Disrupted Company of the Year: Apple. The Whole Company Is Tied to One Phone, and Now the Industry Has Run Out of Road

Remember the Apple Car?

After 18 years of growth, Apple has strapped itself to an industry that has passed its peak. And now it no longer has the confidence to keep growing.

Since October 2000, every three months Apple has published a table less than half a page long, listing three kinds of figures:

• How many units of each product it sold;
• How much revenue each product brought in;
• How much revenue came from each major market worldwide.

Bound together, those tables would make A Brief History of Modern Apple. The letterhead changes from Apple Computer, Inc. to Apple Inc.; the product lines go from distant memories like the iBook and the Power Mac to the big three of iPhone, iPad, and Mac.

The one constant is that the numbers keep getting bigger. From 1.12 million computers sold in a quarter to 61.89 million devices in a quarter. From $187 million in revenue in a quarter to $62.9 billion in a year.

Now Apple no longer has the confidence that people will buy more of its products. At its earnings call on November 1 this year, Apple announced it would end an 18-year tradition and stop reporting how many units of each product it sells. The reason: the number of units sold in any 90 days "is not necessarily representative of the underlying strength of our business."

Steve Jobs, mocking the iPad's rivals years ago, was probably closer to the truth: "Usually, if they sell a lot of something, you want to tell everybody."

Companies do not often change which financial figures they publish and which they hold back. Apple's decision to stop reporting unit sales says not only that it has no confidence in how this year's new iPhone Xs and Xr are selling, but that it expects iPhone sales to stay weak for a long time.

Apple and its investors have both acted surprised.

Apple cut production twice in the fourth quarter, and total orders at an iPhone lens maker were cut by 29%. Promotions for the new phones ran on Apple's own website, which had never happened before, and even the iPhone X, already discontinued to clear the way for the new models, went back into production.

Wall Street reacted just as sharply. In under two months, a third of Apple's market value evaporated, from $1 trillion to under $700 billion this week. Analysts have published diametrically opposed conclusions about how Apple prices its products, as if that were the main problem.

From the conjuring-trick product launches of the Jobs era to steady iPhone growth under Tim Cook, Apple kept growing no matter what the economy did.

Growth was so steady that Buffett, Wall Street's investors, and perhaps Apple itself forgot how little about this business was ever a given.

Among the Fortune 500, the Dow, or the S&P 500, no other company worth $100 billion or more depends on a single product — one that has to be updated every year, and that nobody has to buy — to carry the growth of the whole company.

Oil, chemicals, banking, household goods, and airlines go without saying. But even the tech giants do not stake their future on one product a year the way Apple does. Tencent and Facebook own social relationships, Amazon and Alibaba own online retail, Netflix owns the couch and the hour before bed, and Google owns search, plus the operating system of nearly every phone that is not an iPhone.

Microsoft got hot again because its new CEO, Satya Nadella, cut the hardware business and got companies to pay for services that had moved to the cloud, which meant he no longer had to bet on a Windows upgrade every few years.

One product, the iPhone, has wiped $300 billion off Apple's market value — close to all of Alibaba, and more than JD.com, NetEase, Meituan, Xiaomi, Netflix, iQiyi, and Tesla put together.

Unlike the years when Apple disrupted Nokia, or when Huawei and Xiaomi disrupted Samsung, Apple faces no awkward challenger to the iPhone.

Over the past three years Apple sold nearly 650 million iPhones, with annual sales growth hovering around zero, yet its user base grew from more than 700 million to 1 billion. Users are not leaving: the experience, the brand, and sheer inertia keep them inside the iPhone ecosystem.

But nothing obliges an iPhone user to upgrade. The same figures that prove the iPhone's stickiness also show that more than half of iPhone owners have not changed phones in three years. Even in the United States, where more than half the population uses an iPhone, 41% of iPhone owners are on an iPhone 6s or older.

