Even if Apple Breaks $1 Trillion, It Won’t Stay on Top Forever

 

APPLE JUST BECAME the first US company to surpass $800 billion in market capitalization. Speculation quickly followed that Apple would soon become the first $1 trillion company, with a rumored $1,000 iPhone 8 coming at year’s end. The company’s share price has been on a tear since the beginning of the year, and sales of the iPhone 7 have been strong in part because of safety issues surrounding rival Samsung devices. Apple retains an enviable brand image and a devoted consumer base.

And yet, the shadow cast by past corporate behemoths is creeping up on Apple. As valuable as Apple is now and could still become, the company looks vulnerable to being eclipsed in the years ahead, if not threatened to its corporate core.
Apple makes hardware. It manufacturers a product. Yes, that oversimplifies the vast network of users connected by its software and bound by iOS. But Apple’s software is hardware dependent; it runs on Apple products. That makes Apple more like the manufacturing giants of the 20th century than like the software and digital players of the 21st. By that standard, even a trillion-dollar vote of confidence now hardly portends business immortality for Apple.

APPLE JUST BECAME the first US company to surpass $800 billion in market capitalization. Speculation quickly followed that Apple would soon become the first $1 trillion company, with a rumored $1,000 iPhone 8 coming at year’s end. The company’s share price has been on a tear since the beginning of the year, and sales of the iPhone 7 have been strong in part because of safety issues surrounding rival Samsung devices. Apple retains an enviable brand image and a devoted consumer base.

And yet, the shadow cast by past corporate behemoths is creeping up on Apple. As valuable as Apple is now and could still become, the company looks vulnerable to being eclipsed in the years ahead, if not threatened to its corporate core.
Apple makes hardware. It manufacturers a product. Yes, that oversimplifies the vast network of users connected by its software and bound by iOS. But Apple’s software is hardware dependent; it runs on Apple products. That makes Apple more like the manufacturing giants of the 20th century than like the software and digital players of the 21st. By that standard, even a trillion-dollar vote of confidence now hardly portends business immortality for Apple.

One lesson here (one that we humans seem to learn and then forget with numbing regularity) is that tenure at the top can be remarkably short-lived. Magazine covers lauding success and power in the present have a way of seeming quaint and dated within a very short timeframe (much as magazine covers themselves are coming to seem quaint and dated!). Size and market share for mega-companies are no guarantee of future size and market share, no matter how potent the franchise or deep-seeming the moat.

Moats and networks are the current buzzwords of tech success. Here Apple looks unassailable now but strangely defenseless going forward. It has a network of apps that work within an Apple ecosystem and users who seem not only content but enthusiastic. Google has certainly built a real rival in its Android platform, but one that works as without generating direct revenue for Google (advertising and app revenue from Android are a different story). Apple for now has a virtuous circle of users who pay for the hardware and then pay for services linked to its software.

The world, however, is moving quickly toward a digital future where devices become commoditized. It is likely that within a decade, devices become more and more interchangeable, less expensive, more powerful. They will devolve into conduits for various software and digital services that generate the bulk of profits. Already, Apple’s proprietary ecosystem is becoming less closed. A few years ago, if your family (like mine) had iPhones, Macs, and iPads, the pain of switching to Windows or Android platforms was intense. There was little compatibility and porting was a pain. As Apple has become ever larger, it has also bit by bit become more open, as its customers have demanded. More applications and the data they depend on live in the cloud, and more people use a variety of devices to lead their digital lives.

It isn’t at all clear what Apple could do to fortify itself against these trends, or that it could find the motivation to do so. It is an insanely profitable company generating billions in cash every week. Rarely do companies with a franchise that lucrative make radical shifts. Alphabet/Google is determined to find its next multi-billion dollar revenue stream to lessen its dependency on search; Microsoft has been doing the same with its reliance of Windows. Neither has yet to find that next unicorn, but they have the advantage of being firmly housed in the digital world and not, like Apple, tethered to making devices that are rapidly becoming generic.

No Secrets

The companies that have survived the decades have either become shadows of their former selves—think US auto makers—or different companies entirely. IBM managed to shift from a maker of high-tech 20th century machines (typewriters and computers) to a seller of high-tech services and solutions, but it still had a machine franchise. It too is now struggling to find a next wave. GE has spun through multiple iterations, and while it isn’t in any danger of going out of business, it is finding global competition and margins an ongoing struggle. What is Apple’s long-term plan for itself in a world that is definitively not moving in the direction of its model?

To be clear, I happen to own Apple stock personally; it’s been a very good investment, and one that I continue to hold. Why? Because in the next few years, it seems more likely that Apple will reach that trillion-dollar mark than flounder. The next wave of dramatic changes in how we use hardware to access software is not yet on the visible horizon, and it may be that Apple has a dramatic plan to position itself accordingly when that comes nearer. For the near future, Apple is likely to grow and stay dominant, just as Nokia did throughout the 1990s and into the early years of this century.

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