Apple dependent on iPhone success

The public launches of flagship products generate plenty of hoopla these days. Among technology companies this is none more so true than for Apple. And within Apple’s own product line it is none more so true than for the iPhone.

 

The anticipated announcement of the 6th version of the iPhone is the most critical for the company to date – and possibly for any technology company, ever. For at no point in Apple’s history has so much of its future depended on the fortunes of a single device.

 

 

By examining Apple’s quarterly financials, the sales pattern for the company’s different product lines becomes clear. Revenue from Mac sales continue today in line with historical pre-‘iProduct’ growth rates.

 

While iPod sales are ‘bursty’ and peak noticeably in the last quarter of each year as a result of people shopping for Christmas presents. 40% of annual iPod sales occur during this quarter’s reporting, but year-on-year totals for iPod sales are falling – presumably as a result of the cannibalization of the iPod’s primary function as a digital music player by the iPhone.

 

iPad growth is strong, but tablet computers as a product and a form-factor have a limited addressable market. Tablets are luxury items rather than necessities, designed to drive content consumption and to provide a complementary role to the general-purpose utility of desktop computers and mobile phones. Tablets have distinct limitations in their ability to act as true productivity tools, underscoring their status as a secondary/tertiary computing device rather than an outright replacement for other portable computers like laptops.

 

But the iPhone has a different sales profile – it is Apple’s bread and butter. The portion of total revenue that the iPhone accounts for is huge – just under 50% of all of Apple’s revenue during 2011, and 40% of the company’s cumulative revenue since the iPhone’s launch in 2Q 2007. Put simply, the iPhone is a product that Apple cannot afford to be without. Were Apple to no longer offer an iPhone product, the effect on the company’s revenues – and by association Apple’s share price – would be massively detrimental.

 

 

 

When Apple first entered the mobile phone market it had nothing to lose and everything to gain, so the company was glad to take every percentage point of market share that it could from the established handset vendors. Today the situation is dramatically different and Apple, potentially, has a great deal to lose should its next iPhone fail to deliver: over $60 billion (€46.6 billion) in annual revenue (as of 2011) and its record-breaking status as the biggest technology company in the world.

 

When one is small, one can be nimble and thereby tactical, so with sufficient preparation and the right market entry strategy, it is possible to come up under the radar of incumbent players. But when one is large and a target for others to topple it becomes much harder to maneuver [because there is] more at risk. This is the situation that Nokia and Research in Motion (RIM) found themselves in during recent years – and is also the situation that Apple is in today.

 

Perhaps Apple could walk away from the mobile phone market, having “been there and done that”. But with half of its value and half of its product shipments being accounted for by the iPhone, it is simply too much of a void to leave unfilled. Apple must either admit its dependence on the mobile phone market and commit to a long-term future as part of the telecommunications industry, or find something else to take the iPhone’s place.

 

Apple shook up the mobile phone market a few years ago, especially with the 3Gs, but today’s reality is that the competition has caught up – and in some cases surpassed them. The feature set of the iPhone 4S was even considered by some to be out of date by the time it was launched.

 

Nevertheless, reported revenues from iPhone sales hit astonishing new heights in 4Q11, so there is evidence to suggest that consumers might just keep buying regardless. And as a consequence no real changes to the formula may be required.

 

But does Apple think that it can afford to take that risk? What will happen if the next iPhone is not a ‘true Mk 5’, but ‘just’ another massaged Mk 4? Consumers may come to the conclusion that, not only is their prospective new mobile phone very similar to their last, it’s very similar to their last several – and as a result they may decide to leave that latest offering on the shelf.