Why fuss about a $1 trillion Apple5 min read . Updated: 02 Aug 2018, 11:59 PM IST
Apple's next innovation will come from the software side
It was a question that kept everyone guessing: Which company would be the first to hit the $1 trillion market cap? Would it be Apple Inc., or Amazon.com Inc.? The verdict of the tug-of-war is finally out with Apple briefly touching the milestone in New York trading on Thursday.
The outcome, though, was not as certain as it appears now because markets pundits were see-sawing till even a day back, with many laying bets on Amazon making the final cut. One reason is that Amazon, which is also riding on the success of Amazon Web Services’ on-demand cloud computing platforms, has been tailing Apple for quite a while. Second, Apple’s own performance has not been exactly inspiring.
In fact, when Tim Cook was named the CEO of Apple Inc. on 24 August, 2011, experts believed that the Cupertino-headquartered company would soon lose its magic wand, given that its charismatic co-founder Steve Jobs was suffering from late-stage pancreatic cancer.
When Jobs lost the battle with cancer barely six weeks after Cook walked into the corner office, the perception grew stronger. Back then, Cook was more of a strategist and a guru, credited with the turnaround of the company’s supply chain, rather than one who could inspire a fanatic following—someone who could inspire a million young minds to stand in the queue all night long to earn the first-buyer tag of an Apple product, especially smartphones.
Cut to 2018, the Apple engine continues to roar. Not only on the back of its iconic product portfolio—the iPhones, the iPods and Apple Watches—but also with its next-gen business interests such as Apple Pay, and AI-powered services including Siri and driverless cars.
The company has briefly crossed the coveted $1 trillion market cap figure. Despite Apple’s late entry into voice-based assistants, conversational bots and driverless cars, compared to Amazon, Google and Microsoft, it remains the most valued brand in the world today. Amazon.com Inc. comes a distant second at around $873 billion, while Alphabet Inc. ranks third at around $850 billion.
Much of Apple’s success lies in its unrivalled high-margin products, category-defining innovations such as the iPod, iPhone, Apple Watch and wireless charging, and the legendary design which Jobs was obsessed with. Most of all, the fans put Apple in a completely different league, making it one of the most worshipped brands among marketers.
The recent revenue growth in iPhone sales can be attributed to the release of iPhone 8 and 8s, and the iPhone X, which were launched in November 2017. The full-screen new design iPhone X, in particular, generated a lot of excitement among Apple fans, resulting in strong sales during the 2017 holiday season.
“Although stock price and market cap are financial matters, and the recent share buybacks by the company would’ve contributed to the rise in stock price, the fact that Apple crossed $1 trillion in market cap is an affirmation of us living in the technology era. The top 5 most valued companies today are tech companies, and they have ended over a 100-year rule of oil companies at the top of the public stock markets," says Jayanth Kolla, founder and partner, Convergence Catalyst.
According to Counterpoint’s Market Monitor service, the top 10 companies now capture 76% of the market, leaving over 600 brands to compete for the remaining 24% of the market share. Apple shipped 52.2 million iPhones (trailing Samsung with 78 million units globally) in the first three months of 2018.
iPhone X remained the top seller for Apple during the quarter. In India, though, the premium smartphone market contributes to a mere 4% of the overall smartphone market, even as the top three brands—Samsung, OnePlus and Apple—contributed to 95% of the overall premium.
However, even though Apple trails Samsung (and now Huawei too) in unit shipments, it makes more money in per-unit sales. According to research firm IHS Markit, the manufacturing cost of the Apple iPhone X (A1865 version of the smartphone with 64 GB of NAND memory) was $370.25. However, the iPhone X had a starting price of $999. In comparison, Samsung’s Galaxy S8 (64 GB NAND memory) costs $302 to make, but is retailed at $720.
Based on the bill of materials’ cost and retail pricing, IHS Markit believes that Apple is maintaining its typical hardware margins for the iPhone X. “That gross margin may increase over time as manufacturing yields improve," the note said.
However, not all are impressed with Apple’s success. In a note to investors this April, Mirabaud Securities analyst Neil Campling said, “the iPhone X is dead" and Apple will have no choice but to “discontinue" the handset this year. Forrester analyst Thomas Husson, too, believes that Apple must change the perception that it is lagging Amazon and Google on voice-based assistants and conversational interfaces. “...despite Siri’s relative adoption among Apple consumers and more recently Apple Business Chat, more brands plan to invest in Amazon Alexa and Google Assistant than in Apple’s Siri," he said in a note prior to Apple’s worldwide developers conference event on 4 June. Husson believes the recipe for Apple’s success is to “enable developers and then brands to differentiate daily consumer experiences", which can help it “showcase that it can reduce its dependency on iPhone sales and enter new adjacent markets and territories".
If the conference is any indication, Apple’s next innovation will come from the software side. Augmented Reality (AR) will be a big part of that, with the ARKit updated for more personalised experiences, new AR content formats and multiplayer support. Moreover, Apple Music streaming service is also giving Spotify a run for its money. All these innovative features may help Apple increase its fan following even as it needs to keep tabs on the stiff competition from the likes of Facebook, Amazon, Google and Microsoft. As Kolla puts it: “As we enter a new era in tech, wherein data and artificial intelligence algorithms start taking centre stage, it will be interesting to see how Apple manages to maintain its leadership position leveraging its current products and user base."