On October 19, 2011, 14 days after the death of its celebrated founder Steve Jobs, Apple held a memorial service at its Cupertino campus. Posters bearing Jobs’ visage and his inspirational quotations appeared on the walls throughout the company’s headquarters.
“If you do something and it turns out pretty good, then you should go do something else wonderful, not dwell on it for too long,” declared one poster hung prominently in Apple’s Town Hall. “Just figure out what’s next.”
Nearly a year and a half later, Wall Street and the technology world seem increasingly convinced that Jobs’ company has failed to heed that advice, surrendering some of its aura as a supposedly limitless purveyor of brilliant new inventions along with billions in stock market value. In the Silicon Valley conversation, discussion of a reputedly invincible Apple has given way to questioning whether the company has lost its way while running out of fresh ideas.
On Wall Street, Apple has watched its stock price sink to its lowest level in more than a year, a dive that stands in contrast to its arch-rival Google, whose shares recently hit a new high. In the marketplace, Apple, in its present position, has devolved into a mere purveyor of consistently excellent products -- still an enormously lucrative perch, and yet a comedown for a company that only recently seemed to hold a monopoly on shiny new objects of consumer desire.
Apple did not respond to a request for comment.
In the three years since Apple released its last category-creating blockbuster, the iPad, investors are anxious for signs that the company has another breakthrough in its pipeline. Meanwhile, Apple’s competitors have successfully mimicked the company’s approach -- offering sleek gadgets and an ecosystem of content to go with them, paired with edgy marketing -- making Apple’s magic now seem almost mundane.
“Apple is going from a great company with unprecedented products to a good company with good performance,” said George Colony, chief executive of Forrester, a research and advisory firm. “The products are still very good, but not highly innovative. That’s different from a few years ago.”
No one is writing the company’s obituary. Despite the worried talk and some missteps, Apple sold 47 million iPhones over the last three months of 2012 alone. It remains the most valuable company on earth (or second-most valuable, depending on Exxon's stock performance on a given day). Over the course of last year, Apple's profits exceeded $41 billion, more than Microsoft, Facebook, Google and Amazon combined.
But by one key measure -- its price-to-earnings ratio, or the amount its stock is worth as a multiple of its profits -- Apple has clearly sunk in the estimation of investors. When stock markets have confidence that a company is on the verge of a growth spurt, they bid its stock price up, paying many times current earnings for its shares in the belief that those earnings are about to expand. Over the last two years, Apple has watched its stock value sink from a price-to-earnings ratio of 23 to about nine -- the same territory as companies viewed as mature and stable, such as electrical utilities.
Amazon, which actually lost money in 2012, boasts a P/E ratio of 150 times expected earnings. The value reflects that investors view the company’s future business ventures -- whether a phone, an HBO-like offering or a push to replace supermarkets -- as a source of explosive earnings growth. To a large extent, Apple's more modest P/E ratio reflects doubt that Apple can upend the Law of Large Numbers and keep pace with the incredible growth rate they've maintained thus far. Apple sold 80 percent more iPads in 2012 than in 2011. Can it sell 80 percent more -- or 105 million iPads -- in 2013? And again in 2014?
Even Apple co-founder Steve Wozniak worries that Apple may be surrendering its touch.
“We used to have these ads, I’m a Mac and I’m a PC, and the Mac was always the cool guy,” Wozniak told Bloomberg. “And ouch, it’s painful, because we kind of are losing that.”
Apple shares precious little about its current and future state of affairs, but the outside world senses trouble -- a sense amplified by turnover at the top. Scott Forstall, the company’s head of iOS software, was fired in November. John Browett, who replaced Ron Johnson as senior vice president of retail operations, lasted just seven months at Apple. Three months after Browett's exit, his direct report, Apple’s vice president of retail, resigned.
