Apple Is Not Here to Entertain You

The frantic search for the next category of digital device that will take over the world is in full cry.  There hasnt been anything really new since the tablet and the voracious appetite for 'oh wow!' excitement is growing. There has been some focus on wearables as the next category poised for take-off: it's new, its funky, it's imaginative.

The problem, as the following article explains, is that from a financial standpoint, its prospects pale by comparison to the endless iterations of smartphones that continue to emerge, seemingly every few months.

This raises broader questions about strategy. Should tech companies focus purely on generating ever greater revenues from their existing lines or do they run the risk of ending up as a case study in the next generation of books about the innovator's dilemma?

The challenge they face is that they have to strike a balance. Part of the appeal of new devices is their wondrous capability. But that must be tied to profitability and compound annual growth potential. The industry has been too large, too important and too closely analyzed to indulge flights of fancy. The performance of recent IPOs confirms that the path to profitability must now be obvious to those beyond tech savants. Accusing someone of 'not getting it' is no longer sufficient to generate either feelings of shame - or increased investment. JL

Jason Snell reports in MacWorld:

In four years the wearables market might grow to be one-tenth the size of today’s smartphone market—in units shipped. The average selling price of wearable items will be a fraction of that of smartphones.
Apple has only “60 days left to either come up with [an iWatch] or they will disappear,” analyst Trip Chowdhry told CNBC last month. “It will become a zombie, if they don’t come up with an iWatch.”
It’s easy—so very easy—to point at Chowdhry and laugh, because what he says is stupid. But it’s worth thinking about why Chowdhry and people who make similar proclamations about Apple (and the tech industry as a whole) are so completely clueless.

The boredom factor

I was recently talking about this with Rene Ritchie of iMore, and we came up with two reasons for the cluelessness.
Reason number one: People want to be entertained. For the past few years, the technology industry has been supremely entertaining. New tech products, even entirely new product categories, that change the way we live? Super-exciting. The iPod, iPhone, and iPad have definitely been those. Steve Jobs was the master in converting the slow, often dull march of technological progress into shows in which world-changing innovation seemed to take place live on stage.
Reason number two: The mindset of the financial industry. If I told you that your company was going to be comfortably profitable for the next 20 years, you’d probably feel relieved that you could pay for your kids’ college tuition and plan for retirement. But finance types don’t think that way. I’m wary of going down a rabbit hole here, so let me boil it down to this: Financial types want to see growth. Static (albeit massively profitable) companies are boring.
I don’t want to argue about what this says about our global financial system—chase that rabbit if you want—but to point out that when you see tech stocks react in bizarre ways (like dropping in value when a company announces record profits or sales), it’s because what you consider success often isn’t what Wall Street considers success. (It’s also because Wall Street trades in futures, not in gold stars for past accomplishments.)
Now let’s put those two reasons together: People want to be entertained by dramatic new product announcements and financial types are obsessed with future growth. Perhaps we can finally start to understand why people like Trip Chowdhry say stupid things. A bored financial analyst setting a 60-day Apple Doom Countdown is like a little kid holding her breath until she gets what she wants.

Hey, wearables!

From a pure grab-your-popcorn entertainment perspective, the wearables market is fascinating. (TechHive’s Jon Phillips is doing a great job of chronicling it, by the way.) If you’re desperate to see a new tech product category that will blossom into something interesting, wearables is a pretty good bet. (Car tech and home tech are also good candidates.) And if you’re desperate to find new sources of growth for tech companies, why not focus on new categories?
Unfortunately, I fear that tech-industry observers have completely lost their perspective. As Rene has written, no matter how big the wearables market gets, it’s still not going to touch the smartphone market.
IDC reported that in 2013, one billion smartphones were shipped, up 38 percent from the previous year. That’s a fast-growing market worth hundreds of billions of dollars. Meanwhile, on Thursday IDC predicted that the wearables market will reach 112 million units in 2018.
In other words, in four years the wearables market might grow to be one-tenth the size of today’s smartphone market—in units shipped. Presumably the average selling price of wearable items will be a fraction of that of smartphones, meaning the dollar value of the wearables market is even more minuscule compared to the smartphone market.
All of which means that wearables, while dramatic and exciting and with huge potential to change people’s lives, are never going to rival smartphones in terms of market size. Same goes for smart TV boxes. These are interesting, fun areas of technological change. But the smartphone—that boring old Internet-connected 64-bit supercomputer in your pocket that just keeps improving year after year—is going to be the big dog in the tech world for years to come. Apple’s future success or failure will be dependent on the iPhone, and to a lesser extent the iPad, not on a smartwatch.
In fact, the most plausible argument tying Apple’s fate to its potential release of an iWatch is this: the wearables market could get really big, consumers could decide the best wearable tech runs on Android, and as a result they could stop buying iPhones. That scenario seems unlikely to me, because it would be hard for wearable makers to turn their backs on a large and lucrative iPhone installed base. But at least it’s plausible.

That’s (not) entertainment

So in the end, why do we want Apple to make an iWatch? Because it’s fun to see new products from Apple. Because we want to try one out and see if we like it. Because we like to buy new gadgets. Because we want to complain about how Apple got it wrong. Or because we’re residents of the financial sector and see everything in the context of growth, like a predator that can’t see the prey standing still right in front of it.
And this is why analysts and journalists write dumb things about Apple all the time: Apple does not use the boredom of the public or the chattering of financial analysts to decide its product strategy. Just as a storyteller would be a failure if she gave the audience exactly what it thought it wanted—”and there was no conflict and everyone lived happily ever after, The End”—Apple would be a failure if it acted like a stand-up comedian desperate for the next laugh.
Apple makes products, it makes them carefully, and it designs them to sell in large quantities and to make massive profits. The iPhone has been boring for a while now, and the Samsung Galaxy is boring now too. We live in a world where all the gigantic smartphone surprises are over, and now it’s all about the constant refinement of these remarkable devices that are changing our lives and the lives of people the world over.
If Apple and Samsung were comedians trying to sell tickets to their shows, they’d be in dire trouble. But they’re electronics companies making phones, and between them they also make most of the profits in the smartphone market. They will be boring all the way to the bank—and 60 days from now, no matter what happens in the wearables market, things will be pretty much the same.