Billions Spent On R&D And All Apple Can Come Up With Is This?

| About: Apple Inc. (AAPL)

Summary

Digital glasses probably on the horizon for Apple.

Suggests to me the company is getting desperate for product line success outside of iPhone.

Glasses will probably use augmented reality (AR) tech, not virtual reality.

Why Google Glass failed.

Click to enlarge

source: Rocket Dock

With almost two-thirds of Apple's (NASDAQ:AAPL) revenue coming from the iPhone, and sales dropping, particularly in China, the company has been struggling to produce a new hit product that can carry some of the revenue and earnings weight of the company in the years ahead.

Some reports say Apple is looking to get into the digital glasses market, using augmented reality (AR) tech. The difference between augmented reality and virtual reality is augmented reality adds digital data or images while the person is still able to see the real world. Virtual reality, on the other hand, creates an environment not connected to the real world, and which surrounds the user of the tech.

The same challenges that faced Google Glass (NASDAQ:GOOG) (NASDAQ:GOOGL) will have to be overcome to make digital glasses even viable, assuming there is a market for the wearable tech beyond the usual geeks which buy up almost anything new to try out.

Google's major struggle was the need to develop a small battery that wouldn't weigh heavily on the face of the user, while at the same time generating enough battery life to not have to quickly recharge it. Google wasn't able to accomplish it, which alone with what consumers considered a weak visual design and privacy issues resulted in the product failing miserably.

All of this may be true, but my thought is consumers really aren't that keen on another wearable product after watches and other gadgets have in general not captured the imaginations of consumers. There's a market for wearable tech, but not at the level it would be a game changer for Apple or other large tech companies, even though Tim Cook said he believes there's a lot of potential with this market.

Even if a strong product was developed, I'm not sure it would result in moving the revenue and earnings needle of Apple very much. Since I don't think the market for this would be huge, under the best case scenario it would only be another small gadget to add to the other Apple gadgets that struggle to generate the type of revenue the company needs to complement its iPhone product category.

Keep in mind I'm talking about digital glasses using augmented reality tech, not virtual reality tech, which I think over time has a lot of potential to grow those companies successfully employing it and finding numerous consumer and business uses for it.

Challenge to move beyond over-reliance on iPhone performance

There's nothing wrong with developing a powerful product line like the iPhone and riding it for a long time. The problem with that strategy and approach is the performance of Apple will live and die on iPhone sales, and when they underperform, it has a strong impact on the share price of the company.

That has been the case over the last several quarters. And with growth prospects depending on its performance in China, Apple has disappointed shareholders as it has failed to differentiate enough to produce enough enthusiasm from Chinese consumers to justify its higher price.

Accounting for two-thirds of the company's overall sales, it obviously means the total of its remaining product portfolio combined only generates one-third of Apple's revenue. This is a huge problem if its iPhone sales in China continue to slide.

Is Apple getting desperate?

Those following Apple for a period of time know the company can quickly change direction and abandon a product, so it's not a surety it will go forward with its digital glass project. I think what will happen is it will develop a couple of products and test the wind of consumer opinion at that time to see if it even wants to try to market them.

Unless there's a high probability of it being a big hit, it's doubtful Apple will move ahead because it will generate the perception it was desperate to get a product out there because iPhone sales are failing to meet sales and revenue expectations.

This is of course the problem Apple faces with every new idea pointing to an eventual product release. There are simply not enough tries at this time to make a meaningful impact on the top and bottom lines of the company.

My thought is Apple should try to release a plethora of products built to target smaller markets. It won't get the big headlines the company is used to with iPhone, but the thought it can find something suitable to complement its giant smartphone brand is losing credibility.

I do believe Apple is getting desperate for another big hit, and that may be a problem as it searches for another giant win, when in fact its best strategy should probably be to win with many more products serving smaller but loyal consumers.

The problem to me is Apple has failed with some of its less visible products, which when accompanied by disappointing iPhone sales in China has combined to give the justifiable impression it is losing some of its mojo.

AR digital glasses

In its last conference call with analysts, Tim Cook had this to say about AR glasses:

"AR can be really great, and we have been and continue to invest a lot in this. We are high on AR for the long run. We think there are great things for customers and a great commercial opportunity."

To me this is only more optimistic rhetoric with little to back it up. As I mentioned, I'm not convinced consumers are interested in yet another wearable gadget to go along with numerous others they carry or wear. What added value would these digital glasses have for a consumer or business other than just another toy to play with? As I said earlier, almost any tech gadget will be embraced by the geek crowd, but that isn't enough to make it a winner for a company the size of Apple.

What data would be added to AR glasses that can't already be accessed with another gadget? What would digital glasses add to the existing experience that would loosen up consumers' pocket books?

The other challenge for this market is for Apple or any company for that matter to develop the type of micro-technology needed to make them suitable for consumers to wear without feeling heavy on their faces.

With a questionable market, the effort to do so may not be worth the costs and time.

Conclusion

I don't mind that Apple is pursuing this market from an investor standpoint, but I think the company will have to decide to pursue a variety of smaller products and markets to generate enthusiasm and revenue for the company.

Even if iPhone sales were to do better in China, its recent failures to gain significant market share because of strong competition has revealed the weakness in relying upon one product for the bulk of the company's revenue.

It's not that Apple doesn't understand this, it obviously does. The problem I think is it isn't releasing enough smaller products to boost sales while at the same time seeing if the potential market for it is larger than projected. If a product isn't out there, it can't be adapted to consumer response and made better.

Apple management should announce a change in strategy. It should tell consumers it is going to pursue a number of different market segments and provide different products in each one. I'm talking here beyond the existing product lines it already has.

While giant projects are interesting, the vast majority of them never get off the ground, and if they do, are failures most of the time. But when throwing out many smaller products, the company can fail quicker and get a handle on what has the most potential.

Shareholders and investors would be less concerned about the performance of its smartphone line, and look to many ways the company could grow.

That's not to say the company shouldn't continue to go after markets with larger potential. Only that as it goes forward it can't only look for home runs at the expense of a bunch of singles and doubles.

If AR glasses were to find a market, I would consider it a single at its highest potential. It's obvious to see the disappointment the market would have to that, as it's always looking for an Apple home run. But if it was able to hit a couple of more singles on a consistent basis, it would push the company forward. It would move slowly at first, but would gain momentum as it gained traction from multiple new revenue sources.

As it is, the company, overall, continues to incrementally improve existing product lines, which even there it has failed to capture the imagination of consumers, bringing down growing disappointment in what the company has to offer.

But when introducing new products, there is nothing from the past to compare it with, and it usually generates more positive feedback in what consumers would better like out of the product. I think this is where Apple needs to direct its money and efforts, not on single products that are very unlikely to be big hits, even if they sell moderately for the tech giant.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.