Aug 7, 2012
Apple (NASDAQ:$AAPL) reported what was for any other company a complete blowout of a quarter, especially having to write off an entire continent (Europe). But, the expectation for them are so high and their margins so vast that the Wall St. sell-side projections for their business got way ahead of even Apple’s guidance. This is the single most covered company in the world and it should bother people that a quarter where they made $6.5 billion in net profit for $9.32 per share would be considered a huge miss.
How is it possible to miss revenue projections that badly?
Given Wall St.’s current reputation I guess I’m answering my own question. But, that said there is a potential storm brewing for Apple. Their brand loyalty and the halo effect that it casts have been working very well for them and are still in place, but the question is will it last?
Superior, Not Invincible
Contrary to popular opinion Apple is not everywhere. Even the richest company in the world has limits. And as cool as their products are, how revolutionary the iPhone and iPad were and still are, the markets in which they operate are now more mature and the competition has closed the gap in many areas. For all users? No. But for many the value proposition of an iPhone 4S is not as high as it once was.
China is a major focus for Apple. Tim Cook spent enough time on the earnings call about it. But the force of the low-end price points in that market is just beginning to be felt for everyone there. Baidu’s (NASDAQ:$BIDU) recent gains in the cloud cannot be ignored for it highlights a potential disconnect, or at least ceiling, for Apple’s growth in that market. A CNY 1000 Baidu smartphone, running Yi their forked version of Google’s (NASDAQ:$GOOG) Android that has apps, cloud services and the best search services in China puts the onus on Apple to justify charging nearly $800 for an iPhone 4S.
Add in that Nokia (NYSE:$NOK) is still prized as a phone all over the world and they are building touch-enabled feature phones that will also compete with Samsung, etc. in that arena. Low-end Lumia 610’s sold very well in the 2nd quarter for Nokia. Microsoft (NASDAQ:$MSFT) and Nokia both plan on Windows Phone 7 level handsets to be around for a while. Once Windows Phone 8 hits the streets these phones will move down becoming the entry level phones with full access to the Windows/Nokia ecosystem.
Execution, Execution, Innovation?
The real question is one of leadership. In no way am I bearish on Apple as a company. They have superior products, excellent control of their supply chain and command margins other companies can only dream of. They have become the kind of cash cow that Microsoft was in the 1990’s. They have pushed Microsoft, frankly, to the position Apple was in when Steve Jobs came back. For Microsoft they have been run by the wrong guy for years. Steve Ballmer is only just now realizing that his company needs to lead not follow in Apple and Google’s footsteps. If they are going to survive they will have to completely open up their old business of selling Office and Windows and be the enabler of change.
Listening to the earnings call I got the feeling that Tim Cook wants to lead the existing company that Apple is not the company that Apple could still become. Complaining that it is too expensive to attack India for example is a losing position for a company with more than $100 billion dollars at its disposal while Microsoft is building a multi-pronged strategy to connect India’s education system and businesses to the cloud.
When Steve Jobs died a lot of people wondered if Apple would continue to lead the technology revolution or would they just optimize what they currently have. Nothing at the latest WWDC suggested the former versus the latter. Their ability to execute is, itself, the real threat to Microsoft and Google. They have no margin for error, the same way IBM (NYSE:$IBM) and Apple didn’t have with OS/2 and the Mac in the 90’s. The mighty fall and reinvent themselves. If Microsoft has solved some of their internal culture issues then things could get very interesting.