people may think, Apple isn’t oblivious to the desire of its
customers and analysts for a new and distinct product. They know that the
iPhone is a cash cow and will continue to milk it for a long time. Cook and his
senior executives may know what they’ll like to roll out next, but they cannot
be even half as successful as the iPhone or even the iPad.

To
better understand what is in Apple’s future, look at the company’s patent filings, acquisitions, and key executives. The
executives who are key to Apple’s product roadmap include Johny Srouji, head of
hardware technologies; Eddy Cue, in charge of internet software and services;
Craig Federighi, senior VP of software engineering; Dan Riccio, senior VP of
hardware engineering; and John Giannandrea, chief of machine learning and AI
strategy. The future for Apple is clear; hardware, software, machine learning,
and artificial intelligence.

The
recipe is quite simple: Apple must secure current technology advantages,
develop new ones, and create smash hits in the genre of the iPhone. It would be
difficult for any enterprise, but Apple has done it before. Can it deliver
again?

— Bolaji Ojo is Editorial Director at ASPENCORE Media. The views
expressed in this article are those of the author alone, who promises to base
his sometimes biased, possibly ignorant, occasionally irrelevant, but
absolutely stimulating thoughts on the subjective interpretation of verifiable
facts alone. Any comments should be sent to the author at 
bolaji.ojo@aspencore.com.

Check out all the stories inside this Apple Special Project:

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