Does Apple Need a New Blockbuster to Thrive?

iPhone7

On September 7, Apple introduced its latest iPhone, which offers a dual camera system for the 5.5-inch screen version; upgrades the device’s processor, wireless connectivity and the home button; and notably excludes a headphone jack. The company also announced that it has revamped the Apple Watch with built-in GPS, better fitness tracking, and waterproofing.

As Apple CEO Tim Cook reaches the 5-year mark of his tenure, the latest enhancements to the iPhone and the Apple Watch are critical to address concerns about the firm’s ability to keep growing — a tall order for a company expected to have annual sales north of $200 billion. “It’s the best iPhone we have ever created,” said Cook about the iPhone 7. “There’s a reason why you see so many iPhones everywhere you look. We’ve now sold over a billion of them. The iPhone has transformed the way we do things every day.”

The emphasis at the launch event was on Apple’s ecosystem as much as on the iPhone: The company highlighted a new Nintendo Mario game available through the App Store, reported growth in paid subscriptions to Apple Music (now at 17 million) and shared news that Pokémon Go will be coming to the Apple Watch.

The iPhone has clearly been a success. But that puts pressure on CEO Cook to deliver a new product that can generate similar revenue. Meanwhile, analysts are giving Cook high marks, especially for hitting financial milestones. In the last five years, Apple revenue has surged from $65.2 billion for fiscal 2010 ending Sept. 30 to $233.7 billion for fiscal 2015. Wall Street is projecting sales of $215.45 billion for fiscal 2016.

Sales of the iPhone and iPad have been slumping, however. Apple has had two consecutive quarters with year-over-year revenue declines. The biggest product launch of the Cook era has been the Apple Watch, a device that hasn’t delivered iPhone-like volume.

“Clearly, Cook is meeting his financial milestones, but he was left with an enviable position, and it’s unclear how much of Apple’s success has been due to his value and decision-making,” says Wharton management professor David Hsu.

Hsu adds that the knock on Cook and Apple of late is that the innovation engine has stalled. Apple is historically mum about its product development plans, and it’s unclear where Apple stands on initiatives like augmented and virtual reality, autonomous vehicles and artificial intelligence. Google parent Alphabet has been vocal about all of those technologies and has experiments underway. Facebook has invested heavily in virtual reality. And Apple’s most direct competitor, Samsung, has launched a line of virtual reality products.

“There is a lot of disruption happening, and it’s difficult to repeatedly strike gold.” –David Hsu

“There is a lot of disruption happening, and it’s difficult to repeatedly strike gold,” says Hsu.

Kevin Werbach, a legal studies and business ethics professor at Wharton, says given Apple’s success, “it’s incredibly difficult to move the needle further…. Apple has enjoyed some of the largest quarterly profits in corporate history under Tim Cook. It’s now one of the largest companies on earth in terms of sales and market capitalization. Even great innovations and successful products won’t necessarily make a dent against that backdrop.”

Saikat Chaudhuri, executive director of the Mack Institute for Innovation Management at Wharton, says the criticism of Cook may be overblown given the expectations. “Every company starts maturing at some point, and it’s hard to [come up with] redefining products every time.”

In other words, Apple’s ability to reinvent categories such as music with the iPod, mobile phones with the iPhone and computing tablets with the iPad may not be repeatable, says Hsu.

Kartik Hosanagar, a professor of operations, information and decisions at Wharton, argues that Cook has done well continuing Apple’s tradition. “Fundamentally, Apple is healthy and has pursued a similar strategy as under [former CEO Steve] Jobs. In that sense, Tim Cook has delivered. He has also left his own mark in terms of company culture. Apple is seen as a far more socially and environmentally conscious company,” says Hosanagar. “The company has taken a stand on a number of social issues and launched new programs — such as matching employee donations and better monitoring of their suppliers in terms of their environmental and social footprint. This helps with employee morale and retention.”

Of course, Hosanagar acknowledges that Cook hasn’t delivered a blockbuster product. Over time, that reality may eclipse everything else Cook has accomplished.

“Overall, I’d give him a B+. He deserves credit for a smooth transition,” says Hosanagar. “If he delivers on a new successful product, he gets an A as far as I’m concerned.”

What’s Next?

“Apple wants something to be almost perfect before it releases a product,” says Hsu. “It’s the same strategy that Jobs had, and it’s been carried forward by Cook. It’s very top down, yet high risk.”

