Apple is Backing Itself Into a Dangerous Corner with the iPhone
It’s practically cliché at this point to talk about how the iPhone has revolutionized so many different markets. Of course, since Steve Jobs announced Apple’s foray into the phone market way back in 2007, the iPhone has helped change the way consumers and businesses interact in so many different facets.
The iPhone effectively killed the digital camera market. Physical media (CDs, DVDs, etc.) has been supplanted by streaming media services. And the App Store opened up a whole new world of possibilities to developers, which only worked to extend the iPhone’s disruptive reach, from ride-hailing apps, to the way we shop, to how we interact on a basic level socially, and so on.
iPhones, and smartphones in general, have moved from status symbols to a basic utility that most people can’t function without nowadays.
Their importance goes without stating. But oddly enough, it turns out that the iPhone could be even more important to Apple itself than the consumers carrying them around in their purses and pockets. What we mean by that is this: In the 10 years since the iPhone went on sale, the product has supplanted every other Apple offering, firmly solidifying its status as the number-one item in the company’s portfolio—and it isn’t even close.
Today, the iPhone alone brings in around five-and-a-half times Apple’s 2007 total revenue… Let that sink in… In 2016, according to Apple’s own data, iPhone sales accounted for 63.4 percent (!!!) of the company’s $215.64 billion in revenue, which works out to a whopping $136.7 billion. In 2007, Apple was a $24.6 billion company, and the iPhone accounted for just 0.5 percent of that revenue. They moved roughly 1.39 million units after launch during the third and fourth quarters, bringing in around $123 million.
Those present-day numbers and growth are impressive, but it also shows how big of a liability the iPhone has (and could) become.
In fact, Apple has already experienced some of the drawbacks of being, essentially, a one-product company. In 2016, investors slammed the company as it experienced its first revenue decline in 15 years. And it was almost entirely due to sluggish iPhone sales, which experienced three straight quarters of declining year-over-year sales.
Apple today is a much different company than it was 10, 15, 20 years ago, and is pulling in far more revenue, so this next point might seem moot, but it’s worth mentioning, in my opinion. Even when it didn’t have the iPhone in its back pocket, Apple was a well-diversified company. In 2007, sales were pretty well split between the iPod and Mac departments, and other services (iTunes, AppleCare, and accessories) made up a little more than 20 percent of sales. Last year, however, Mac sales—once the company’s core product—made up just 10.6 percent of Apple’s total revenue, while other services (which now includes things like Apple TV, the Apple Watch, Beats products, and App Store revenue) fill out the rest of the company’s revenue.
What About What’s Next?
The company has a solid portfolio of products, but, as we saw in 2016, their success very clearly hinges on how well the iPhone performs from quarter to quarter. And that’s a scary position for Apple to be operating from—for both the company itself and for investors.
I don’t doubt that they’ll continue to crank out a solid smartphone, but it makes you wonder if they’re a future proof company. It’s hard to imagine, but at some point some company is going to introduce some product that disrupts the smartphone market. It might not be for another 10 years—could be sooner, could be later—but there’s going to come a time when we don’t use smartphones the way we do now, if we’re using them at all. That’s just the way technology works.
If you take out the iPhone sales, Apple is still better off, cash-wise, than it was in 2007. But the crash of the smartphone market and the loss of two-thirds of its revenue would be a devastating blow. Apple would cease to exist—go rotten, if you will.
So what does that mean for Apple?
My guess (it’s really more 'my hope') is they’re already thinking about a world without the iPhone. Rumors about the tenth anniversary device already suggest that Apple is planning something that could “change how we use our smartphones.” The device is expected to implement Apple’s recently announced ARKit, which could be our first look at the technology Apple believes will replace the iPhone. Whether that leads to augmented reality glasses or a head-mounted AR computer down the road, no one really knows.
Whatever this future technology ends up being, Apple has to remain at the forefront if it hopes to remain relevant. Steve Jobs worked tirelessly to ensure his company was the one pressing the tech industry forward. That effort now lies with Tim Cook.
In a recent interview with Bloomberg, Cook acknowledged that while he’s at the helm of Jobs’ company, he looks to the founder’s way of operating at a guiding principle.
“Steve’s DNA will always be the base for Apple. It’s the case now. I want it to be the case in 50 years, whoever’s the CEO. I want it to be the case in 100 years, whoever’s CEO,” Cook said. “Because that is what this company is about. His ethos should drive that—the attention to detail, the care, the simplicity, the focus on the user and the user experience, the focus on building the best, the focus that good isn’t good enough, that it has to be great, or in his words, ‘insanely great.’”
Refreshingly, Cook also addressed change, saying that while Jobs’ principles remain the “North Star” for every Apple employee, the company has to remain nimble.
“[T]hese principles that Steve learned over many years are the basis for Apple. It doesn’t mean the company hasn’t changed,” said Cook. “The company’s going to change. It’s going to go into different product areas. It’s going to learn and adjust. Many things have changed in the company, even in the last six to seven years.”
Perhaps the hardest change in the company’s future is finding a way to begin easing the level of dependency the company’s bottom line has on its current flagship device.