Apple China’s rotten quarter

Apple China’s sales fell 30 per cent in what one retail analyst described as “another fairly rotten quarter” for the tech giant globally.

Apple’s international decline has accelerated with total sales revenue sliding by 14.6 per cent and operating income by 28.2 per cent.

“That the numbers are down come as no real surprise given that Apple has launched very few significant products or initiatives since the last reporting period. However, that they are sequentially worse than last quarter is a cause for some concern, especially so as all geographies, bar Japan, are now in strong decline,” observed Neil Saunders, CEO of Conlumino.

But Apple’s current problems are a lot more worrying for the company than a couple of bad sets of  quarterly figures, even though the company remains highly profitable and cash-rich. At the core of Apple’s challenge is the long period of sustained innovation and ingenuity seems to have dried up.

The same day as Apple announced its latest results, one of the most reliable Apple leak sources, Evan Blass, revealed the next iPhone scheduled for release on September 16 will now be called the iPhone 6SE, because there are insufficient upgrades to warrant a new generation 7 model number. The iPhone – once the mainstay of Apple’s stellar rise – used to be the most-coveted smartphone handset on the market. But Samsung’s Galaxy Edge has well and truly evolved into the most beautiful handset on the market, and a raft of brands around Asia are producing phones with features and specifications equal to or better than the iPhone 6, usually at prices substantially lower.

That partly explains why iPhone sales fell 23 per cent in revenue terms in the latest quarter: it’s just not as sexy as it once was; customers have a wider choice now, and owning an Edge has as much street cred as owning an Apple in many parts of the world.

Laptop sales are weak globally as more and more consumers who do not need computers for work purposes find Phablets and tablets are more portable and just as convenient for social networking, email and watching videos. Mac sales fell 13 per cent last quarter – and again Apple has offered little reason to upgrade in recent years, save the high-resolution retina screens. New models are slated for later this year, but expect this to be another round of higher spec for a reduced price as Apple tries to hold its own against the likes of Samsung and arguably the biggest innovator in Windows-platform computers, Lenovo.

Sales of other Apple physical products fell by 16 per cent.

The only ‘innovation’ from Apple in the last two years is the Apple Watch, which, as Saunders observes, was supposed to be “the next best thing”.

“However, its performance has been disappointing [because] it doesn’t really do very much.

“In most cases it simply replicates what can be done on a phone, albeit less effectively. As such, other than as a status symbol, most consumers do not see the value in spending hundreds of dollars simply to remove the effort of having to lift up their phones. This is a great example of Apple’s genius in producing what remains a technically impressive and aesthetically pleasing device, while missing the bigger picture of how that device fits into people’s lives.”

Ouch. But he is right: The Apple Watch is a solution searching for a problem. It is not a ‘must-have’, life-changing product, merely a gimmick; an expensive, flashy replacement for a pedometer which, wait, you can download onto your iPhone for free on iTunes…

“All of this is characteristic of a company that, while still highly successful, has simply lost the edge that once persuaded consumers to continually upgrade and buy into more expensive pieces of kit.  Apple has become too obsessed with the technical minutiae of products rather than developing radically new devices which capture the imagination, and cash, of consumers,” says Saunders.

Services a bright spot

Saunders says the one bright spot in an otherwise gloomy set of Apple figures comes from the services segment. Here revenue grew by 19 per cent, thanks to more Apple Music subscribers and the strong performance of the App Store. “However, the ground gained here is nowhere near enough to make up for the decline in product revenue, which is where Apple takes the bulk of its sales and makes most of its profit.”

Just what Apple is working on behind the scenes as it seeks its next life-changing product is uncertain. There have been long-running reports it is developing a motor vehicle, for example, a huge investment which the company certainly has the cash reserves to fund. But reinventing the motor vehicle is a hard concept to conceive. Elsewhere it seems to be searching for acquisitions which could aid its growth – among the recent rumours is a bid for Formula 1, one of the world’s most-watched televised sports which could bring access to technical innovation, and most importantly content for a planned TV concept and its existing devices. Neither F1 or Apple has denied those rumours.

Saunders argues that if the company is to return to its once stellar growth, it needs either a radical step change in its existing product line-up or needs to come up with a completely new device that creates a whole new market.

“This is easier said than done, but there are emerging areas of technology – like virtual reality – where Apple should be at the forefront of developments.”

Saunders also praises Apple’s latest incarnation of its retail store.

“Apple’s latest store format is impressive and provides just the type of experience that modern consumers enjoy and will engage with. However, without great products this new format will not deliver very much. As such, Apple needs to put the same sort of forward thinking into its kit as it has done its new shops.”

He concludes: “As much as this may all sound harsh and critical, it is simply because Apple set such a high benchmark to begin with. It remains a very impressive business and retailer, but it is one that is in desperate need of that magical ‘one last thing’ to transform its trend of declining sales.”

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