Apple Profit Dip Shows iPhone Maker Isn't Immune to Market Forces

By Wayne Rash  |  Posted 2013-10-29

Apple Profit Dip Shows iPhone Maker Isn't Immune to Market Forces

It's important to note at the beginning that Apple is not in any financial distress. The company enjoyed profit margins that are the envy of the tech industry, and sales that appear to be heading for the stratosphere.

The only people who are disappointed at Apple's quarterly results are those who live in some sort of fantasy world in which profits, margins and stock prices keep rising indefinitely. Most companies would do anything to have a 37 percent gross margin.

Of course that fantasy world is called Wall Street, and it's populated by analysts who apparently never studied economics in school and seem to think that the business world exists as they want it to be (which means making themselves and their employers even richer than they already are) instead of as it really is.

The facts of Apple's economic existence are that the company has moved into a new world in which there are credible competitors in the smartphone market and one in which Apple has to focus very closely on market share.

This is a different world from the one that the company originally inhabited since the early 1980s in which Apple focused on selling very high-quality products at relatively low volume with marketing that emphasized exclusivity. That worked for a long time, with some notable ups and downs, until Apple decided to define the smartphone market with the iPhone. But now Apple finds it has to fight for market share and they can't do that and retain exclusivity.

Making matters worse, Apple has continued to seek the upper end of its markets so that it can maximize its profit margin. The fact is that there's more profit in a $600 phone than in a $200 phone. As long as you are satisfied with the limited market that implies, then you can keep your margins up. But when you have to deal with competition that delivers a product with the same or better perceived value, such as the Samsung Galaxy S 4 smartphone or the Note 3 tablet, then something has to give.

The same thing was true in the land of personal computers in which Apple found itself competing with dozens of companies building low-cost Windows computers and offering features—touch screens for example—that you can't get with Apple computers. As a result of such competition, Apple is finding out that they either have to lower their prices, as it has done with its computers, or try to compete on value, which Apple is trying to do with phones.

Apple Profit Dip Shows iPhone Maker Isn't Immune to Market Forces

So now Apple is dealing with a higher cost of sales in its mobile market. That higher cost includes the cost of more advertising, promotional and marketing costs along with some pressure on pricing to keep its partners loyal. All of these things are the normal effects of the competitive industry that Apple is finding itself in. To his credit, Tim Cook has realized this rather than pretending that the laws of economics don't apply to Apple.

There are a few things that Apple can do to raise its profit margins, assuming the company feels it's necessary, although the only people who seem to care are those previously mentioned Wall Street analysts. These are, after all, huge profits for any other company.

The first is to develop a phone that retains the Apple cachet, but costs less to make than the iPhone 5 in its various iterations. The problem with the iPhone 5C is that the only places you're really saving money are in the plastic case and the lack of a fingerprint reader. Low cost markets such as China and India can't afford either phone, but there's no reason Apple couldn't follow the lead of some Android vendors and Nokia and come up with a cheaper phone while retaining margins.

A better idea, at least from Apple's position, might be to introduce a new unique product that, like the iPhone, is a must have for cool people while having features that are wildly popular. But it can't be a phone, or a tablet, or even a watch or a TV console. It needs to be something that people can really convince themselves that they need, that provides a useful capability that they can't get anywhere else.

What might such a new product be then? If I really knew the answer to that, I'd be out looking for venture funding. But imagine what would happen if Apple were to make a dedicated personal search appliance. Suppose it had a voice interface better than Siri, could access the Internet seamlessly and provide a voice response that was useful, and have a screen for times when only a picture would do? Would this sell like the product Apple needs?

Clearly, I'm not an Apple developer or product designer, but assuming Apple needs something beyond what the company is already selling, then it needs to be something revolutionary. That means the next Apple breakthrough can't be just another iPhone.

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