For most people, the main reason to replace a phone is now losing it or cracking it. Waterproofing, edge-to-edge screens, Face ID — none of these persuades anyone to buy again. This is a crisis for the whole phone industry: global smartphone sales have fallen for four straight quarters, nobody has found a way out, and it does not look as though anyone will for a long time.

Apple has the most to lose, because its whole $700 billion market value rests on the iPhone. Over the past four years, the iPhone brought in more than 60% of Apple's revenue, more than 65% of its gross profit, and more than 80% of its digital services revenue. At the same time, its prices keep the iPhone from finding fresh growth the way Xiaomi, Huawei, OPPO, and vivo each have in Eastern Europe, Southeast Asia, India, and South America.

Pouring everything into one product is why hundreds of millions of people keep buying from Apple. It is also where the crisis comes from.

Apple dodged an industry-wide slump twice, because it disrupted its own industry first

There was a time when Apple leaned on the Mac, and later the iPod, even harder than it leans on the iPhone today.

More than a decade ago Clayton Christensen saw the risk, and predicted once, twice, and again that however good Apple's products were, the crisis would come sooner or later. Each time, Apple moved first.

"What matters is that we start the transition ourselves. As Christensen's 'innovator's dilemma' has it, the people who invent something are usually the last to see what is coming. We obviously don't want to be left behind," Steve Jobs explained in the autumn of 2010, just as thirty years of growth in personal computers were ending. The whole industry shrank the next year, and the three big PC makers — HP, Dell, and Lenovo — went through losses, layoffs, and break-ups on the way down.

Apple, which invented the personal computer, was not caught in that dilemma in 2010. That year it became the largest phone maker in the world and launched the iPad. By December, reporters were asking Jobs how it felt to have taken Apple past Microsoft to become the most valuable technology company on earth.

Modern Apple begins with Jobs' return in 1997, when he killed most of the business and put the company back on the Mac. In 2001 the modern Mac operating system, Mac OS X, arrived, and the first Apple retail store opened in Virginia. Only then was Apple out of danger and done worrying about bankruptcy.

In 2003, two years into the Mac's recovery, Apple made the iPod work with Windows computers, betraying its own most important business. Buyers now had one less reason to buy a Mac, but the iPod caught fire because it could reach hundreds of millions of Windows users.

The iPod turned Apple into a real consumer electronics brand, built its global supply chain, and piled up the cash it needed to operate.

In 2004, the second year of the iPod boom, Apple pulled 1,000 employees together to develop the iPhone in secret. Three years later the iPhone arrived and destroyed the reason for MP3 players to exist, the iPod included.

In 2010, the iPhone passed 40% of Apple's revenue for the first time. That same year Apple released the iPad, remaking the personal computer with iPhone technology and opening a new source of income.

Mac, iPod, iPhone: opening two new markets in turn spared Apple the fate of Dell, Sony, and Nokia. As one kind of product died, a good product opened a new market. Even the iPad, which later had an identity crisis, still accounted for close to 20% of Apple's business three years after it launched.

But Apple got into those markets on far more than a good product.

The iPod and the iPhone are often explained away by saying Jobs was a product genius and Apple used beautifully made hardware to disrupt one market after another.

That is too simple. A good product was necessary for the iPod and the iPhone, but it was nowhere near enough.

Apple was a computer company. It was good at industrial design and it could write an operating system. The iPod, though, depended on the iTunes music store, which meant negotiating rights with every big record company in the world and building a way of selling music that consumers would accept. It also depended on the Apple Stores the company began opening in 2001, physical flagships modelled on luxury brands.

The iPhone was harder still. Making 200 million phones a year, controlled to Apple's standard, means managing hundreds of suppliers, from buying aluminium and commissioning custom parts to assembly and delivery into essentially every sales channel. It also meant designing its own chips to get out from under Samsung.

On all four counts, Apple ended up the best in the world.

