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Diversify to Survive: Apple on the Defensive
AUG 01, 2016 19:34 PM
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Diversify to Survive: Apple on the Defensive

 by James Hayward

While Apple’s profits have hit record levels recently, the writing has been on the wall as the competition from Asia in particular begins to produce much improved products at lower prices.  With Apple’s quarterly profits and revenues down, the change in strategy at their primary market matures is becoming less subtle. They need to find the next iPhone, meaning the next big thing. They won’t mind whether it’s a car, a medical device, a wearable, a service, or one of those Jobsian products that we don’t know that we want yet. They will get there, but expect a bumpy ride along the way.

You don’t break the quarterly record for profit from a single company by blowing it all on R&D, but with the purse so big, the strings are now being loosened. Apple’s R&D spending hit 6% of revenue in Q2 2016, equating to a forecasted annual spend of around $14bn in 2016. By the end of the year, this will correspond to an order of magnitude increase in R&D budget during the 6-year Tim Cook era so far, growing above revenue at over 40% each year. Contrast this with the 6 previous years (2004-2010) under Steve Jobs, which saw just 24% CAGR in R&D spend.


R&D spending at Apple, showing the change as the markets evolved, as well as the change between the Steve Jobs and Tim Cook eras

Source: IDTechEx

 

This strategy is nothing particularly innovative, yet along with the infamous secrecy, it fuels an impressive rumor mill about what will come next. Whether it be their automotive division, a virtual reality product, freshly stoked ambitions on augmented reality, a greater focus on services, or even links to some activity in smart textiles, the world waits and second guesses. The next huge breakthrough is not going to come from R&D funding alone (e.g. check in with Volkswagen or Intel, #1 and #3 for 2015 R&D spend respectively), but when other analysts tout a company as the “most innovative” in the world, the world watches and waits not-so-patiently to be impressed.

The writing is on the wall within the mobile phone hardware market. The dominant iPhone has now formally lost ground to its rivals, albeit in the trailing edge of the usual product cycle. In the hardware, the core of their product portfolio has become broader, safer and, thanks to fierce competition, less unique. Incremental gains remain the order of business in the short-medium term, so as prices fall, these changes will be increasingly weak ammunition when defending their famously high ASP.

For example, perhaps the most significant rumored change for the new iPhone, due later this year, is the loss of the headphone jack. Here they would be a first to move, but it remains a defensive one. It provides a welcome boost for new custom headphones options, as well as helping their own premium market-leading adopted whiz-kid: Beats Electronics. Other rumors: the large OLED display, the extra emphasis on the camera, etc. Apple as a follower? Nothing new.

 

What this means for the Watch?

While the Apple Watch remains the undisputed champion of the world of smartwatches, it can hardly be called a heavyweight. Back in January IDTechEx Research forecasted there to be around 8.7 million units in the first year which, despite being one of the lowest estimates out there at the time, appears to still be slightly high. In 2016 sales have slumped, and while new versions of WatchOS have ironed out some early creases, they won’t do much to the bottom line.

The issues are as old as the consumer smartwatch discussion itself; can we optimize fashion vs function vs battery life? Can we find a good product business model somewhere between the 2-3 year planned obsolescence model from portable consumer electronics and the lifetime ownership model in Swiss watches? Can we build a platform that will have a lasting widespread use, considering that nearly all of the functions today are already accessible via a phone (which, most smartwatches still rely on)?

The future is uncertain, and following many discussions with various leading companies throughout our research, our most recent wearable technology forecast is the first that I’ve seen to describe a negative revenue growth for smartwatches within five years (or at least, smartwatches as we know them today, defined as “mobile phone accessories”).

However, in our most recent report on the subject, we describe a future standalone personal (wearable) communication device, or “Personal Hub”, as an evolution of the smartphone. We introduce this as a direct evolution of the smartphone can take over many of the core functions of the mobile phone, and deliver them in a more efficient form factor with a new user interface (based more heavily on voice, motion, etc.). 

IDTechEx Research’s forecast for three categories in the wearable computing device market: smartphone accessories (including smartwatches as we know them today), Standalone personal communication devices (Personal Hubs), and others. See idtechex.com/wearable for more details.

Source: IDTechEx Research

Part of the justification behind this comes from observation of the form vs function discussion of these devices. Early mobile phones followed a strong trend towards being more portable, but the introduction of high-end displays has driven the form factor and size in the opposite direction since around 2007/8. The conclusion we arrive at is that we want the personal and portable nature of the small device, while also having the luxury of a large display when it is required. We predict that mobile phones will evolve into a smaller, more portable and convenient personal hub, with additional phablet-style devices where needed. These can also contain the same functionality, but remaining as an optional accessory for use when needed.

 


Diagram showing the evolution of mobile phones over time, and our case for the evolution of the smartphone into a “personal hub”. Please get in touch for more details.

Source: IDTechEx Research

A device like this could be one way in which the smartphone platform as we know it today evolves. It requires significant improvements in components (e.g. taking the user interface beyond touch, into gesture, voice, etc. and in optimizing the battery life via better energy storage, lower power consumption, etc.), as well as needing to be driven from an innovative leader. As such, this remains just one of several ways in which this platform will evolve, but is the kind of idea that a company like Apple could grasp and lead the device evolution. While some small players have similar ideas in the market today, it will take time and an R&D budget / reach of a global leader to really drive change.

The smartphone war wages on, yet the balance of power is beginning to shift. However, one eye remains on the longer term battle, where the winners will take this ubiquitous smartphone platform and drive its evolution. Despite coming down off the wave of hype, the wearable technology boom has shown that there is space for new consumer electronic products. Devices that are more personal and more convenient than a smartphone can have significant value - a “personal hub” could be the type of product that captures it.

More information on related topics such as wearables will be covered at the IDTechEx Show! on Nov. 16-17 in Santa Clara, Calif.

 

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