Apple has a new hit device, so popular that it has sold out across most of America and Britain. If you order it online, it takes six weeks to arrive. “Best Apple product in a long time,” one online review sings. Useful and, of course, slickly designed, it enjoys the highest consumer-satisfaction of any Apple product in history, according to a study by two research companies, Creative Strategies and Experian.
Such enthusiasm must be bittersweet for Apple’s bosses. The gadget in question is Airpods, a set of wireless headphones that look rather like Apple’s traditional ear buds, except without a wire. Priced at $159, Airpods could become a business worth billions of dollars, like the Apple Watch, a wearable device that Apple started selling in 2015.
Nonetheless, headphones are hardly the transformative, vastly profitable innovation that many have been waiting for.
That wait started only a few years after its biggest blockbuster launched. On June 29, 2007, the iPhone first went on sale. Since then Apple has sold some 1.2 billion phones and notched more than $740 billion in sales from the bestselling tech gadget in history. Two-thirds of Apple’s $216 billion in 2016 sales came from the iPhone.
Atop a hill there is usually nowhere to go but down. Questions about the future of the iPhone and whether Apple ever will design another product to match it pursue the company. The relentless rise of smartphone ownership is slowing, with around two-fifths of the global population now owning one. Apple also faces more competition—especially in its second most important market after North America, China, where sales have been declining—lending weight to fears that Apple is experiencing “peak iPhone.”
Even though Apple has been spending $10 billion a year on research and development, “people aren’t banking on innovation,” said Amit Daryanani of RBC Capital Markets, a bank.
That helps to explain why the company’s shares are valued on a price-to-earnings ratio of around 10 times its forecast 2018 earnings, stripping out cash, which is lower than the 12-to-14-times valuation that the information-technology industry trades on.
Certainly Apple’s attempts to diversify away from its hit product have been flawed. One disappointment has been television, worth some $260 billion globally. Its television offering is a cable box that is little more than a portal to content from other companies, such as Netflix, not the disruptive offering that Apple executives had promised.
There is also justified skepticism about another possible avenue for growth: personal transportation, an industry that is worth some $10 trillion. In June, for the first time, Apple CEO Tim Cook publicly discussed the company’s ambition to develop an autonomous-car system. Apple surely could design a sleek car, but the big shift is away from ownership toward transportation as a service. Routing cars to specific places, as Uber does, is a leap.
Part of Apple’s difficulty in finding the next big thing may be that it still is steered by a small, insular group of executives, most of whom have been with Apple since the 1990s. They include Cook, who took over shortly before the death of Steve Jobs, the company’s adored founder, in 2011.
Apple is not good at hiring people from outside who could help bring new skills and ideas. Other companies have a far better record of bringing outsiders into the fold. Amazon’s Prime video offering, and the work that formed the basis for Echo, its home speaker, drew on newcomers’ expertise.
Apple will have every chance to adapt, however, because of the enduring strength of its hit product. The iPhone business will not grow as rapidly as in the past, said Ben Thompson of Stratechery, a research company, but it will remain more important for far longer than people think. The iPhone 8, due to be unveiled in September, is likely to be innovative enough to encourage between 250 million and 300 million iPhone users to upgrade, driving a new “supercycle” of sales.
Katy Huberty of Morgan Stanley, a bank, went so far as to say that “for Apple the next iPhone will be the iPhone.”
The inclusion of augmented reality, which superimposes digital information onto real-world images, is likely to drive strong future iPhone sales. Apple is likely to include a 3D camera in the iPhone, and recently said that it would begin operating Arkit, a platform for software developers to design new apps that integrate augmented reality.
Data are increasingly central to designing the smartest software, however, and Apple already risks lagging behind in areas such as voice recognition and predictive software if it remains inflexible about vacuuming up consumers’ information. Whether to prioritize privacy ahead of innovation may turn out to be Cook’s most important decision yet.
© 2017 Economist Newspaper Ltd., London (July 1). All rights reserved. Reprinted with permission.
Image credits: Jim Wilson/The New York Times