Cook made several big attempts, but never opened a new market

Contrary to the usual accusation, neither Apple's way of developing products nor its release rhythm changed after Jobs died.

Apple still concentrates on a handful of products. Jony Ive still ran industrial design himself, as he had for 22 years, and kept his team to about 20 people so they could still talk to each other — Samsung, by comparison, still had 1,600 industrial designers last year.

The supply chain and the chip work the iPhone was built on both peaked under Cook. Apple has made 1.47 billion iPhones, 1.39 billion of them since 2011, and never repeated the production crisis of the iPhone 4. Today its own CPUs have not only left Qualcomm far behind, they have passed Intel.

The problem is that since then, every attempt to enter a genuinely new market has failed.

In 2014, four years after the iPad, the Apple Watch arrived. Echoing the 2007 iPhone launch, Tim Cook stood on stage and gave three reasons to buy one:

• A precise watch
• An intimate, immediate communication device
• A complete health and fitness companion

Just as the iPhone in 2007 was three things:

• A widescreen iPod
• A phone
• The internet in your pocket (the Safari browser)

Cook meant to use the Watch to get into luxury goods. Apple launched a gold watch at 120,000 yuan, rebuilt its stores, and redesigned the way people shopped in them. It hired the CEOs of two luxury companies, YSL and Burberry.

A year later Apple started the Watch over: no gold model, no fashion celebrities, and a new position as an iPhone accessory for health and fitness.

Today Apple sells more watches than Rolex, but Rolex does not sell anything for 3,000 yuan. In the end Apple was doing the electronics-accessory business it already knew, and never entered the luxury market. Forget filling the hole an iPhone decline would leave: the Watch business is not even a third of what the iPad had reached three years after its own launch.

Beyond the watch, Apple assembled a team larger than the one that built the first iPhone and bought 58 hectares of land to prepare to make cars.

By 2016 Apple had taken so many people from Tesla that Musk attacked it in public, calling Apple the "Tesla graveyard", full of people who could not cut it at Tesla — though his own vice president of engineering later joined Apple too.

Cook, who never discusses unreleased products, did not deny the car project when he was asked about it. He reached for a Christmas-present analogy and said people would have to wait.

At the end of 2017, ten years after the iPhone, Apple held its launch in the newly built, all-glass Steve Jobs Theater. Cook gave a moving speech in Jobs' honour, traced how the iPhone had defined a decade of technology, and announced the starting point of the next decade: the iPhone X. It may be the most changed iPhone ever made, but it is still an iPhone.

After that, Apple's work became building a moat around the iPhone

With no new product working, Apple twice tried lowering the price to put the iPhone into other price brackets. Both attempts failed.

The first was the iPhone 5c in 2013. To keep it from competing with the iPhone of the same generation, the 5c cost only 10% less, used an old processor, and had no fingerprint sensor.

The second was the iPhone SE in 2016. This one cost half as much, but to keep it from competing with the iPhone of the same generation, it reused a two-year-old design.

Even this year's iPhone Xr, which starts above 6,000 yuan and cannot be called cheap by any measure, comes with compromises.

The pattern repeats: Apple makes sure the "cheap" iPhone is expensive enough, or different enough, that it will not eat into sales of the main iPhone, and the margin is protected.

Every other product, meanwhile, has to feed the iPhone's growth.

The Apple Watch does not work with Android, not because more than 85% of the world has no interest in fitness, but because this gives people one more reason to use an iPhone.

Apple Music does work with Android, but every big redesign lands there after the iPhone version, not because that helps Apple catch Spotify or Tencent Music, but because it gives people one more reason to use an iPhone.

The iPad Pro is supposed to be the next computer, yet it does nothing with Android, not because people who buy Android phones do not buy iPads (what they mostly do not buy is Android tablets), but because this gives people one more reason to use an iPhone.

iMessage, HomePod, and even the planned video service, which may arrive as a free service to lock in iPhone owners. If it does, it can never challenge Netflix.

