Introduction: Apple’s Summer Of Discontent
Labor Day is one of the year’s more decisive turning points.
Summer lovers and sun worshippers treat the holiday with a bit of basic dread. Everyone loves fall, but winter is the season of dark, cold and snow for many.
Winter and cold weather enthusiasts, on the other hand, are ready to stop sweating, burning and lying around waiting for their energy to return. The unofficial end of summer is to be celebrated instead of mourned, because all the good things happen when the mercury starts a-dropping.
We suspect that the team at Apple this year is hoping for the latter but worrying a lot about the former.
It’s not the weather. It doesn’t get very hot or very cold in Cupertino — most days, it is sunny, with temperatures between 60° and 80°, no matter what month it is.
But temperate climates aside — after almost a decade of nearly bulletproof results, Apple has had a taste of the dog days of summer.
And a long summer it has been.
The ‘Best’ Wasn’t All That Great
Apple had some good news this summer — they are still Apple after all — but even the good and mostly good news didn’t get the level of buzz it might once have when Apple was the undisputed king of new and innovative tech.
The iPhone 7 will gets its first public introduction later this week, but analysts have spent the summer questioning it if it is even possible for it to be a big enough hit to turn the tide of disappointing sales and earnings performance.
“Right now, everyone is looking forward to the iPhone 7 … I think it can only disappoint,” noted Steven Grasso, director of institutional sales at Stuart Frankel.
Not such a cheery outlook.
Other popular-ish events from this summer included updates to the developer fee structure announced at Apple’s Worldwide Developers Conference early in the summer. There was a lot of praise but also a lot of questions.
The billionth iPhone sold generated a lot of headlines about how world-changing and important a product the iPhone has been. But those articles only triggered a lot of wistful think pieces wondering if Apple’s best days are behind it.
Apple Pay is jumping to the web, which only highlighted how much trouble it’s been having catching on with users any other way and reminded everyone that, to use it, you still have to have the right Apple devices. Seems like the hardware-first/everything else-second lessons of Apple Pay remain unlearned.
The Troubles Were Myriad
Those lessons are also pretty indisputable.
Apple Pay’s adoption numbers are disappointing by almost any count. PYMNTS/Infoscout’s tally from mid-summer indicates that, nearly two years and a lot of buzz later, Apple Pay can get people to try the service once or twice, but forming a habit is proving to be a lot harder. If anything, usage is down — a disappointment generally but a tough obstacle to overcome since the folks who are not using the mobile payments service are those who are among the most reverent early adopters.
Then, there’s overall company performance. It’s not been able to keep its earnings reports full of the kinds of stratospheric numbers investors are used to. And in Q2, Apple just didn’t do it: Sales were down, revenue was down and, though Apple share price got a bump, it was mostly because analysts had thought the news was going to be much worse.
Apple is used to winning by thrilling — not by merely failing to horrify.
Apple also found itself on the losing end of a dispute with the EU over taxation and ordered to pay $14.5 billion in taxes to Ireland (which Ireland doesn’t actually want, confusingly). Adding to those international woes, there is also Apple’s ongoing and rather ugly battle with Australia’s big banks over who exactly is breaking antitrust rules in an illegal attempt to limit competition. Which has a certain ring of irony to it since, to play with Apple, one has to play by its rules, including giving it basis points on every transaction.
Summer 2016 clearly hasn’t been the best of times for Apple. This is not to say the best is not yet to come. We may all be mere days away from having our minds melted by the awesomeness of the iPhone 7.
But given the summer Apple has had, it needs to be awesome.
Chapter 1: Worldwide Developers Conference
Among the ingredients in Apple’s secret sauce are the developers that create the apps that make Apple’s App Store so popular to consumers and lucrative for developers. There may be more Android phone owners in the world than iPhone owners, but the Android ecosystem is more fragmented, making critical mass harder for app developers to achieve. And iPhone owners tend to be more affluent, more technologically in tune and more likely to download apps.
But those demographics are always in flux, which means it is always in Apple’s best interest to keep the best developers in the world in the fold and, first and foremost, developing their apps for the Apple App Store.
