IBM created a technological revolution by bringing personal computers(PCs)to the market. Then every electronics company focused on hard drives of higher capacity and monitors of better resolution.At the same time, a maverick college dropout named Bill Gates realized the untapped potential of PCs. When every electronics company was busy improving hardware, Gates was busy supplying an operating system on(almost) every PC. After a few years, the hardware business was fully commoditised. However, the near-monopoly of Microsoft’s Windows operating system(OS)on PCs continued for decades. Eventually,IBM even sold its PC business to Chinese company Lenovo, but again the operating system remained the same.
Fast forward a few years. Nokia once had a near-monopoly on cell phones. It developed cell phones of all sizes,shapes and for every pocket,but gave very little attention to the OS. It never thought a mobile phone could be beyond “phone”. Then Google launched its Android OS and gave it for free to phone manufacturers, leading to a blossoming of cell phone makers,mostly in East Asia and China, killing Nokia’s monopoly. Again,software won over hardware.
While this battle between software versus hardware was going on, one company emerged with a disruptive model with a tight integration of software and hardware,both developed by it—Apple. Since Steve Jobs launched his first Macintosh, Apple Computer’s cardinal principle was to create a niche market of high-end users and provide them a unique, inimitable user experience and charge a premium .The average price of Mac computers was (and is) much higher than of other PCs but consumers were ready to pay for this unique user experience .Eventually, a Mac became a status symbol.
Jobs repeated the same strategy when he launched the iPhone .Based on strong intellectual property protection and tight integration of OS and hardware, he created a new segment of phones. Again, consumers paid a premium for this unique user experience. Eventually, Jobs became a cult figure, engendering high brand loyalty among iPhone users(and Apple customers in general).
Apple’s success story is unprecedented in tech history . In the last decade,it was mainly driven by the iPhone. It also created a totally new product segment,the iPad, forcing others to come out with similar tablets. These innovations paid rich financial dividends to Apple. Apple rarely gave deep discounts to its customers. In fact, its margin per iPhone is the highest in the sector. According to a Reuters report,the gross margin on the iPhoneX is 64%(compared with 58% for the Samsung Galaxy S9+). Apple didn’t play a volume game,focusing sharply on profitability. “We don’t believe in such laws as laws of large numbers,” Tim Cook, the chief executive officer of Apple, said in 2015. This resulted in a 10-fold increase in its market cap since the launch of the iPhone in 2007. In 2018, it crossed $1 trillion in market cap, with close to $300 billion in cash reserves.
Against this backdrop,a letter to investors by Cook at the beginning of the year astonished everyone. He not only predicted close to 8% decline in sales but also predicted an uncertain near future,blaming mainly slowing demand in China.This sent shock waves globally. Apple’s market cap plummeted to around $600 billion.
While slowing growth in China may be a major factor, according to several analysts, this slump is inevitable. First, people are reluctant to buy the latest iPhone. The top spec model costs more than$1,000 in the US and more than ₹1 lakh in India. Would-be buyers feel that despite the steep price, there is not much difference in features between these models and previous ones.Second,and just as important, Apple has not launched any new breakthrough product after the iPad that could create a new market segment and give it the first-mover advantage. Therefore,the question is whether Apple is investing enough in the future.
Investment in research and development (R&D)is one benchmark of how innovative a company is. Apple is investing heavily on R&D but it is still significantly less compared to its peers. According to a 2018 PwC report, Intel spent above 20% of its revenue on R&D. Amazon, Alphabet (Google’s parent company),and Microsoft are spending in the range of 12-14%, but Apple is spending less than 5%.
R&D investment is just one criterion. Undoubtedly, Apple is one of the most innovative companies, with more than 2,200 patents granted in 2017 alone. Jobs didn’t believe that one needs to spend a lot for innovation. He once said “innovation has nothing to do with how many R&D dollars you have”.While he proved his words in his lifetime, Cook seems to have revisited this hypothesis. No wonder, compared to 2014, Apple has doubled its R&D investment in 2018,topping $14 billion.
Despite these investments, it’s no secret that new product development is a treacherous path with multiple hurdles, most of them unknown. While no one doubts Apple’s innovation potential, whether it can launch new products that repeat the success of the iPod, iPhone or iPad, is the question. Microsoft has reinvented itself,under Satya Nadella, as has IBM. Reinventing Apple will not only define its future, but will also determine Cook’s legacy.
Vijay Chauthaiwale is a molecular biologist and in charge, dept of foreign affairs, BJP. Views are personal