What Apple Is Doing Wrong and Why It Means Trouble

Back in Sep 2008, I wrote that Apple (AAPL) was losing its mojo [the stock was at $140 back then]. I argued that apart from doing a lot of things correctly, Apple was guilty of doing a lot of things incorrectly - which led me to question/pick on Apple’s mojo. Here’s the list:

1. Not being brave when updating the Nano.
2. Slighting their faithful.
3. Not marketing iPod Touch as a MID.
4. Gravitating towards proprietary hardware.
5. Once again, thwarting generics [which did them no good the first time around].
6. The Cult of Jobs - dependence on one single person.

Apple’s marketing department did fix #3 and the iPod Touch is marketed as a MID and then some. But Steve Jobs’ temporary exit from the helm for health reasons has the stock down some 7% after-hours Wednesday. The stock went down 5% when Jobs was rumored to have died. I have a deep dislike for rumor and innuendo - especially when it applies to the life of a human.

While Steve Jobs is an honorable man, Apple’s response to his now disclosed illness will be analyzed and dissected from every possible angle [in fact, mea culpa of the same]. I think that both the company and Jobs need to be taken to task for the direction that they chose - when it came to disclosing his still unknown illness. Since Jobs is on a LOA, he should have disclosed *what* it was for - or absolutely nothing - with no mention of enzymes or proteins or anything for that matter. In other words, tell us nothing or tell us everything. Anything half-way will invite criticism from both Apple lovers and Apple detractors.

The future for Apple looks like they will be back to the cellar that they were in from 1980 to 1998. Let me explain my thesis. For starters, Apple has been a target of the new Blodgets [while I love the current avatar of Henry Blodget, I am talking about the Y2K version here]. 40% of the smart-phone market - or 77 Million phones is what they need to sell [at the high end of expectations]. WIth numbers like these, Apple will need to cut corners to maintain its gross margins, AND enter the cut-throat world of consumer electronics. Either way, it is a lose-lose situation.

The current growth of Macs is fueled by people willing to pay just a little more for Apple “coolness” and Apple “reliability”. These numbers have already shrunk due to the economy - where for now, the net-book is king. If Apple moves more towards proprietary hardware, a lot of these new adopters will turn on Apple - as they are unlike the faithful - who funded Apple during the “bleak years”.

In other words, Apple will be a victim of its success. They successfully killed the WalkMan, Vista; created a conduit through which people pay real money to download songs [iTunes]; and did not even try to get into the high-end corporate and data-center market - a good move, as this would have put them in competition with Dell (DELL) and Hewlett Packard (HPQ). Now, the only “cool” technology that Apple can conquer is Ubuntu/Goobuntu - but then again, Ubuntu is free, and open - which does not fit into Apple’s mould for success.

So these are what will lead Apple to the cellar:

1. The cult of Jobs.
2. Not being cutting-edge [as it applies to new versions of devices].
3. Existing top end of estimates are ridiculously optimistic.
4. Apple knows how to be a niche player, and has no idea on how to be a commodity electronic gadget-maker.
5. Line-extensions will succeed only for a few years.
6. The Mac, MacBook and iPod Nano are getting stale.
7. and finally, the new adopters of Macs and iMacs and MacBooks are unlike the faithful who supported Apple from 1980 to 1998. They will happily switch to HP or Dell when the time to replace their toy arrives.

I am confident that there will be a lot of people who disagree with me, but I am an Apple user. In fact, I use my MacBook almost exclusively for all of my computer use. But I am like the people I talk about in #7 above.

Disclosures: No positions in AAPL.

Comments

[jmmx:]

BLAH BLAH BLAH

What good does it do anyone to know the details? Don't you understand - NO ONE KNOWS what is going to happen. So just let him get on and deal with his health and not a bunch of tabloid pseudo-journalists! Cult of Jobs? It is YOUR cult - you and your ilk are the ones who cultify him.

And like the Apple management really needs your advice?? LMOA!

Just look at this price drop as a buying opportunity!

