Apple, a smartphone company that also makes computers, lost almost 10 percent of its stock value yesterday after the company lowered its earnings projections. Just a few months ago, the company became the first to reach a trillion-dollar valuation. Now it’s worth about $675 billion, having shed almost a third of its value since its summer high.
In a lengthy letter to shareholders explaining the change in expectations, Apple CEO Tim Cook mostly blamed China: The country has been a huge market for Apple, and quarterly sales there missed targets, a situation made worse by a U.S. trade war with the country.
But that’s not the whole story. Cook also revealed that “some developed markets”—that probably means the United States and Europe—were seeing lower iPhone upgrade rates. More people chose to replace their existing phones’ batteries or just keep older devices for longer, given the high price of the hardware and the decline of wireless-carrier subsidies. In other words, more people are hanging on to their phones rather than buying new ones.
Apple still sells a lot of hardware and makes a lot of money—$84 billion for the quarter that just ended, according to Cook’s new guidance. But that revenue had been growing so much, for so long, that investors expected it would continue, whether from iPhone sales or something else just as big that Apple would invent and bring to market. But nothing is as big a product as the iPhone, and the global market has reached a point where almost everyone who wants or needs a smartphone has one already.
For years, the excitement the smartphone generated seemed unstoppable. Apple keynotes, which were really just glorified product announcements, felt like concerts or sporting events. So much of ordinary life took place on these rectangles—work, photos, socialization, dating, play, entertainment. And the technology that facilitated those conduits for that intimate contact with the wider world evolved so fast and so deliberately, it felt electric.
And then it didn’t anymore. Smartphones domesticated and became ordinary and necessary accoutrements of everyday life. People still love them, but they are also exhausted by them—by their grip on time and attention, but also on their wallets. Who needs a new iPhone every year or two? More and more, nobody does. And that’s both a victory for Apple, which has made the smartphone the single most important change in 21st-century life, and a huge problem for a company expected to amass ever-greater profits from their sales.
But perhaps the solution to that problem isn’t to sell more iPhones, or even to replace those sales with something new. Maybe it’s time Apple made smartphone life better, rather than just unceasing.
Every year, some people need a new car. But taken together, car sales in America have remained steady since 1970, declining a bit in the 2000s and experiencing a bigger dip after the Great Recession.
That’s because cars won. They became a part of American daily life, for better and worse. That could change if cities suddenly invest in transit and walkability, or if new services such as ride-on scooters and autonomous cars transform personal transit. But until then, a car is just a car. You use it to get around. You buy a new one (or a new, used one) when your old one breaks down or no longer suits your needs.
What you don’t do is buy a new one every year or two. Even on a lease. A car is often a necessity, but that doesn’t make auto manufacturers high-growth companies producing record-breaking profits year after year, like Apple and Google and Facebook. Instead, at their best, those businesses are blue chips—large companies with consistent past success, whose financial performance tracks a generally reliable market. Insurance companies, banks, airlines, consumer packaged goods, automakers—and, now, perhaps, smartphone manufacturers. As the Wall Street Journal writer Christopher Mims put it last year, phones are like cars now: “There is absolutely no reason to upgrade unless your old one no longer does what you need.”
Critics have warned that Apple needed new innovations to account for the inevitable plateau in its smartphone business. But that need makes a couple big assumptions. First, that companies like Apple should sustain high growth rather than transition from novelty to stability. And second, that a company like Apple is even capable of multiple hits as big as the iPhone.
Apple was already an outlier among high-value technology businesses. It makes most of its profits selling electronic devices, whereas other top tech companies, such as Google and Facebook, make money from digital advertising. The latter model is also running out of steam: The ad racket is a high-margin business, but that market might be plateauing, a risky proposition for companies that generate almost all their revenue from selling ads.
Microsoft and Amazon offer a different model for success. Their approaches look pretty boring by comparison, but they might represent the mold that Apple will follow as it acclimates to flat smartphone growth.
Microsoft, which went public in 1986, grew slowly until the 1990s. During that decade, its stock increased about fiftyfold thanks to the PC boom before withdrawing after the dot-com crash. The company receded into the background during the 2000s, the decade of Apple, Google, Facebook. It had become staid and dull, out of sync with the contemporary technological situation. Even so, Microsoft performed admirably, selling operating-system and productivity software, providing business services, and selling devices such as the Xbox. Revenue and earnings were reliable, and the company paid generous dividends to its shareholders. It became a blue chip.