WWDC is its annual big event to woo those developers, and 2016 had plenty of banner announcements. Among the bigger announcements were that Apple Pay was moving to the web (for Mac users), Siri was going to be more programmable for developers, Apple Music was getting some bells and whistles and OS X got the official switch in branding to macOS.
But the big news was about subscriptions. Apple was opening up the store so just about any app could have a subscription attached to it, and Apple was even generously lowering its cut on those subscription apps, from 30 percent to only 15 percent (after the first year of paying 30 percent).
And there was the rub.
As Karen Webster pointed out, what Apple didn’t mention was how that deal with developers is actually much better for Apple then for the people making the apps for the store. WWDC wasn’t as much about making friends with developers this year as it was about making a statement about what kind of platform Apple wants to be.
“Apple’s announcement didn’t seem to be only about making friends with developers, even though, perhaps, just maybe, that’s what they hoped the tech media would notice. Instead, as I see it, it was also, and more importantly, about taking a big, bold and deliberate step into declaring itself a commerce platform — by expanding the number of apps they can tax to just about anything — from digital media to products to enterprise apps to you name it — as long as it comes with a subscription initiated from within the app itself.”
· Karen Webster, What Apple Didn’t Tell You Last Week
Relevant PYMNTS Links
Chapter 2: Apple Pay’s Long, Long Walk To Ignition
Almost exactly two years ago, the payments and commerce ecosystem spent its Labor Day weekend wondering about the future of payments the Apple way. Would it create its own set of rails? Would it reinvent payments the same way it reinvented music? Could it do what no one else could ever do before and really make mobile payments ignite? The speculation was endless.
As we await the next “one big thing” from Apple on Wednesday (Sept. 7), we have 21 months of Apple Pay adoption figures gathered through a meticulous consumer study done in collaboration with InfoScout. And the answer seems pretty clear.
Apple has certainly launched to worldwide buzz, but by and large, the data shows that the last 21 months has been more of a buzzkill than a buzz.
Over that time, more and more consumers know about it, which makes sense since more and more people have purchased an iPhone 6s. And they’ll even give it a try. But they don’t stick with it. And the number of people who don’t stick with it has increased steadily.
More than a third of Apple Pay’s best prospects — those early adopters who always carry innovation across the chasm to ignition — rarely think about using it anymore, a stat that is two times higher than it was 20 months ago.
The number of true believers — those who once used Apple Pay every chance they had to use it — has shrunk incredibly. In March, 48 percent of those who had used Apple Pay reported using it “every chance they had;” by this summer, that number had shrunk all the way down to 21 percent and has fallen each time we’ve measured it.
It is possible Apple Pay could be looking at a boost by a jump to the web, though it is not one we are holding our breath for. Apple Pay on the web is just as limited to Apple devices as Apple Pay in-store or Apple Pay in-app. This has not been a winning formula for Apple so far.
“In addition to needing Apple devices — iPhones that support Apple Pay and Macs — consumers have to use the Safari browser to use Apple Pay. Safari accounts for roughly 5 percent of search on the web. Four percent usage of Apple Pay of a 5 percent Safari browser universe isn’t much of a market for merchants to get jazzed about. The only thing Apple didn’t do was require users to wear Apple-branded gear while checking out.“
· Karen Webster, Apple Pay’s Tough 20 Months
Relevant PYMNTS Links
Apple Pay’s Tough Twenty Months
Chapter 3: Earnings — When The Rubber Hits The Road
Usually when a company sees its stock price bounce after an earnings report, the presumption it makes is that the report was good and the important numbers all show growth. Every once and awhile, that’s not the right assumption to make.
In Q3 2016, Apple was one of those rare cases.
After the latest figures were disclosed from the notoriously secretive team at Cupertino, share prices bounced by about 2 percent. Those were about the only upward-facing numbers to report. Despite some media accounts, “Apple Crushes Earnings” was probably a bit too enthusiastic a headline.
Quarterly profit was down 27 percent year over year, and net income fell from $10.68 billion a year ago to $7.8 billion in the quarter that ended June 25. Earnings per share fell to $1.42 from $1.85, and revenue declined 14.6 percent to $42.36 billion from $49.6 billion a year earlier. Apple’s stock was down 22 percent over the same time a year ago.
