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Tuesday, February 5, 2013

Peaking Companies: Apple Has Ripened

Disclosure: I am an Apple user; I have a MacBook Pro, iPad2 and iPhone 4S.  I am quite happy with these products, but I am not a raving fan. Why? There are lots of little disappointments and annoying features that seem easy to fix. Now my attitude is positive/neutral, but I would consider other brands when I purchase my next new device.  

Disclaimer: This should not be considered advice for buying or selling any equities. Personally, my stock picking record is not good, so I have given it up and do not hold any individual equities in any companies about which I write. 

We have seen it before: big corporations get so big and consequently, they have difficulty with technology inflections, the need to increase their addressable markets, and adding more markets to continue their glory and meet the expectations of Wall Street.

Historically, I have observed that companies are slow to admit there is a problem and turnaround/comeback plans are audacious and high risk and usually unsuccessful. IBM peaked back in the 1970s before minicomputers ate their lunch. DEC rode the minicomputer wave, peaked in 1987 and was a shell of its former self in just five years. Dell and HP have similar stories. We have too many examples of companies soaring and becoming high fliers and then dropping and in some cases crashing rapidly. History is repeating itself; Apple is now in this category.

Apple has had an amazing run of growth, great products and huge profits. It seemed it could do no wrong, but that was then.  Now, it seems the company can do little right. iPad mini was not very impressive; AppleMaps was a disaster; the iPhone 5 was somewhat disappointing. Not only did the iPhone 5 force everyone to a different charger, but it also broke Bluetooth connections with many devices. The result is that are doing major damage to the brand, resulting in a reduction in demand for iOS devices.

Many Apple fans are abandoning their apple product and are considering other brands — unconceivable just a few years ago. This is natural as the essence of brand is human reaction/feelings, and our emotions are influenced by little things. If enough little things accumulate it triggers a cognitive switch, and we generalize those little negative feelings toward everything about that brand. (Banks, cable and telephone companies have this problem.)

Apple has reached its long-term peak (two to five-year frame), and it will not regain its glory. Since the company no longer has a one-of-a-kind product visionary, Apple needs to either replace the visionary or transition to a different business model. Because it was able to produce great new products or create all new categories every four to eight years, it could beat competitors to market, command higher prices and higher margins. In an incremental product enhancement model, profits are challenged with lower margins, and competitors Samsung and Google are formidable if you do not keep changing the rules of the game or the categories.

IMO, Apple’s major problem is that it lacks a product visionary. Steve Jobs was a genius, and it is hard to replace that. There are other models to foster insanely great innovations absent a superstar, but I do not see this yet in Apple. Tim Cook appears to be a reasonably good manager, and Jonathan Ives is a great designer, but neither are product visionaries. It is not easy, and maybe they need to change the culture, policies and attitudes towards innovation. They have already started to follow Google’s lead with the Blue Sky initiative (employees are allowed time to pursue projects); however, it won’t work without real buy-in and respect from top management. Until we see that, do not expect Apple to return to its former self any time soon. 

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David Dines

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