Is Apple past its prime?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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I know you’re wondering if this is yet another of those clickbaity, attention-grabbing headlines that may result in retaliation from a legion of Apple loyalists. It’s not. It’s a genuine question to whoever can answer. From an Apple fanboy, this has been a thought that’s been festering now more than ever. Is Apple past its prime? As a longtime customer, I sincerely hope not, though I can’t help but wonder about a few questions.

Which geography will growth come from?

Apple gets about 42% of its revenue from the Americas, 25% from Europe and 19% from China. A cursory look at the macroeconomic outlook for regions shows a cloudy future.

The International Monetary Forum’s (IMF’s) recent World Economic Outlook pegs global GDP growth at 3.2% in 2024 and 2025, with advanced economies growing at just 1.7% and 1.8%, respectively. China, too, is likely to grow slower in 2024 and 2025 than it did in 2023— nearly 86% of the company’s revenue geographies are at a macro risk.

The pain is also visible in its recent financials, where the revenue growth for the last quarter and the whole of the previous financial year has been lower than four-year averages. Greater China saw a decline of 13% in January-March revenues, and analysts don’t expect a return to a positive trajectory in 2024, at least.

A major turnaround in the global economy is essential to Apple’s immediate revenue recovery. The future for that, however, remains uncertain.

Apple Revenue Growth

Source: Company filings, Bloomberg

To mitigate this, Apple has also been diversifying into high-growth geographies in the recent past. Revenue growth in Asia Pacific, excluding China and Japan, has been compounding at about 30% higher than the company’s overall average growth.

India, for instance has been among the fastest growing countries for Apple in recent years. As per a Registrar of Companies (RoC) filing, Apple’s FY23 revenue in India stood at ₹49,321 Cr ($5.9 billion), a growth of 48% over the previous year. For FY24, the projections range between $10-12 billion (₹85,000-1,00,000 crore).

The question is, how long before India becomes big enough for Apple? For perspective, Apple’s revenue in China for FY23 was $72.5 Billion. For India to be at least as big as China by FY30, Apple India’s revenue will have to compound at around 40% annually for the next six years. Possible, but highly improbable given India’s high concentration of wealth among a small segment of the population and a struggle for growth at the mass-end.

With macro risks around its key geographies and limited contribution from newer countries, the onus of growth moves away from just geography to vectors like innovation and products.

Can iPhone and accessories still drive growth?

It can be safely said that no product has been more influential in this millennium than the iPhone. It singlehandedly brought about a radical change in how phones are designed, businesses are conceptualised and content is created.

The iPhone, launched in 2007, first crossed the sales of the Mac in 2010 and has been Apple’s hero product ever since. iPhones now account for two-thirds of the company’s product revenue, and over half the company’s overall revenue.

However, with small incremental changes, a longer replacement cycle and over a $200 billion revenue base; growth acceleration opportunities may be lower than what the street is used to seeing earlier.

As a result, we’ve also seen a reduction in the CAGR of iPhone sales over the years.

Pace of iPhone Sales Growth

Source: Company filings, Bloomberg

This still leaves us with the following question—which product will growth come from>

Among all products launched by Apple in the Tim Cook era, the Apple Watch and AirPods have been the most successful. The company classifies this under Accessories in their reported financials.

Image: Reuters

Apple Watch was first launched in September 2015 and AirPods, the next year. Accessories reported $17.4 billion in sales in the 2018 financial year and have now ballooned to roughly $40 billion. However, just like the iPhone, both AirPods and Apple Watch are seeing smaller, incremental changes and longer replacement cycles—a sign of a maturing category.

In the absence of a revolutionary feature, it is unlikely that these products will grow far ahead of the category, apart from occasional bumps seen during product launches. That brings me to my next question.

What will Apple’s next hero product be?

In June 2023, at Apple’s annual Worldwide Developers Conference, CEO Tim Cook first gave the world a sneak peek at the Apple Vision Pro. This marked the company’s first “revolutionary” category launch since the Apple Watch in 2015.