By 2013, Microsoft’s stock price started to grow again, eventually doubling its dot-com value by the end of 2018. It did so through innovation, but innovation of a fairly modest novelty compared with its competitors. Microsoft pushed into mobile computing and cloud services, for one, moving Office online and offering it as a service to organizations. It added a tablet hardware product, the Surface, and standardized Windows across PC and tablet platforms. It stabilized its share of the video-game-console market. It bought Skype, LinkedIn, Visio (a popular block-diagramming software), and Mojang (the makers of Minecraft). Other acquisitions, such as picking up Nokia’s flagging phone business, didn’t work out so well, but overall Microsoft has thrived. As Apple sunk to less than $675 billion in market value in the wake of its downgraded earnings outlook, Microsoft was the most valuable company in the world.
That state of affairs suggests a different path to long-term value, through periods of substantial growth interspersed with the sustained support of a mature, diversified business. That’s what Amazon looks like, too: an online retail giant that also boasts successful business units in home automation, streaming media, ad services, manufacturing, and cloud computing (Amazon Web Services now accounts for more than 10 percent of the company’s revenue). Those successes were hardly driven by the purity of visionary innovation; each one came along at different times, as Amazon recognized market opportunities in which it had a unique ability to capitalize.
And though it’s easy to forget, that’s what Apple’s history looks like, too: the personal computer in 1977, the user-friendly computer in 1984; the computer as interior design in 1998; the portable music player in 2001; the smartphone in 2007; the tablet in 2010. Each of these devices created a new market, even if Apple wasn’t the first or only company to realize them—in most cases, it was copying or building upon prior ideas, making them viable and desirable for a mass market.
But the iPhone was entirely different from those other products—and from anything else ever made, too. It became the most successful consumer product of all time. That success brought enormous profits to Apple, along with outsize expectations. Apple had been roughly doubling iPhone unit sales for years. The idea that Apple would replicate the iPhone’s success with a quick succession of follow-up products was probably always a daft one. The iPad hardly even counts as a different product line from a smartphone or a laptop. The Apple Watch has shown promising results, but it remains mostly a mediator for the smartphone. Airpods are great, but it’s hard to see them replicating the iPhone’s success.
As Microsoft and Amazon indicate, long-term success often looks far more boring than triumphs driven by innovation. Making an office suite work online, as Microsoft did, or selling the infrastructure that Amazon’s e-commerce business runs on, as AWS does, are hardly exciting prospects for investors or consumers. But they offer enough value to produce reliable, stable growth.
Some might criticize Apple for failing to deliver on wholly new products, such as its long-rumored car. Given the enormous pile of cash the company has on hand, some kind of R&D miracle might seem inevitable. And those who yearn for a design and lifestyle miracle as monumental as the iPhone might hope that this slump will push Apple to double down on big ideas.
But a careful read of Tim Cook’s letter to shareholders suggests the opposite. Instead, Cook seems poised to double down on boring services, like the kind that have helped Microsoft and Amazon. Once iPhones reach market saturation, Apple is far more likely to enjoy greater profits from selling add-ons for those devices to the customers committed to the platform. Apple Music offers one example, as does iCloud, a subscription that has become a begrudging necessity as families need to back up and store photos from their Apple devices. Apple has tried to turn the iPhone itself into a service, via the iPhone Upgrade Program, which takes a monthly fee and allows users to get a new device every year or two—Cook’s letter indicates a desire to make that service more appealing, too. There’s also been chatter about a Netflix-style Apple subscription program for newspapers and magazines, a service that Apple might be uniquely positioned to offer.
But all of that is probably not enough to make up for declining iPhone sales. Especially since sales aren’t really declining from indifference or disruption—it’s just that the marketplace is saturated, the devices are excellent, and nobody needs to pay as much for one as often as Apple would like, and as the market seems to have assumed they would.
Apple’s earnings warning stripped $67 billion from the company’s market cap and dragged the whole Dow Jones Industrial Average down 600 points. That’s partly because Apple’s surprise performance issues a warning for the global economy, and not just in China.
As my colleague Alexis Madrigal noted, that worry stems partly from the fact that growth in American companies has become so reliant on overseas markets—not to mention the fact that growth itself is expected without end. If that growth falters, it spells trouble for the economy in the short term. But the obsession with growth also privileges the accrual of corporate wealth over the improvement of quality of life.
One of the saving graces of blue-chip companies that sell toothpaste and cars and, now, smartphones, is that they provide something else, too: stability over time. Apple’s a part of the Dow Jones Industrial Average, a stock-market index that was built to track blue chips, those companies that are supposed to do well in good times and bad, over the long haul. Google and Facebook are not components of the Dow, but Apple and Microsoft (and Intel, IBM, and Cisco) are. As trade war looms and the stocks enter what looks like the end of the longest bull market in history, maybe the American economy—and the souls of its people—don’t really need another gizmo like the iPhone, around which their lives might be redesigned anew. Maybe they just need the lives they have, contorted though they’ve been by the smartphone, to enjoy responsible, long-term support and maintenance. The iPhone is here to stay. Imagine if Apple could make that state of affairs feel like a comfort, rather than a burden.
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