IMHO

Jan 15 06:13 AM

[Gregory Pepin:]

Did Apple contact you in case of replacing Steve Jobs? because you seems to be damn good and know a lot of stuff better then those guys :)

Jan 15 06:59 AM

[KeemoSaabi:]

"Apple knows how to be a niche player, and has no idea on how to be a commodity electronic gadget-maker."

They seem to have done well with the iPod, which went from niche device to commodity device despite lower cost alternatives that now exist. iPhones and the app store seem to be doing great and unlike their computer competitors they can grow their mkt share in that space.

Jan 15 08:52 AM

[Tom B:]

People aren't going to stop using computers, and even if you gave MSFT another 20 years, I doubt they could come up with something as usable as OS X is RIGHT NOW.

Google's anemic Android should tell you that GOOG, while a fine, innovative company is NOT going to put Ubuntu on everyone's desktop-- to do so they'd have to follow MSFT's business model; one company for the OS, many largely brainless companies for the hardware. Google would have to make it's own hardware, and that is HARD.

I'd like to see a tablet MacBook I THINK--though I am totally unimpressed with the Netbooks and tablet PC's I've seen to date. Maybe Apple could "do it right". But, radically new hardware at the halfway point of a deep recession might not be such a good idea. Maybe by the summer, before "back-to-school"

Jan 15 10:07 AM

[Synthmeister:]

"Apple knows how to be a niche player, and has no idea on how to be a commodity electronic gadget-maker."

One of the most ridiculous statements I've heard… ever!

Let's see, Apple controls around 70% of the portable music player market.
Apple is now No. 2 in the worldwide smartphone market. iPhone OS had 32% worldwide share in December, up from 6% in May
Apple's worldwide computer market share is up to around 10% (from 3% ten years ago.)
According to AdMob, iPod touch requests increased from 18 million in July to 292 million in December.
The iPhone/iTouch App store is on a steeper trajectory than the original iTunes store, yet it has a much smaller user base than the original iTunes store.

Let me reiterate your "gripes" with a few editorial changes:

1. The ineptitude of Balmer, Sony, Dell, Nokia, Moto, Palm
2. Not being cutting-edge [as it applies to new versions of devices].
3. Existing top end of estimates are ridiculously optimistic.
4. Microsoft knows how to be a monopolist, and has no idea on how to be a commodity electronic gadget-maker. Whereas Sony, Nokia, Moto et al, couldn't design a usable OS if their lives depended on it.
5. Line-extensions (of Vista, Palm, Symbian, Android) will succeed only for a few years before developers realize the real money is on the App store.
6. The Vaio, Zune, Blackberry and Storm are getting stale and have no peripheral or App store ecosystem to help them stay fresh
7. and finally, the new adopters of Android and netbooks and PalmOS are unlike the faithful who supported Microsoft from 1980 to 1998. They will happily switch to Apple when the time to replace their toy arrives.

There. Much better.

Jan 15 10:40 AM

[Infinite loop:]

Your thesis is flawed Bapcha. Sorry.

You're subject to the same fallacious thought process that most analysts struggle from. That Apple needs to be everything to everyone... WRONG. Does BMW, Mercedes, Tiffany's, Saks, etc, etc, need to serve everyone? No. They target a demographic and don't waste time trying to everything to everyone. Why do you insist they do? Why are you trying to cannibalize/commoditiz... Apple's Brand? Do you understand Branding in the least?

The one true measure of success for Apple is Mindshare. It is now a "viable" alternative to Windows in the minds of the "discriminating consumer". Not everyone wants to buy the cheapest piece of crap on the Best Buy shelves. Some people actually want the best, not the cheapest. Apple offers great value to many consumers, and that value metrics is growing with each new product introduction.

Im old enough to remember how people viewed Apple in the 80's and 90's, and that view was that Apple was not a viable alternative. That cognition has changed considerably since then. Apple is now viewed as a leader in innovation. People are actually eager to see what Apple will release next. And you and I both know they have some great products in the hidden wings of 1 Infinite Loop.

