But he added: “We’ve got some amazing new products in development, so we’re excited about the year ahead.”
That was 2002, and Steve Jobs launched the iPod less than a year earlier. Back then, Apple was embarking on a remarkable wave of innovations that would culminate in one of the most lucrative consumer products of all time: the iPhone. But this week, after Jobs’ successor, Tim Cook, issued a similar warning, investors are now wondering what can possibly follow “peak iPhone”.
Mr Cook’s 1,400-word letter to investors was long on excuses but lacked the pithy promise of an imminent return to form that Jobs’ 72-word statement did 16 years ago — the last time Apple issued such an intra-quarter bombshell.
“We are confident and excited about our pipeline of future products and services,” Mr Cook wrote. “Apple innovates like no other company on earth, and we are not taking our foot off the gas.”
How Mr Cook and his team respond to the iPhone’s current crisis will reveal exactly what kind of business Apple is becoming as it approaches its 43rd birthday.
Is the company that hired the former chiefs of Burberry and Yves Saint Laurent really a fashion brand, selling affordable luxury but subject to the whims of fickle consumers? Can it turn its services business — which generated $10.8bn in revenues in the past quarter — into a new engine of growth, in a transformation similar to the one that propelled Microsoft to supplant Apple as the world’s most valuable company?
Or is it just another hardware company such as Nokia or BlackBerry, as naysayers have long predicted?
“This is going to be Tim Cook’s defining moment as CEO,” said Michael Gartenberg, a former director of marketing at Apple who now works as an independent tech analyst. “It’s easy being Apple CEO when everything is going right and firing on all cylinders. This is the time we will see Tim Cook really be tested.”
‘Huge change’ in the smartphone market
The dotcom bust turned out to be a profitable period for Apple thanks to the iPod and, from 2003, the iTunes Store. Those hits fuelled the development of the iPhone, which also launched into an economic downturn in 2007.
“If there is a world recession, Apple has been very resilient through those times,” said one former long-serving Apple manager.
But he added that this week’s warning nevertheless marked a “huge change” as the smartphone market braces for its first global downturn.
Despite many of Apple’s suppliers warning of cutbacks and waning smartphone demand, “it seems like [Apple] had their head in the ground”, the former manager said. “What surprised me more was that they weren’t ahead of this.”
While Mr Cook and his key deputies Phil Schiller and Eddy Cue have lived through Apple’s previous ups and downs — Mr Cook joined the company two decades ago — the vast majority of Apple’s rank-and-file employees, as well as about half of its executive team, have only ever experienced the breakneck growth of the iPhone era.
Before the iPhone launched, Apple had 17,787 employees, according to regulatory filings from late 2006. Apple’s headcount now stands at 132,000 — doubling even since 2012.
Another Apple veteran said the vast majority of Apple’s staff had “never seen struggle or conflict”.
“Steve [Jobs] always used to say recessions are great time to invest in R&D,” they added. “Most companies cut back.”
Even with revenues set to decline by around 5 per cent in the crucial December quarter, Apple’s R&D budget continued to soar last year, climbing 23 per cent year-on-year to $14.2bn — more than twice its spend in 2014.
Some of those resources are going into forthcoming products, including autonomous cars, smart glasses and new entertainment services. The company recently hired former Tesla designer Andrew Kim and Oculus VR producer Dorian Dargan, underscoring its continuing ambitions in transportation and immersive computing. A new original video service to rival Netflix is expected to debut within just a few months. And Apple’s huge R&D investment has already produced new successes, such as the Apple Watch and AirPods, sales of which grew by almost 50 per cent in the past quarter.
But it will take time to develop any new product into a meaningful business, at least by the iPhone’s outsized standards.
“It would be nice to see an unveiling of a brand new Apple product that has people lining up outside Apple stores days in advance, but it doesn’t look like anything like that is on the horizon,” Mr Gartenberg said.
The end of the ‘golden era’?
Seven years into his tenure as chief executive, Mr Cook can claim several meaningful milestones, including briefly turning Apple into the first trillion-dollar company. But he has not succeeded in lessening Apple’s dependence on the iPhone — arguably reflecting a misplaced bet that the smartphone could generate even more revenues through higher prices, even as absolute volume growth slowed.
In February 2015, revelling in the huge success of the iPhone 6 and on the day it became the first US company to exceed a market capitalisation of $700bn, Mr Cook told a Goldman Sachs investor conference: “We don’t believe in such laws as laws of large numbers.”
But the “old dogma” seems to be catching up with Apple, as it struggles to convince customers to pay upwards of $1,000 for a new iPhone. Critics say the current line-up is both expensive and confusing, with too little differentiation between the $750 iPhone XR and $1,000 XS. Yet overtly cutting prices risks hurting Apple’s premium brand positioning — and is likely to push the company to explore more creative ways to promote its devices, such as annual subscriptions or bundling its hardware with subscriptions to services such as Apple Music.
Investors’ concerns that Apple may never find a real successor to the iPhone sent its shares tumbling by 10 per cent on Thursday, its worst one-day performance in five years and leaving Apple valued at $675bn, less than Microsoft, Amazon and Alphabet. In a matter of months, it has shed about $400bn of market capitalisation — more than Facebook’s entire valuation.
Some analysts have even compared Apple’s situation to that of Nokia, the former mobile market leader that was so thoroughly disrupted by the iPhone.
In a research note on Thursday that warned of the “potential for further downside” to sales estimates this year, Goldman Sachs pointed out that Nokia saw a “rapid expansion of replacement rates in late 2007”, similar to the trend Apple is now experiencing of some customers holding on to their existing iPhones for three or four years.
Richard Windsor, an independent mobile analyst, said: “Nokia discovered between 2003 and 2006 that when a consumer device market matures it becomes very unpredictable, which is exactly what I think is going on here.”
But he added: “I do not in any way think that this represents Apple’s ‘Nokia’ moment, simply because there is still nothing to seriously challenge the iPhone in the high-end segment.”
What comes after the smartphone remains an open question for Apple and the entire device industry as it prepares to gather in Las Vegas next week for the Consumer Electronics Show.
But just as it would have been foolish to write off Apple in 2002, some observers still see potential for another comeback.
“If ever there was a team that could deal with these issues and go forward, I think it’s the team that is in place,” said Mr Gartenberg. “The question is, is this still the golden era of Apple or is it going to become just another technology company?”
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