The company’s uncanny grasp of consumer taste has lately seemed on the wane. In the past, Apple’s ads have become cultural phenomena of their own -- and yet Apple’s latest round of commercials were noteworthy only inasmuch as they proved entirely unremarkable (the notable exception: a series of “cringeworthy,” “hated” ads for the Apple Genius Bar).
Apple’s major product releases, such as the iPhone 5, new iPad and iPad Mini, offered only incremental improvements over their predecessors, or, in the case of Apple Maps, a product that fell short of expectations (though even with these "incremental improvements," Apple sold 1.7 million iPads and 3.7 million iPhones per week in the final three months of 2012). The company that prides itself on making the world’s best, most beautiful products has recently watched its mapping, mail and browser apps for the iPhone upstaged by Google’s own, in the estimation of some users.
“The Apple user is an adrenaline junky,” noted Howard Anderson, a lecturer at the MIT Sloan School of Management. “He wants the latest and greatest, revolutionary not evolutionary.”
Apple’s business model, which relies on producing top-tier gadgets that retail for top-tier prices, appears weaker than it has in years, given changing conditions within Apple and in the market at large.
Though analysts note that Apple’s existing lineup of devices still bears Jobs’ fingerprints, the chief executive’s obsessive focus on product details can’t easily be matched. Despite Apple’s impressive sales under Cook's watch, Wall Street still seems to be wondering whether the company can maintain its momentum without its visionary founder.
Apple, for its part, has changed its product review process: Where designs for new features or products used to go through Jobs for his sign-off, they’re now evaluated by members of Apple's executive team, with a different mix of people assigned to different projects, a former Apple employee told HuffPost. The person noted that this procedure has been in place since Jobs’ health worsened.
And even as Apple has been adjusting to an innovation cycle that doesn’t include its founder’s input, its rivals are demonstrating that they are both able innovators and keen imitators of the Apple formula.
Competitors like Google, Samsung, Amazon and HTC are closing the gap between Apple’s offerings and their own, with high-quality handsets they sell for less than Cupertino’s, and a growing ecosystem of apps and entertainment to go with then. Analysts warn this trend may erode Apple’s profit margins, which in turn may erode confidence in the company’s future earnings.
“The market as a whole has changed. The Samsungs and others can now almost read the mind of Apple, more than they could have ten years ago,” said Peter Fader, a professor of marketing at the University of Pennsylvania’s Wharton School. “It’s not clear to me that Apple can continue to have the same success with this innovation, product-driven strategy, as I think others will catch up. Customers are getting smart, and they can’t have the virtual monopoly they’ve enjoyed.”
Apple's allure has stemmed in large part from the sense that its devices are "gateway gadgets" to more spending: when people buy an iDevice, they are supposed to be making just the first of many purchases from the company, and will eventually fork over their credit cards to buy books, apps, music and other gadgets that all sync seamlessly within Apple's universe. People with MacBooks are enticed to buy iPhones with the pitch that they will be able to use the new device to play the iTunes music that they already own. This dynamic is supposed to be self-perpetuating, making people accustomed to shopping at iTunes -- and especially as the iPad beckons as a screen for video -- or to purchase an iPad so they can sync apps already on their iPhone.
Now, other companies have developed their own media and app libraries, which also act as portals to a range of content. And standalone services, such as Pandora, Spotify, Netflix and Amazon's Kindle ebook library, let people easily transfer their entertainment from one company's platform to another's, providing an alternative around Apple's iTunes.
In the longer-term, analysts like Colony warn that the exploding popularity of Google’s Android operating system, which powers phones and tablets from Samsung and HTC, among others, could lure developers away from the Apple system, which may soon be in an undesirable position familiar to BlackBerry and Microsoft: Apple could find itself playing catch-up with its app offerings.
Forrester estimates that by the end of this year, Android smartphones will outnumber iPhones by nearly five to one, with 894 million Android phones and 247 million iPhones worldwide.
Apple has previously brushed off questions about its share of the smartphone market, while citing data showing that even as Android commands a greater number of users, Apple users more frequently employ their devices to shop online, browse the web and download apps.
