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Past Is Prologue On Mobile: Apple Finding “Foolish And Hungry” Again.

|Includes: Apple Inc. (AAPL), GOOG, GOOGL

 

The dynamics between the Apple and Android ecosystem has been changing rapidly lately. I wanted to jot down some thoughts about how I look at the history of the space and what that might mean for the future of innovation in mobile. Further, what are the opportunities for Apple to innovate again.

The Past- what can we learn from past innovation cycles that could predict innovation in the future?:

When I want to understand an innovation cycle I like to look at history. In mobile, mobile one place to look is the prior leaders just a decade or so ago. Before Google's Android and Apple ruled the roost you had Nokia and Blackberry leading the prior generation.

· Nokia use to capture 40% of the mobile market much as Apple and Google dominate revenue and profits now. Nokia reigned supreme for years as it commoditized the rest of the space. Carriers would reel in pain but Nokia always did well as Carriers would subsidize Nokia's handsets to acquire new customers. Many new entrants came into the handset market - all would die as Nokia continues to thrive. It's likely many handset makers in mobile phone still need to exit and will do so this year such as LG, HTC etc.

· The world for Nokia and frankly for those of us in technology changed with one huge deal between Steve Jobs and AT&T.

· People forget but before this happened nobody even thought such a deal with a US carrier was remotely possible. Steve gets credit for beinga great product guy- I'd argue he was a corporate deal genius and that's truly what changed Apple's trajectory. Before this carriers had such a tight stranglehold on applications and content it stifled any innovation.

· VCs used to keep launching new startups into this breach of mobile innovation death with even the best management teams meeting failure as Verizon and ATT sucked the life out of every idea. Verizon STILL tries to do this but thanks to Apple, it's too late for even Verizon to strangle innovation.

· This deal Steve jobs Struck made Apple the most valuable company on earth and got the carriers to actually subsidize sales of devices with 40% margins for Apple.

· Steve Jobs gave a speech where he said to always stay hungry and foolish. It's hard for extremely wealthy people to stay hungry(maybe not foolish)- since wealth brings so much comfort and complacency so his speech and wisdom here should be taken to heart. In a world where Postmates delivers to your desk at the press of a button, staying hungry isn't easy either.

· Is Apple still hungry and foolish now? Let's look at the products released the last few years at Apple. I would argue these products are neither hungry or foolish and in some cases should not have been released. Apple Watch? NFW there is an ounce of innovation there. Apple wasted valuable brand equity to get people something that really doesn't change anything. With better sensors Watch could be a fantastic health product but right now it's just too early to launch without those sensors and brand capital has been wasted on a launch that will ultimately sour consumers view of Apple. There are rumors the next upgrade will have a wireless connection. The use case here is the device is on your body and until we have better sensros- the product should be shelved.

· Apple used to pride itself on low #s of skus. Innovation requires simplicity and focus and that means instead of 15-20 products it needs to go back down to 2-3. It's painful to cut but as you do this- it will allow you to grow again.

· It's unlikely Apple will disappear the way Nokia did because there is no immediate challenger other than Android but it will lose share down to 10-15% in the US. This means sales will continue to drop another 15-20% and margins will drop not 1% but more like 10% and if trends continue down to 25%. Further, Android is already the share leader and in many ways is the innovation challenger to Apple this does keep the pressure on in a way that Nokia never had. Becuase Nokia never had a real challenger, it folded much more quickly than Apple would.

The Future: What does Apple need to do to innovate and grow again?

· Bring in Services Talent. Apple services are the weak spot. Generally they are vastly inferior to what Google offers. Mail, Calendar, Maps, Photos and browser? Apples forces users into these applications and they are quite terrible compared to what Google offers. The differences between Android and Apple used to be large- now Android is many ways out innovates Apple particularly in all these key applications and related services. Apple needs to pull in folks who understand how to build and maintain services which means raiding Google services talent.

· Get Hungry and Foolish again. Tim Cook needs to shake up the org structure. I'm not sure if this means bringing back guys like Scott Forestall who were maybe a pain in the ass but kept innovation at pace. These guys are a pain in the ass but it knocking heads brings diverse ideas and better products to the forefront.

Change the management culture at Apple from an operational excellence culture back to an innovation culture. Everything has to change from how decisions are made, to the number and scope of meetings, and importantly how ideas are introduced and challenged. Do new FOOLISH ideas get trounced easily or are we just going for safe baby steps ? A lot of the scariest ideas are the most valuable but they are also the easiest to kill. As CEO Tim Cook needs to actually go outside his comfort zone and let this happen. These changes have to go throughout the culture and will be painful - Tim's background is all operations and for him the challenge here is perhaps the most difficult.

· China has to work. Apple needs to use every trick in the book to get the Chinese government to bless it's entry into China. It needs to use US political muscle and raise hell every time a barrier is put in place to expansion. I'm not saying this has to be a Trump level trade war but this idea that China keeps pushing out US company's under the veil of censorship is bullshit. If China continues to do this, there needs to be real consequences to it's exports abroad. Apple needs to organize US political help and make sure there are trade consequences for Chinese company's too which all want to expand internationally to diversify out of China.

· Stop spending half of the product release events on Global Warming and fighting for our civil rights. I care deeply about these things and I love it that Apple does too but this seemed excessive. I get that our political system has serious issues but Apple isn't who I want to fix it. From Apple- I just want innovation and it's a lie to say Apple has been doing any of that in the last 5 years.

· Many voices saying the 2016 iPhone will be dull so won't lead to upgrades and I won't rehash that here but Apple needs to bring innovation forward to this year. Mossberg was out with an excellent piece in March about what he'd like to see. Move heaven and earth like Steve did with his reality distortion field. Wireless charging and OLED screens ? The Apple tea should bring them this year and blow everyone away with one more thing.

· Services in the home. Use Siri (through phone, desktop and Apple TV) to build a third party API for connecting with all the devices in the home. Sonos and control of home speakers is a perfect example. Amazon has led the way here- and Apple can/should use it's strength in handsets to perfect.

· 40% margins are awe inspiring and last earning call analysts freaked out because there was a 1% drop in margins because of the mix of the SE. This in itself is alarming because its likely those margins are going to come down a lot more than 1%- more likely that 40% margin will come down to 25-30% longer term. Apple needs to cut prices or it's going to continue to lose share rapidly. Android phones are too close in features and technology so price cuts of $100 to perhaps even $200 are probably necessary.

· Apple should shift to a services company. Apple TV is actually a fantastic product. Deals with content providers have stalled the efforts here but Apple needs to do a deal like it did with AT&T in 2007 to change cable forever. Things is the kind of revenue nugget that could help Apple grow revenue again.

What should investors do? If you hold the stock because you love Apple- you should price the stock for margins dropping 10% this year and further decreases in units sold by another 12-15% at least. Things will get much worse before they get better.

I'd love to see Apple make some of these organization changes. Despite weak products launches the last 2 years- Apple Watch, IPhone 6S, Apple TV and iPad- it's not too late to get hungry or foolish.

AppleTech

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.