“If Jobs were still alive, we could be talking about how he lost his mojo. Which companies have been able to produce radical innovation every few years over time?” –Saikat Chaudhuri

The risk is clear: Apple depends on big-bang product launches. When you contrast Apple’s approach with that of Google and Facebook, two companies actively experimenting on a range of products, there are concerns, says Hsu. “At Google, the approach is that [the company] doesn’t know what’s going to change the world so it’s going to place some bets around,” says Hsu, who added that Facebook and Google are also actively acquiring companies. “It’s a different game that Apple is playing.”

Analysts say that it may be time for Cook to make his own mark. If Apple doesn’t have the next big thing, the company could outline what it sees as big bets for the future. Being more open could buy Apple time to turn one of its research areas into a significant new product category. Hsu says Apple today is more akin to where Microsoft was during the glory days of Windows, and Apple can continue make money from its platform and services for years to come.

Chaudhuri suggests that Apple can expand its footprint with corporations, invest more in artificial intelligence and tinker with new forms of hardware that combine the smartphone and laptop. The “internet of things” could also be a big market for Apple. “Apple still plays a huge role in the connected device market on the consumer and business side,” he says.

According to Werbach, one thing Cook has right is that he’s not trying to be Jobs. Nevertheless, Cook’s chore is to reposition Apple away from being a company that largely relies on hardware to one that revolves around services. On the company’s last two earnings calls, Cook talked about the potential for recurring revenue and subscriptions from the company’s various services.

“Apple occupies a unique position in the current technology world. It’s the only big player based primarily on hardware as opposed to services, commerce or software. Microsoft, Amazon, Alibaba, Facebook, Tencent and Google have completely different economics,” Werbach notes. “For almost everyone else at scale, with the exception of Samsung, hardware is largely a commodity business. And Samsung doesn’t have Apple’s skill at integrating hardware into compelling user experiences.”

Another issue for Apple is that it’s the only player its size with an entirely proprietary stack of technology from semiconductors to software and services. That approach gives Apple an edge in some areas, but may hurt the company in situations where it has to connect to other technologies, Werbach points out.

Cook may also have to increasingly focus on public policy, as have Microsoft and Google. Apple has had a public fight with the FBI over privacy and is now dueling with the European Union over taxes. “Apple has never built the same public policy relationships as Google and Microsoft, or even companies like Intel and Cisco,” says Werbach.

“It may well be that the iPhone was a once-in-a-generation product, not just for Apple, but for the tech sector as a whole.” –Kevin Werbach

Needless to say, Cook’s next five years are going to have some unique challenges. What’s unclear is whether any CEO can do it all. Hsu says it’s quite possible that the Jobs-to-Cook era at Apple will be like the Bill Gates to Steve Ballmer handoff at Microsoft, which struggled to outline a clear vision under Ballmer. Microsoft has since been reinvigorated under CEO Satya Nadella. “I could see Apple going sideways for a long time before new blood comes in,” says Hsu.

Would Steve Jobs Have Delivered?

According to Chaudhuri, the prism Cook is viewed through is unfair. Yes, Steve Jobs launched the iPhone, but the timing for the device was perfect as mobility, wireless networking speeds, hardware advances and content came together at the right time. “It’s not fair to pit Cook against Jobs. Jobs got everyone used to waiting for a new product that defines a category,” says Chaudhuri. “Jobs was unique.”

Chaudhuri argues that Jobs may have taken the same path Cook is taking now. “Once you have a dominant platform in place, it makes sense to build on it,” he notes. “Apple faces the same tradeoffs as any market leader. You have to balance what you can do to exploit the products you have and keep up with the next generation of technology.”

Jobs would have had the same issues Cook faces to deliver growth from a large base of sales. “If Jobs were still alive, we could be talking about how he lost his mojo,” says Chaudhuri. “Which companies have been able to produce radical innovation every few years over time? Just because Jobs had three blockbusters in a row doesn’t guarantee another.”

Indeed, Werbach says the iPhone may have been a generational product launch. “It may well be that the iPhone was a once-in-a-generation product, not just for Apple, but for the tech sector as a whole,” says Werbach.

Meanwhile, Werbach notes that it’s worth remembering that Jobs wasn’t always the executive now viewed as a legend. “Jobs wasn’t always the Steve Jobs we canonize — he was fired from Apple, and even after he returned, it took several years of gradual turnaround before the iPhone catapulted the company into the business stratosphere,” says Werbach. “Cook, to his credit, has managed to humanize Apple in important ways, without losing its edge. Maybe he hasn’t changed the world like the previous guy, but that’s a bit too much to expect.”

In the end, Cook’s biggest challenge may be managing expectations and not innovation.

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