Analysts said they expect Apple’s future strategy to look a great deal like its past approach: grow revenues by launching products in new categories, and then push those devices into new markets. In short, adapt to swiftly changing consumer demands.
In the 2007 fiscal year, desktop computers comprised some 17 percent of Apple’s net sales, while iPhones made up only one percent. Five years later, the iPhone accounted for more than half of net sales, while desktop computers had shrunk to just 4 percent. In those past five years, Apple has also conquered new territory, with China now Apple’s second-largest market.
It is worth bearing in mind that Apple’s success has stemmed from entering areas pioneered by others, yet far from tamed, to enable mass enjoyment of consumer products. Apple did not invent the MP3 player; it merely built the most popular version of all time. The iPad came a decade after Microsoft’s efforts at launching a tablet, but Apple’s was the first to find a mass market. The iPhone was far from the first smartphone, trailing entrants from Microsoft, Nokia and BlackBerry, but its public embrace made apps and the mobile Web part of everyday life.
Apple’s future success now seems likely to hinge on its ability to pull off that trick once again, finding another lucrative area to transform -- perhaps television, wearable technology, or even the car. Some speculate that its next major play will be for the home, with devices like an Apple TV to put iTunes, Siri, the App Store and other Apple offerings on more screens and provide more opportunities to pay for Apple content.
The living room and the wrist seem to be among Apple’s primary targets, as rumors abound of possibilities like an Apple TV -- a full television, as opposed to the streaming video box the company sells now -- or an iWatch.
“Apple’s valuation is based on them continuing to revolutionize more businesses, which is practically impossible,” said Harvard Business School professor David Yoffie. “If they want to regain the shine they had two years ago, there needs to be more significant innovation that we have to see in existing core products, or new products.”
Apple’s sticky ecosystem of movies, music, magazines and apps looks likely to keep its base of existing users for the foreseeable future, even if it fails to deliver a revolutionary new product to entice fanboys.
But questions remain about Apple’s ability to produce cheaper devices that enable it to move into developing markets and tap a burgeoning population of smartphone owners. Can it conquer new markets -- a must to maintain its levels of growth -- unless its prices come down?
Cook has repeatedly emphasized that Apple will not sacrifice quality to achieve lower prices, though this past year Apple released a much less expensive iPad, the $329 iPad mini. When it discounted the iPhone 4, Apple was, in Cook's words, “surprised” by the large demand for the cheaper phone.
“They’re missing the popularization of the smartphone in making it a worldwide multi-socio-economic phenomenon,” argued Colony. “In so doing, that may in fact mean that they lose the war for developers … That is the Achilles heel at this moment.”
Domestically, with over half of all U.S. cellphone users already smartphone owners, Apple is “battling for fewer and fewer users, a smaller and smaller addressable market,” noted Ben Arnold, an analyst with research firm NPD.
Still, Arnold added, Apple is still attracting a flood of new customers -– by his firm’s measure, 27 percent of iPad buyers said the tablet was their first Apple product ever, yielding Apple an entirely new population of people that can tap into its app store, and might soon find themselves adding an iPhone or MacBook Air. And iPhone users remain loyal to the smartphone, with 88 percent of current owners saying they were likely to upgrade to another iPhone when the time came to buy a new phone, according to Strategy Analytics.
Wall Street’s pessimism about Apple’s future ultimately suggests that Apple’s obsessive secrecy, for so long an advantage for a company that enjoys more speculation about its products than any other, may finally be doing some harm. Is Apple mum because it’s hard at work on the next gadget revolution? Or is the silence sign it hasn’t figured out its next hit? Investors can’t seem to decide.
“Jobs was brilliant at managing expectations, and it’s hard for anyone else to replicate that … he’s no longer there, and the credibility is no longer as secure,” said Yoffie.
“It’s always a mistake to underestimate Apple,” Yoffie added. “I’ve done it a few times in my studying of Apple, and it’s never a good thing to do.”