Ever since the product was made available for sale in the US from February 2024, Ming-Chi Kuo, a seasoned Apple analyst, has revealed that Vision Pro’s demand has surpassed Apple’s original estimates of 1,50,000-2,00,000 units. At $3,500 a pop, this could well add another billion dollars to its quarterly sales and has all the makings of a hero product.

However, at $3,500, the Vision Pro, many say is prohibitively priced without any justifiable use case.  User reviews have also suggested, at that at over 1.3 pounds (600 grams), the Vision Pro is heavy and neck fatigue can set in quickly. The headset, some said, is also not easy to travel with.

So while there is potential for the Vision Pro to become the next hero product, teething issues and the development of a use case and an ecosystem around it may take a few years for it to reflect in sales.

Apple Revenue from Products

Source: Company filings, Bloomberg

Additionally, the hope of another hero product in the form of the Apple Car was dashed when reports suggested Apple’s closure of the project after almost a decade in development.  It was in 2014 when Apple started the ambitious “Project Titan” with more than 1,000 automotive experts and engineers to develop an Apple-branded electric vehicle with limited self-driving capabilities. Through the decade, Apple’s car foray has been a bumpy ride with internal strife and leadership issues. Rumours of its auto plans having been shelved have surfaced a few times from 2016 through 2022. Approximately 2,000 employees working on the car, as per the report, have now either been reassigned to Apple’s generative AI team, laid off, or sent to other divisions within the company. More on Gen AI later, but until then, another question.

Is Services the new product?

Apple has always positioned itself as the entire ecosystem of offerings. A software company so obsessed with quality and design that it makes its own hardware as well. Services, the revenue it generates from the share of In-App purchases, subscriptions for Apple Music, TV+ and iCloud storage have been a major focus area for the company. It was in 2017 that Cook proclaimed, “We want to double the revenue of services business by 2020.”

Six years later, how have they fared? Apple’s Services revenue has nearly trebled—from $32.7 billion in FY17 to $85.2 billion in FY23. The contribution of Services to its revenue increased from 14% in FY17 to 22% in FY23. In the January-March quarter as well, revenue from Services grew 11% even as that from Products was flat. Services alone in the previous quarter brought in as much revenue to Apple as did Accessories, Mac and the iPad combined.

Apple: Rising Share of Services Revenue

Source: Company filings, Bloomberg

Investors love Services due to its high gross margin (~2x products) and its recurring nature. Apple’s market capitalisation has quadrupled since Cook’s 2017 pivot to focus on doubling Services.

Increasing Services revenue just means cash registers ringing non-stop. But, another thing that increasing Services revenue does is ring the alarm bells of competition watchdogs. That’s the next question which worries me a bit..

Can regulatory action topple the Services applecart?

Apple’s growing popularity and market dominance have both irked competition and made lawmakers vigilant. Two recent instances suggest Apple isn’t immune to regulatory risk. The first was in June 2022, when the European Union passed a law requiring all devices to be compatible with a USB Type-C charging port by late 2024. That made Apple move away from their proprietary Lightning port to a more commonplace charging port in most of its products, including the latest iPhone 15 series.

The second, more recent one, was when Apple lost the EU antitrust case after Spotify’s complaint. It has been asked to cough up a hefty $2 billion fine as the lawmakers concluded that the App Store rules do put unfair restrictions by banning app developers from fully informing iOS users about alternative and cheaper subscription services available outside of the app and also from providing any instructions about how to subscribe to such offers.

The App Store—and the Google Play Store—does charge a 30% fee from App Developers on all transactions on the Store and In-App Purchases. While Android allows for downloads from outside the store as well, iOS doesn’t. This is what app developers are complaining about.

The current ruling may also embolden other app developers to complain and may pose a risk to Apple’s ability to keep charging as freely, at some point.

While that is a risk for the future, the current, more pressing concern is about AI. Ever since that image of Cook and Sundar Pichai surfaced, one wonders…

Has Apple missed the bus on Generative AI?

At Apple’s shareholder meeting in February, Cook said “Apple will ‘break new ground’ in Generative AI this year”. He also added, “We believe it will unlock transformative opportunities for our users when it comes to productivity, problem-solving, and more,”

The question is, when and to what extent? Cook has previously called the secretive Apple Car project the “mother of all AI projects.” It has now reassigned a lot of the now-abandoned car project employees to its Generative AI team.

