Apple’s Ship Has Sailed

There is no “next” iPhone…

Edit on September 7, 2016: This thesis, presented September 16, 2014, played out and manifested via year-over-year declines in iPhone sales for reasons including those listed below. Apple has some interesting opportunities ahead, and leadership will become paramount in the years ahead. I hope to write more on this in the future, but for now, consider this piece closed!

I’m bearish on Apple. Not it’s innovation, or its designers, or its leadership. Tim Cook has created a well-oiled machine and I love the company.

But they can’t change the fact that there is no “next” iPhone. Because there is no next “mobile phone”. What we’ve really been selling is “Internet”. Available-anywhere, always-connected access. It’s like wielding fire for the first time, or electricity. And it only happens once in a generation. It joins a very short list of things that “everybody needs” on the planet. Because Information (Internet) falls into the category of Electricity, Air, Food and Water. And for all the talent in the world, Apple cannot create another one of those. Watches, TVs, and tablets are all optional in comparison.

The Hardware/Software Cycle

After nearly a decade lull in computing hardware, mobile devices ushered in a new wave of advances: touch screens, sensors, battery improvements, and mobility.

The early improvements were marked. More sensors, better cameras, batteries and more. But over time, the “new hardware features” have slowed, and become more predictable. We get faster NFC, and Bluetooth, and Wifi, but the changes are incremental: computing gets to be good enough.

Historically this has been where the spending shifts to software. And it will this time, too. Deep learning will mean a troupe of intelligent assistants for us all to enjoy.

Unlink previous cycles, Apple has ushered in “free software” like never before. This has sustained them well as a sort of reverse razor/blades business model. But should the hardware sales slow, the free software model becomes onerous.

The Shifting of the Telecoms

I’m surprised at how many people don’t realize that their phone cost is “subsidized” by their two year plan. Put another way, many of us have been paying $25/month to spread out the cost of our $799 phones.

Recently, AT&T has been promoting plans that more easily opt out of this. For my wife and me, this means $600 savings in our phone plans per year.

Given the lack of “automatic” upgrades, the new purchase decision becomes a $799 decision, instead of a $199 decision. This, at the same time that improvements are more incremental.

Perhaps these options have always been available. But they haven’t been so heavily marketed. And over time, the nature of these decisions will start to change.

What about the next 5 billion?

At this point, most people will be asking: “what about the next 5 billion people to buy smartphones”?

To this I respond: economic growth is a long-term game. To think that these consumers will reach a point of economic viability for a luxury brand like Apple in the next 10 years (a window pertinent to investors) is simply not how economics work.

Photo Credit: Mike and Megan Gilger