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Apple has to ride the Digital Transformation … as any others

Relative contribution to Apple bottom line of its different product lines (iPhone, iPad, Mac, other products, including Apple Watch, and services). Services is expanding although it is still a smaller contributor to the bottom line. Graph credit: Business Insider Intelligence

The announcement of Apple, forecasting a sharp decrease in iPhones sales (and attributing the cause to the Chinese market), had analysts voiced strong concerns over the future of Apple, to the point of comparing the fate of Nokia in 2007, when it dominated the cell phone market, to the one awaiting Apple.

A much better analyses, at least to me, is provided in a nice article on Wired where Zachary Karabell (the author) points out that:

  1. the trade difficulties (war) between China and US represent only a factor that is accelerating a more general issue of market saturation (in China as well as in the world)
  2. it is affecting the whole industry, not just Apple
  3. Apple is working, and has been working over the last few years, to prepare for this, by shifting focus on services

Indeed, Apple makes the news but there are plenty of companies that area facing both the saturation of market and the shift of value perception (plus the decrease in the monetarization of value -transforming value in hard currency, a real big issue!).

The cell phone market started from “zero” penetration 30 years ago to a over 100% penetration (of course this is a penetration that includes people having 2-3 phones and some having none), has managed to create a need for changing the cell phone (over 4 million phones are thrown away every day to be replaced by new ones) but in the end it has reached its peak. The substitution rate is not growing (quite the opposite) hence the overall market is not growing (decreasing actually). The big companies live on growth, a steady state is not just stymieing their stock value, it is actually a warning bell.

The shift from products to services is generating cash, but not enough to compensate the one lost by products. The reason is intrinsic in the Digital Transformation. When moving from atoms to bits the value chains in the cyberspace are much more effective, meaning that the whole value chain loses the value that was before tied in the inefficiencies (transaction cost) and this loss translates into decreased price, hence decreased revenues (assuming volumes remain stable).

Looking at the graph showing the partitioning of revenues one can see the increase of the service components but it is unlikely that the increase in the next decade will be able to make up for the decrease in revenues of products, if this decrease becomes significant.  However, Apple will keep selling “replacement” products and that (provided Apple can maintain its market share) should provide a stable revenue base. At that point the overall increase in revenues can be ensured by the increase of the service part. This is clearly a strong point for Apple. Indeed it makes a difference from Nokia. Nokia was pushed out of the market because it was not able to keep its market share, as new smartphones catch the eyes of buyers. In the case of Apple the issue is that the market is not growing.

It is unlikely that smartphones will disappear in the next decade hence the market substitution will continue. In other areas the Digital Transformation can kill a product in favour of a service, and as I noted it is unlikely that the service revenue can make up for the loss from the product revenue. If you need an example consider the area of digital cameras and lenses. These products are likely to be replaced in the next decade by computational photography where software will replace a variety of lenses (and most likely an embedded camera, like the one in a smartphone, will be able to replace a digital camera). Even assuming that some companies will be able to sell the software (as a service, like Adobe is doing for Photoshop) there is no way that the revenues generated by those software will be able to make up for the loss of revenue in selling digital cameras and lenses!

About Roberto Saracco

Roberto Saracco fell in love with technology and its implications long time ago. His background is in math and computer science. Until April 2017 he led the EIT Digital Italian Node and then was head of the Industrial Doctoral School of EIT Digital up to September 2018. Previously, up to December 2011 he was the Director of the Telecom Italia Future Centre in Venice, looking at the interplay of technology evolution, economics and society. At the turn of the century he led a World Bank-Infodev project to stimulate entrepreneurship in Latin America. He is a senior member of IEEE where he leads the Industry Advisory Board within the Future Directions Committee and co-chairs the Digital Reality Initiative. He teaches a Master course on Technology Forecasting and Market impact at the University of Trento. He has published over 100 papers in journals and magazines and 14 books.

One comment

  1. It looks like, and it is no surprise, that the issue of slower sales in China is not an Apple issue only but it is quite general. Official Chinese Government statistics, issued on January 7th 2019, indicate a decrease of smartphones shipments in China has fallen 15.5% in 2018. https://9to5mac.com/2019/01/08/smartphone-shipments-china/
    Samsung has also reported a decrease by 28% of its revenues, again mentioning China as a leading reason.

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