While Cook didn’t go into detail on how Apple plans to bring AI to the iPhone and other products, industry insiders are speculating that Apple will disclose its AI strategy at the WWDC in June. For its part, Apple has released an open \-source AI model called MLLM-Guided Image Editing, as per Github. There’s more expected on AI with the release of iOS 18 as well.

To up its game in AI, Apple has also announced the acquisition of Darwin AI, a Canada-based Artificial Intelligence (AI) startup, as per Bloomberg. Darwin AI has created AI technologies for visually inspecting components during manufacturing and works on ways to make AI systems smaller and faster. Apple has also on-boarded Alexander Wong, an AI researcher at the University of Waterloo who helped build Darwin AI, as a director.

However, the slower relative pace of Apple in Generative AI innovation has raised concerns, especially as Samsung has already collaborated with Google to bring Gemini AI features to its new phones. Several rivals too have rushed ahead with self-developed large language models (LLMs).

At its peak, Apple was known to be at the forefront of any underlying tech development. Even when its products weren’t necessarily the first in a category, they are first of a kind. While it’s extremely secretive about any new product or software developments, its silence in the market on Artificial Intelligence has many worried.

With that, it’s time for the final question. Any company, tech or otherwise, is eventually run by people and leaders and that makes me think…

After Tim Cook, who?

Cook has been the CEO of Apple for 13 years now. While Steve Jobs casts a long shadow, Cook has made Apple his own, so much so that it seems difficult to imagine Apple without Cook. Despite that, the truth is, his days are numbered. Cook joined Apple in March 1998. He’s been working for a little over three decades. He turns 64 in November 2024. He is due to receive a million shares of Apple—stock options that vest in 2025. Nothing about further equity options has been disclosed thereafter.

In a recent conversation with Dua Lipa on her podcast, Cook hinted about the future CEO of Apple where he said, “I really want the person to come from within Apple.” While he did mention that he’s not looking at stepping down anytime soon—he still can’t “envision his life” without being at Apple—he also said, “We’re a company that believes in succession plans and we have very detailed succession plans.”

Now, depending on the rumour mill you hear from, Cook’s retirement could come anytime between 2025 and 2028. Some suggest he would like to be at the helm for another major category launch and watch Apple’s market cap hit a historic $4 trillion as well.

The names for his successor range from Kate Adams (Apple’s General Counsel) to Eddy Cue (Senior Vice President of Internet Software and Services)—a 32-year veteran in the company, and even the charismatic Craig Federighi. Greg Joswiak, who is the longest serving Apple employee on Cook’s executive team, is also in line.

Irrespective of who the successor would be, a few things are clear. Typically, volatility follows any leadership transition, but more so when the organisation is Apple. Tim Cook’s first few years as a leader after Jobs were met with scepticism and questions similar to the headline of this piece.

Another certain thing is that companies take different directions under different leaders. Cook’s Apple is vastly different from Jobs’, even if the ethos is the same. The cultural shift in Apple from a product- and design-obsessed “startup-like” mentality to that of a large corporation focusing on Services and Wall Street is quite visible.

But then again, Jobs never asked Cook to do what he would do; instead, “Just do what’s right for Apple,” he said.

Once Cook steps down, both of Jobs’ trusted lieutenants Jony Ive and Cook himself, would have left Apple. A new leader would take charge approximately 16-18 years after Jobs’ passing. This implies that a large part of the leadership may not actually have had first-hand experience or face-time with the company’s visionary co-founder. How much of Apple’s ethos percolates down to the new leadership and what shape the new organisation takes is an important imponderable for long-time Apple fans.

As a company, a brand or even an investment bet, Apple has always had an outsized impact on public sentiment. People feel a little more attached to Apple than any other company because of the impact its products and services have had on their lives. Apple has been at the forefront of shaping popular culture globally, directly or otherwise.

Just because it’s Apple and it is important to the world, it has been asked at various points in history, only to be surprised positively—“Is Apple Past its Prime?”

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow