Apple may rate good value over volumes as market slows down

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As the tech giant revises its revenues, it looks to be turning its attention to new revenue streams

When Apple CEO Tim Cook announced on January 2 that the Cupertino-based juggernaut had revised its expected revenue for the last quarter down by £3.83 billion to £64.3 billion, it was seen as a concerning start to the year for the company.

As a result, share prices crashed by nine per cent overnight, with Apple pointing the blame at the Chinese economy experiencing a slow second half in 2018.

Cook told Apple investors that the company “did not foresee the magnitude of the economic deceleration, particularly in Greater China”.

Although shipments of Apple smartphones appeared consistent throughout last year, the tech giant dropped down to third place for overall market share, after Huawei claimed second.

Apple’s recent problems have caused many to question whether its time at the top of the smartphone market is under serious threat for the first time.

Slowing market

A number of factors have contributed to Apple’s slump in expected revenue, with a slowing global handset market most likely the main culprit.

Combined with higher prices and a perceived lack of innovation among some observers, this has hurt Apple.

Figures from the third quarter of 2018 reflect how the smartphone market has stalled over the past year.

In that quarter, 386.8 million smartphones were shipped globally – a three per cent decrease, according to Counterpoint Research.

Closer to home, Brexit could cause future concerns in what is a key market for Apple, says Eurostar Global head of commercial and vendor management Steve Hankey.

“It’s a market that is contracting, and the uncertainty around Brexit has contributed too, with people more likely to keep hold of their cash,” he says.

It will affect all aspects of businesses across the UK, while not many people will have £1,000 of disposable income to spend on the latest iPhone devices, adds Hankey.

Julian Shovlin, founder and managing director of tech repair specialists iSmash, doesn’t believe, however, that cost will deter iPhone fanatics.

“I’m not too sure the price point has been a determining factor for Apple, as customers are willing to pay for high-end devices. There is still a demand for this and Apple is good in this area,” he says.


Innovation

Apple has also been questioned by some observers over a perceived lack of innovation with the iPhone XS that was released last September.

But IDC senior analyst Marta Pinto argues that Apple, although conservative in its approach, is still a key innovator in the industry and expects this to continue.

“I wouldn’t say Apple hasn’t innovated. If you look at the notch display it launched in 2017 with the X, Apple essentially set the industry trend for 2018,” she says.

“Apple might not be the greatest disruptor in terms of innovation, but it is still innovating; it’s just not as noticeable to the end user.”

Hankey says that although it has proven difficult for manufacturers to innovate in recent times, Apple needs to differentiate to make its smartphone stand out.

He explains: “Apple needs to refind some of its form. What made Apple so great in the smartphone market over a short period of time was its ability to innovate and stand out from the crowd.”

According to Hankey, the disappointing financials may have been due to a lack of innovation with the iPhone XS.

“It’s a contributing factor. I can’t see how Apple can keep differentiating every year, with 2018 proving to be a refinement year for Apple,” he says.

Change to financials

While Apple will continue to be a serious player in the smartphone game for the long term, it has decided to report its financials differently.

The company no longer reports iPhone, Mac and iPad unit sales, something that may suggest Apple is heading in a different direction with its approach – one in which it desires value over volume.

At the Consumer Electronics Show in Las Vegas this month, Apple announced that it had tied up a deal with rival Samsung that allows owners of Samsung Smart TVs to have direct access to iTunes content.

For independent technology, media and telco, this represents a different channel for Apple to tap into and an even wider target audience, as he urges Apple to focus on services across all areas, including music and video games.

“This is where the company can use its heritage to innovate further by bringing together a range of services and tightly integrating them with its devices,” he says. “As well as making them available on other platforms to seek new audiences.

“The time has come for Apple to make a multibillion-dollar acquisition in the TV/video landscape – more so if it has serious aspirations to compete in this space.”

Pinto agrees and labels the company’s approach as “efficient”.

“Apple is still a very strong company and its business is shifting; smartphones are just one of many areas Apple can excel in,” she says.

“The smartphone market has plateaued, and this has forced Apple to turn its attention towards different revenue streams such as services and wearables. This is a key part of Apple’s business.”

Shovlin shares that opinion, while expecting iPhones to still be a pivotal product for the long-term.

“For the foreseeable future, the iPhone will still be Apple’s hero product, but Apple has other revenue streams such as accessories.”


China situation

One of the biggest hurdles that Apple is likely to face in the coming years isn’t so much one of its own making.

The ongoing US-versus-China trade war could hit Apple hard – and with the company citing the Chinese market as a key reason for its revised financials, this is likely to be an issue in the future.

Pinto believes, however, that China has more to lose than Apple from this situation.

“I think the trade war will eventually hit the market share of Western companies in China if things continue,” she says.

“However, Apple phones are assembled in China, so this would hurt China’s market more than any other.”

The unexpected deceleration in the Chinese market presents an additional challenge to Apple, says Pescatore.

“The heightened political tensions between the East and West, as well as econmic uncertainty, are factors that have contributed to the ongoing challenges in China.”

The unexpected stall in China was even more surprising given that the country’s smartphone manufacturers enjoyed a fruitful time in 2018, with Huawei in particular impressing to claim second place for global market share.

Huawei claimed 13 per cent market share in the third quarter of 2018 – one per cent more than Apple – but Pinto says Apple desires value over volume and that “market share isn’t everything” for the company.

IDC stats show that the market share of iOS users slightly increased in the third quarter of 2018 to 25.6 per cent, up from 25.2 per cent in the same quarter of 2017.

Despite Huawei, Xiaomi, OnePlus and OPPO entering more markets and providing a different consumer option, Shovlin expects Apple to see off this challenge.

“There is an increased amount of competition now coming from China – in the UK in particular,” he says. “However, I believe Apple has the resources and know-how to overcome any challenges.”


Loyalty push

During an interview not long after Apple wrote to its investors about the revenue revision, Cook told a CNBC journalist that Apple’s three most important focuses are “innovation, satisfaction and customer loyalty”.

The last of those – loyalty – is something that Apple has found in abundance from its fanbase globally, and Hankey expects Apple customers to stick around for the long term.

“It is difficult to get people away from Apple and its ecosystem, and although people might not upgrade as quickly, they are more likely to stick with iOS than look elsewhere.”

In fact, Pescatore believes that Apple has become a victim of its own success.

“Incremental upgrades with new devices aren’t enough to justify users paying more for these features,” he says.

But he also expects Apple users to stick around – for now, at least. “It is extremely unlikely that Apple users will churn for cheaper rival products,” says Pescatore.

5g wait-and-see

Apple has also faced questions over its 5G approach. While Samsung and Huawei have confirmed that they will release 5G smartphones this year, there has been little to nothing coming from Apple on the subject.

This wait-and-see approach isn’t too surprising, given that the first iPhone didn’t have 3G and 4G didn’t arrive until 2012 with the iPhone 5.

Pinto doesn’t believe this is down to a lack of interest or research from Apple in its 5G approach, saying the company is “playing its game” with its strategy.

“Apple will have some research in place, but the problem is more in the infrastructure side and how it can benefit users. It will be difficult to command a premium price for a 5G phone when it’s not yet in place,” she says.

“For Apple, it’s not about being first with 5G; it’s about getting it right.”

Pescatore is also unconcerned with Apple’s 5G strategy, amid the limited consumer uptake for the technology expected this year.

“With this in mind, it is sensible for Apple to wait rather than be among the first to offer a 5G device. 4G still has a lot of legs.”

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