USAToday Column

October 28, 2015
Apple's biggest threat could be ... Apple

By Bob O'Donnell

FOSTER CITY, Calif. — It isn’t exactly an enemy within, but it’s close.

After yet another record-breaking set of quarterly results, it may seem like Apple is immune to serious challenges from outside competitors. And in truth, that may well be true.

But there are other challenges that the company could face, and most all of them come, in some way, from the organization itself. For one, though obviously not intentional, Apple continues to morph itself into a single-product business. In the company’s fiscal fourth-quarter results reported Tuesday, the iPhone reached a record 63% share of revenue.

Now, at $32.2 billion for the quarter, it’s not exactly a bad business. In fact, Apple’s revenue growth for the quarter was bigger than 90% of all Fortune 500 company’s total quarterly revenue, according to CEO Tim Cook, and the iPhone represented a huge portion of that growth.

No company wants to be that dependent on a single product line, however, and Apple clearly needs to find more big revenue streams to keep the iPhone revenue share percentage from continuing to grow higher. In a sense, the company is becoming a victim of its own success.

Plus, though the company is optimistic about its iPhone growth potential on both a unit and revenue basis next quarter — as Cook said in their earnings call — everyone knows that all great runs have to come to an end at some point. We can debate exactly when it will happen — and Wall Street investors make quite a game of doing so — but no growth streak goes on forever.

In fact, the worldwide smartphone business continues to slow — even growth areas like China have started to stagnate — so that impact is bound to eventually impact all players in the smartphone market, including Apple.

Another big challenge for the company is that what little growth remains for smartphones is expected to primarily come from emerging markets like India and Indonesia, where Apple’s high price points make it a much smaller player.

One potential way to address those markets, as well as the large percentage of consumers in more established markets where Apple’s prices also present an impediment to growth, was actually discussed by Cook on Tuesday's call.

Apple is expecting that both their and several carriers’ new trade-in and annual upgrade policies should eventually lead to an abundance of “barely used” iPhones that could then be sold at lower price points to more cost-sensitive customers.

On one hand, the theory makes a great deal of sense. After all, there are many consumers around the world who would love to have an iPhone, but simply can’t afford the price for a new one. A good price on a model that’s only a year or so old, though? Sounds like a dream come true for some.

The problem is, in many cases, Apple won’t actually get the benefit of that resale. While the company has announced its annual iPhone upgrade policy, so have all the major carriers here in the U.S., and we’ll likely see similar policies from other carriers around the world. In other words, Apple is likely to only get a small percentage of the used iPhones. Plus, it’s unlikely it would choose to sell those used iPhones itself.

Instead, we’ll likely see many carriers and other resellers offer these “cheap” iPhones, in some cases probably diverting potential sales from customers who might otherwise have tried to stretch to buy a new iPhone. Plus, based on some quick comments made by Cook and CFO Luca Maestri on Tuesday's call, it seems Apple will account for the revenue from any of its own upgrade plan in a different, more stretched-out, service-like manner.

Of course, it remains to be seen what the long-term impact of that accounting method might actually be. At first glance, however, it seems like it could blunt the immediate impact of these sales, thought it might also smooth out some iPhone revenue longer term. On the positive side, if Apple can continue to build the base of iPhone users, it can generate more services and other income from things like the App Store, Apple Music, etc. However, those numbers are significantly lower than iPhone hardware sales.

On top of this, early reports from carriers suggest that only a small fraction of their customer base is actually starting to take advantage of these trade-ins. Many are signing up for the plans with the intention of trading in/trading up their phones, but the number of used phones actually coming in is still very low.

Part of the problem is likely the fact that upgrading to a new phone, though easier than it used to be, is still a real pain. New operating systems, new versions of applications, only partially-transferred settings, and other real-world issues make it less appealing to upgrade than the theory sometimes sounds. Given how much information we store on these devices and how important they’ve become, any glitches with smartphone upgrades can create a very negative experience for customers.

As with other smart devices, the lifetimes of smartphones continue to increase, particularly as we get to really high-quality devices with large screens. The need to upgrade just isn’t as compelling as it used to be and that could prove to have a large negative impact on the potential size of the “barely used” phone market.

To be sure, Apple’s iPhone business is incredibly strong and the envy of most any company in most any industry. But, there do seem to be signs that even though competitors haven’t been able to bring it down, Apple’s own challenges could be the hardest to overcome.

Follow USA TODAY technology columnist Bob O'Donnell on Twitter: @bobodtech.

Here's a link to the original column: http://www.usatoday.com/story/tech/columnist/2015/10/28/apples-biggest-threat-apple/74734632/