Yesterday Apple posted the largest quarterly profit in the company’s history, and still somehow managed to disappoint investors. The stock was down nearly 11% this morning, with analysts citing myriad reasons for disappointment: slowing growth, lower-than-expected iPhone sales and the launch of the iPad Mini, which offers slimmer profit margins than its full-size compatriot.
Now, let’s be clear: Apple is not a company in crisis. It sold 47.8 million iPhones in the last quarter, a 78% improvement over the previous year, and sold 7.5 million more iPads over this Christmas season than it did the previous one. But any expectation the company could maintain this kind of skyrocketing growth indefinitely is—and always was—unrealistic. If Apple’s growth for the next five years matched what it’s done in the past five, the company’s revenue would hit $1.2 trillion, according to a recent report by A.M. Sacconaghi, an analyst at Bernstein Research—roughly equal to the GDP of Australia. Unless investors expect Apple to start printing its own currency and opening embassies, they need to accept an inevitable slowdown in growth.
Apple cannot afford to simply stare at its balance sheet and assume everything is fine. Research in Motion made a similar mistake, assuming their customers would stay loyal and their profits would stay healthy, even as warning signs mounted around them. Indeed, Apple is banking on the same consumer devotion to its products as RIM once did. “At Apple, it’s important to us that we make products that customers not just like, but love,” CEO Tim Cook told analysts yesterday.
That love for Apple is increasingly fickle. Consumers once enraptured with the iPhone can now cast their eyes to Samsung, or a fleet of other phones running the Android operating system. Apple hasn’t done much to maintain consumer loyalty with a widely derided revamp of iTunes and the complete failure of its in-house map application. As people live with Apple products, they develop grievances and gripes about their idiosyncrasies. “For glassy-eyed fanboys like me, the seamlessly magical Apple experience has frayed a little at the edges lately,” Canadian Business columnist Bruce Philp recently wrote.
Part of that fraying is the fault of the company, no doubt. But it also has to do with a general shift in the digital world. Apple has always made beautiful objects, but consumers now expect their gadgets to play well together. The new expectation is that we can, say, download a song on your phone, and then stream it to your stereo. Or store our photos in the cloud and view them on our tablets or TVs. This is a great idea, in theory, and one that Apple is clearly chasing. The company’s iCloud service, which now has 250 million users, is intended to provide this seamless experience. Anyone who’s used it, however, knows that the reality is far from it, requiring plenty of fiddling with menus and network settings. For the company that built its reputation on “It just works,” this is a serious problem.
Apple garnered love by selling fuss-free products. That’s a considerable challenge even when you’re building a single device. The challenge becomes exponentially greater with each phone, tablet and laptop added to the equation. And further, Apple has long relied on a “Halo effect,” where consumers enamoured with their iPhone decide they might love an iMac as well. But if those two devices don’t communicate, it creates a temptation to look elsewhere instead.
Apple’s short-term health seems assured. But unless it can make cloud computing and networking as elegant as it once made the iPhone, it won’t be feeling the love forever.