Every Apple product now exists to deepen the moat around the iPhone.

There was a time when Apple trusted its products enough that people who bought an iPod or an iPhone went back and bought a Mac, and bought an iPad.

As for Apple's swelling profits, in recent years more has gone into the stock market than into new products

A billion Apple users each have their own reason — the experience, the performance, the looks, habit, or vanity — but at bottom they trust the brand, and so keep buying without much thought. There was a time when the brand cared how many people could buy without worrying, when it smashed the "$999" price tag on stage and said, "we want to get it into as many hands as possible."

A Ferrari costs a million yuan more than an economy car, and a Miele washing machine can cost 20,000 yuan more than a Little Swan. But the iPhone, which never leaves your side, once cost only one or two thousand yuan more than its main rivals. It was one of the few genuinely good products most people could afford.

Now that new technology no longer moves anyone to replace a phone, Apple sells more expensive products instead, so the people who do buy pay more and the margin holds. When the iPhone X arrived in 2017, you could argue the price had to rise because so much new technology went into it. Making the iPhone Xs dearer still in 2018 can only be because Apple wanted the higher profit. A top-of-the-range iPhone Xs Max costs twice what a top-of-the-range iPhone 4 cost in 2010, and 10,000 yuan more than the average Android phone.

Dropping the unit numbers means Apple intends to keep prices high. If it hoped to win more users with lower prices, there would be no reason to take the sales figures away.

Facing a crisis across the industry, Apple has chosen to keep chasing profit, and has positioned itself as a company that moves product and keeps investors happy.

While sales stall, the machinery of the business is being affected too. In 2012, an Apple device took an average of 3.26 days to reach a distributor after it was built, and the distributor carried the inventory from there. By 2018 that had tripled, to 9.82 days.

Flat or falling sales also mean Apple has less hold over the companies that make its products. Apple can take more profit out of an ever more expensive iPhone, but the firms making its parts earn no more per part because the phone costs more. From the small company making one chip to giants like Foxconn and TSMC, everyone is absorbing the losses of the iPhone's decline.

And most of the money Apple earns is not going into new products or new manufacturing.

Over Cook's eight years, Apple's R&D spending has risen sevenfold, and capital spending on tooling, factories, and the like has risen 5.4-fold. Over the same period, from 2012 until now, Apple has put $380 billion (including the buyback still under way) into dividends and share repurchases to push up its own share price — more than twice everything it has spent on research, manufacturing, and retail stores since 1997, combined.

Whether buybacks are a good thing has always been argued over. Read badly, a company buying its own shares is a company not spending that money on lower prices, better pay, or new products and technologies.

Read well, it is Apple admitting it cannot put the money to good use in its own business, and handing it back to investors to put into other companies, where it may create more value.

It is not as though the earth has run out of technology worth funding. Amazon, and even Google — two companies with no talent for making consumer electronics — sell ten times as many speakers as Apple; Tesla, worth less than the cash Apple has on hand, is stumbling forward with the electric-car revolution; and Netflix, borrowing billions of dollars a year, has changed how hundreds of millions of people watch films.

Apple chose to prop up its share price and reward Wall Street rather than make riskier bets and enter new markets. It chose to become the sort of company Buffett likes: no risk, a deep moat, with Friedman's line for a motto — the only social responsibility of business is to make a profit and return it to shareholders.

But it is not a steady business like Walmart. When something goes wrong with the iPhone, Wall Street runs much faster than the users do.

"The computer field is a bit like sedimentary rock. You contribute one thin layer inside a mountain and make the mountain a little higher. But in the end people just stand on the summit, and only with an X-ray can they see what is inside." That was how Jobs, in 1994 and in the middle of his second start-up, described his own work.

Over 42 years, Apple laid several layers into that mountain that were not thin at all, and left people with the impression that it could go on doing so. That impression may in the end be nothing more than an impression.

Graphics: Feng Xiuxia

Cover image from Visual China Group