A recent announcement from Apple suggests that it is partly experiencing the problem that Clayton Christensen wrote about in his book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, first published in 1997.
The theory is that a company innovates a great groundbreaking product, but is never able to follow it up with another innovative product.
Therefore, the company dies slowly over time as its initial product gets overtaken by everybody else’s. Further, the company is too scared to abandon its great product and move forward, essentially remaining stuck in the past.
Apple fits some of the above, but not all.
The iPod was a groundbreaking product that resurrected the company after almost two decades of no real innovation and stagnant products.
It then followed up with the iPhone, which fundamentally changed the way smartphones work, and which sold at massive margins compared to the many other smartphones one could buy.
But since then innovation has largely stalled.
The iPad is a great product, but not overly innovative and, importantly, a tablet is not nearly as in-demand as a mobile phone.
The upgrade cycle for tablets is therefore much longer than that of a mobile phone.
The Apple Watch is another nice product but is very niche and also has a long upgrade cycle.
With this in mind, consider that the recent trading update on 2 January stated that revenue for the last quarter of 2018 would be approximately $84bn rather than within the estimated range of $89bn to $93bn.
Lots of reasons were mentioned, most notably a slowdown in China, but I wrote late last year that the move by Apple to stop reporting unit sales was a warning of lower unit sales.
The reasons put forward may all be valid, but the bigger picture remains that it has now been over 11 years since the company introduced a major new product (the iPhone) and – while it is a great product – other Android phones are generally considered better, and the high pricing reduces the potential market size.
The two-year upgrade cycle is also being eroded as people keep their phones longer (I know of people who are still using an iPhone 5 or iPhone 6 that works just perfectly).
So where to for Apple?
Well, the company still has a monster pile of cash (about a third of its more than $700bn market cap) and still generates more profit from its iPhones than the rest of the mobile phone industry combined.
Apple also has a massive services business that takes a 30% cut of all software/app sales for the iPhone and iPad and many other smaller and less profitable products.
In short, Apple has failed to deliver a new innovative product and likely never again will. (Companies seldom find one such product, and Apple has already produced two. History therefore suggests it is improbable that they’ll deliver another.)
This leaves the company as a very profitable, but maturing business.
Nothing wrong with this, but it does spell a different sort of investment from a fast-growth stock.
I would also point to Alphabet (Google) and Facebook, which both have a similar problem.
Google remains the world’s largest search engine and Facebook the largest social network.
But these products are respectively two decades and one decade old and dominate their respective industries.
They’re not going away, but revenue per users will slip – as we’re already seeing.
The businesses will eventually mature, especially in the absence of a great new idea (ideas which seems unlikely for them).
All businesses need to either adapt and find new products, or they’ll mature. Some won’t survive the changes as their products become obsolete, but every fast-growing company will in time slow and those I’ve mentioned are good examples of this process.
It doesn’t make them bad investments – in fact, Apple is attractive at current prices – but it is very important to understand where an investment is in its life cycle.