And then, there is the iPhone. The running eight-year growth streak in iPhone sales ended in Q2 2016 with the product’s first decline, and the decline (as expected) followed through the June quarter. The company said it sold 40.4 million units of the iPhone during the three-month period, compared with sales of 47.5 million units a year earlier. That’s slightly better than the 40 million units Apple analysts were predicting.
Not a lot of great news. Some analysts are worried, but Tim Cook is not.
“As we look forward to the fall, we are thrilled by customers’ response to the software and services we previewed at our Worldwide Developers Conference last month. And for the first time, we have four innovative Apple platforms for our developers’ apps — iOS, macOS, watchOS and tvOS. In fact, iOS 10 will be the biggest release ever for iOS. The momentum of all four platforms shows the strong relationship Apple enjoys with customers throughout their day and wherever they go, whether it’s at home, in their car, at work or everywhere in between. The Apple ecosystem is thriving and growing, and our new OS releases this fall will take these great experiences to a new level.”
· Tim Cook, July 2016
Relevant PYMNTS Link
Chapter 4: Apple’s EU Troubles
Apple has found itself at the losing end of a fight with the EU, where, notably, it is only a peripheral player. Apple may be soaking the $14.5 billion fine, but the European Commission’s issue is actually with Ireland and whether or not it can offer Apple special tax incentives to run a business there past merely having a lower corporate tax rate.
Apple Inc., which is based in California, set up two companies in Ireland: Apple Sales International and Apple Operations Europe. According to the European Commission, these companies had no employees or real offices. They existed to realize large profits at a low rate. Those profits, due to an obscure legal provision in Ireland, meant that, until 2015, Apple Sales International paid just 0.005 percent tax, according to the commission.
Tim Cook has thundered back angrily at the ruling and vowed to appeal. The letter is colorful — beginning with the phrase “once upon a time” before calling the decision “an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process” He then goes on to point out that “Apple has directly contributed to the health of the economy by employing workers directly but by creating more need for manufacturing jobs, small businesses and other suppliers related to Apple products.”
Ireland’s officials have called the ruling “bizarre,” since they don’t actually want the money.
“The opinion issued on August 30 alleges that Ireland gave Apple a special deal on our taxes. This claim has no basis in fact or in law. We never asked for, nor did we receive, any special deals. We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don’t owe them any more than we’ve already paid.”
· Tim Cook, Response To EU Decision
Relevant PYMNTS Link
Shakespeare famously wrote in “The Tempest:” “What is past is prologue.” And it is certainly the case that, after a summer bogged down by unfriendly headlines, tepid predictions and grim-looking numbers, the fall could bring with it a whole new conventional narrative for Apple. It is not beyond the range of impossibility. In the run-up to the iPhone 6 release, the headlines were similarly fraught. Was Apple out of good ideas? Was Tim Cook an unworthy successor to Steve Jobs? Was the iPhone fundamentally out of ideas? These were the common questions.
The indisputable success of the iPhone 6 and 6 Plus was the answer.
But even if the iPhone 7 pulls off a similar trick, the question will remain: Is Apple a one-trick iPhone pony? So far, Apple has not proven that it can “wow” on the services side of the house. Most of its services are “me-too” replicas of competing services — Music, News, even Siri’s voice-activated skills mimic what Alexa has been doing for months — and have not moved the revenue needle for Apple as had been hoped.
Now, devices are not a bad gig, as long as consumers are hip with them. But with replacement cycles on phones lengthening, carrier subsidies disappearing — which makes those phones more pricey — and the lack of a “wow” feature that will make people outside of the fanboys throw out the old and bring in the new, the answer to the question of hipness remains uncertain.
So, what’s next for Apple?
That remains the question for the fall. Some of the answers will be apparent later in the week when the world reacts to the iPhone 7.
The rest will come when we see whether Apple can really leverage the new phone (and all the old phones) into the commerce platform it clearly hopes to become.
The game is long, and we’re still in the early innings.
We suggest staying seated — the game played from here on out can only get more interesting.