A tale of two smartphone manufacturers
By Ajith Ram August 2, 2016
- Apple and Samsung post contrasting revenues
- Lack of innovation and new products hurt Apple
IT is the best of times and the worst of times. If you are Apple, the trends are ominous. The guillotine of fate and the wrath of the stock market are threatening to slice open the company.
Apple's quarterly profit fell 27 percent in the last financial quarter to US $7.80 billion from US $10.68 billion a year ago. But defying gravity and all sense of reality, the company's shares actually rose as the earnings beat analysts' expectations. Quarterly revenue was US $42.36 billion, down from US $49.60 billion a year ago, a drop of 14.6 percent.
To make matters worse for Apple, its rival Samsung has posted its highest profit since the first quarter of 2014 thanks to strong sales of the Galaxy S7 and Galaxy S7 Edge. Revenue has climbed to US $42.1 billion up five percent, while operating profit was US $7.8 billion which was an increase of 18 percent.
So what exactly is Apple doing wrong?
CEO Tim Cook said the third quarter results "reflect stronger customer demand and business performance than we anticipated at the start of the quarter,".
If customer demand was 'stronger' as Tim Cook claims, then the company should have posted higher profits compared to an year ago - not lower.
According to The Wall Street Journal, analysts polled by Thomson Reuters estimated that Apple would post earnings of US $1.38 a share on revenue of US $42.1 billion." Earnings per share were US $1.42. So that probably explains the immediate increase in share price and Tim Cook's claim of stronger demand.
This is just classic corporate smoke and mirrors. The fact of the matter is Apple has probably peaked. Both in terms of revenue and innovative ideas that once defined the company. It seems that the mantle of innovation has now been passed to its rivals.
For a brief history of Apple's innovative products, watch the video below.
And those were definitely the glory days. For instance, the iPhone 6S and 6S Plus are not showing the same demand as the 6 and 6 Plus models, which were Apple's first phones with 4.7 and 5.5-inch screens. Purely in terms of features, Samsung's Galaxy S7 phones vastly outpace Apple's devices in both hardware specifications and software features.
So an iPhone sales bump is not going to happen unless and until Apple gets back to its roots of bold, industry-defining innovation. At the moment, there is no sign of that happening. CNBC reported that in a conference call after the earnings announcement, Cook said the iPhone SE "strategy is working" as it has helped "meet the needs of customers who love a 4-inch phone, and to attract even more customers to our ecosystem."
And this is more smoke and mirrors from Tim Cook - focussing only on iPhone SE while everything else is ablaze. Just look at the numbers. Apple sold 40.40 million iPhones in the quarter, down from 47.53 million a year ago. iPad sales were 9.95 million, down from 10.93 million, while Mac unit sales dropped to 4.25 million from 4.80 million. So much for a working strategy.
Compare this to Samsung. The company's mobile division accounted for over half of the revenue and profit. Samsung's mobile division posted operating profit of more than US $2.9 billion in the previous quarter.
There is only one silver lining in an otherwise ominous-looking cloud for Apple. Apple Services revenue, which includes online services, AppleCare, Apple Pay, licensing, and other services, rose to US $5.98 billion from US $5.03 billion a year ago. “Our Services business grew 19 percent year-over-year and App Store revenue was the highest ever, as our installed base continued to grow and transacting customers hit an all-time record,” Apple CFO Luca Maestri said.
Tim Cook added that the company was working to make sure its products worked well with third-party products like Pokemon Go. Again, his optimism might be misplaced. With iPhone sales continuing to tank and sales of premium Android smartphones like Galaxy S7 Edge rising, the rosy future using apps such as Pokemon Go might belong to Samsung - not Apple.
Also, the basic problem still remains. The jump in Services revenue (even with Pokemon Go) is nowhere near sufficient to offset the dramatic fall in hardware sales.
And what about the future?
For its next quarter, Apple predicted revenue between US $45.5 billion and US $47.5 billion, with a gross margin between 37.5 percent and 38 percent. Cook said that Apple is “high on augmented reality for the long-run” and investing heavily in this field. If that is the case, then Apple is likely to be a 'me too' company in the field rather the revolutionary innovator it was with the original iPhone.
Even before any augmented reality hardware from Apple has hit the market, other computing giants such as Google with Magic Leap and Microsoft with HoloLens have already announced their intentions. So even if Apple launches an augmented reality gizmo this year (highly unlikely), the company will still need to convince thousands of developers to create interesting applications for it.
Apple has not even released a SDK for its mythical unannounced augmented reality hardware. On the other hand, Microsoft is already shipping its HoloLens development kit to interested developers. In other words, Apple is likely to be late to the augmented reality party.
Tim Cook also highlighted Apple’s investment in artificial intelligence. The only shipping product using AI is its SIRI technology. But this is hardly a revolution. Competitors like Microsoft's Cortana and Google Now have already caught up.
“We have been and continue to invest a lot in this. We think there’s great things for customers and a great commercial opportunity. The deployment of artificial intelligence technology is something that we will excel at because of our focus on user experience,” he said.
Seeing is believing. As things stand, Tim Cook's claims of excelling at AI is just vapourware - like rising profits.
According to Cook, technologies such as artificial intelligence and augmented reality will only enhance the importance of the iPhone. Naturally, he forgot to mention that the same technologies are going to be hardly unique to Apple and the company's competitors like Samsung and Amazon are already working on the same.
For sometime now, there have been rumours of an Apple electric car and a revamped Apple TV which will challenge traditional broadcasters. Neither of these are truly revolutionary - something which Apple used to be known for. If Apple has to stop its inexorable slide into oblivion like many Japanese manufacturers in the 1980's, it has to get back to its roots of creativity and 'thinking different'.
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