Your biased data mining is nothing more than that. I could easily counter every point with my own biased mining. But at the end of the day Apple will survive and thrive for one simple reason, positive mindshare. And that is something I can quantify easily. Just look at the Customer Satisfaction Surveys, Tech Support Surveys, and Brand Recognition Surveys. Apple consistently scores 50-75% higher than any competitor.

You're only fooling yourself Bapcha. It's Microsoft that's on the ropes, not Apple.

Jan 15 10:42 AM

[mark46:]

Regarding 2. Apple has never been “cutting-edge” (in the way that most people think about being cutting edge). Just about everything they “introduce” has already been done by someone else. Apple just does it so much better that it has a chance of being sold to the aspirational mainstream consumer.
Re 4. Except for the iPod, Apple has always been a niche player, but so what? They know how to be a profitable niche player. Even if a category is considered a commodity, Apple knows how to differentiate so that they can still profitably sell higher-priced products in that category.
Re 5. Apple just introduced a whole new platform – iPhone/iPod touch mobile computers. They have at least ten years worth of “line-extensions” before it’s time to move on to the next thing.
Re 6. The Mac and MacBook are no more “stale” than any other computer. And the PC platform still has a ways to go before it is replaced. With Snow Leopard and OpenCL for the Mac, Apple is again differentiating the Mac and moving ahead of other computer mfrs who are just using the Wintel platform. As for the iPod nano, yes, it is stale, but the next step is the iPod touch. The iPod nano is just holding ground in the low-end and stale personal audio/video (nee mp3) player category. Don’t expect any more innovations in that category as everyone is rushing on to a connected device (either via cellular or wifi). And Apple is already there.

Jan 15 11:21 AM

[MagicDiligence:]

Apple has a lot of things it didn't have the last time the company almost dissolved. For one, iTunes is a massive lock-in mechanism, and even though it's moving to all MP3, it's still only accessible from Apple hardware. Secondly, the iPhone is a closed platform that has the potential to dominate much like Windows on PCs. Once a substantial investment is made in games, apps, music, movies, contacts, etc., a user is less likely to abandon the platform unless something else is significantly better. These lock-in benefits also drive demand for Mac computers, as they most easily integrate with iPods and iPhones.

Apple's computers fill the "BMW" niche - they are generally cache, but even an objective viewer would generally consider the build quality and experience superior to the Dell's and Acer's of the world. While this is not really a sustainable competitive advantage, it is a current one.

Jobs leaving, if it turns out to be permanent, it certainly a long term concern, but he's built a company that can sustain itself for many years without him. The bench here is strong too - Cook is a solid ops guy, Ive and Forestall are top notch hardware and software guys, respectively, and Schiller has overseen a very successful marketing operation. I wouldn't worry about Apple, especially at these prices.

Jan 15 12:15 PM

[captainccs:]

>>>6. The Mac, MacBook and iPod Nano are getting stale. <<<

I can assure you my Mac is not stale and I've been a Mac user for 24 years.

But I do worry that Apple is "The Steve Jobs Show." Apple under Amelio and Scully was a disaster. If they hire some by-the-numbers CEO to replace Jobs, Apple will become a mee-too kind of company in short order. Creativity is not something you can easily buy in the market.

BTW, let me assure you I'm no Jobs groupie, I don't even like the guy, but Jobs is Apple and Apple is Jobs.

The reason Gates could retire from Microsoft is that just about anyone can create the crap they sell. They just make expensive imitations of things others design. That is not Apple's story.

Jan 15 12:20 PM

[ARHPG:]

This is a great article and a strictly-to-the-point appraisal of Apple: the company is over-rated and soon to be out of its element -- a fish out of water. I think big trouble looms ahead for this company, as it has run out of the flashy innovations brought forward in the past to keep Apple groupies happy. Disingenious company handling of Jobs' health will haunt the company -- lack of truthfulness in business is deadly. With a stagnating economy and fewer niche buyers, Apple will get "caught out" much like Dell against HP. The good thing about the company is its cash on hand, so it may live for another day.

Jan 16 08:15 PM