Can Apple handle its growing empire?

Attendees at Apple's WWDC this week
Attendees at Apple's WWDC this week Credit: Getty Images

For years, the most important date in Apple’s calendar has been a morning in early September, the annual showcase at which a new iPhone is first revealed to an expectant public.

Apple revolves around the all-powerful iPhone, which comprises almost two thirds of the company’s $218bn (£169bn) in annual sales. A brilliant new feature, or a disappointing launch, sets the tone for the rest of the year, as well as most likely deciding its fate.

The slick design and bigger screens of the iPhone 6, released in 2014, catapulted Apple to the biggest quarterly profit ever enjoyed by a listed company; the muted changes of its successor led to the company’s first annual sales decline in over a decade last year.

But that picture is changing. Last week, the company’s annual developers’ conference, known as WWDC, featured all the polish and stage-managed excitement of an iPhone launch. Held down the Interstate 280 from Apple’s Silicon Valley quarters, the company packed 6,000 developers, analysts and reporters into San Jose’s McEnery Convention Centre.

Tim Cook at WWDC
Tim Cook at WWDC Credit: Reuters

Famous faces to appear on stage included Michelle Obama, although it was Apple’s chief executive, Tim Cook, that people were here to see.

Cook, six years into his tenure and in his familiar Southern drawl, unveiled new versions of some of the gadgets that have made Apple famous – its laptop line received an update, and Apple unveiled a souped-up version of its iMac computer. The company also introduced a new version of its high-powered iPad Pro, with a 10.5-inch screen, sleeker design and better display.  

But two other announcements drew the most attention. The first was Apple’s HomePod, a $349 (£274) “smart speaker” controlled via its voice-activated Siri assistant that will be the company’s first new major product in almost three years when it is released in December.

The second was not a high-priced gadget. In fact, Apple will give it away for free: iOS 11, the latest version of the iPhone and iPad operating system.

As the improvements tech companies can wring out of new handsets have declined, the software that powers those phones has become just as important. This is no more evident than on the iPhone itself: its basic design has not changed much in recent years, even as competitors like Samsung have introduced features such as curved touchscreens and wireless charging. Many commentators now argue it is iOS that gives Apple the crucial advantage over Samsung more than the shaped metal and glass of the phones themselves.

As iPhone sales have stalled, the company has sought to shift attentions to the iOS ecosystem. It announced last year that more than one billion devices – iPhones, iPads and iPod Touches – have been sold, a number that is still growing – in the first three months of this year Apple sold 51 million iPhones and 9 million iPads.

The reach of iOS is so enormous that Apple’s new products struggle to move the dial on its balance sheet in a meaningful way. The Apple Watch, released in 2015, has higher revenues than every watch company in the world bar Rolex, yet has been deemed a disappointment. Its Beats headphones and the AirPod earpieces released last year were estimated to capture 40pc of wireless headphone sales at the end of the year, but only contribute a tiny fraction of the company’s total sales.

Instead, analysts say the company’s success rests largely on two things: how much growth it can squeeze out of each successive generation of iPhone, and the additional cash it can make from existing iPhone and iPad users by selling them more software and content.

In recent months, Apple executives have talked up the prospects of its Services division, which includes its App Store, Apple Music software, and iCloud online storage. In 2016, revenues totalled $25.5bn, up 20pc on the preceding year and roughly comparable with Facebook’s entire business. Last week, Apple said app downloads had increased by 70pc in 12 months. Analysts at Credit Suisse estimate that revenues from the Services arm will double by 2020, and that by then the division – which is now larger than either the iPad or Mac computer by sales – will make up around a third of Apple’s profits.  

On stage at WWDC, Apple gave its followers no shortage of new features to mull over. It improved apps such as the camera and its much-maligned mapping software. A “do not disturb” mode for drivers will block notifications so that motorists are not distracted by phone calls and texts. The App Store received its biggest overhaul in the nine years since it was first released.

iOS 11's Do Not Disturb While Driving mode
iOS 11's Do Not Disturb While Driving mode

Many of the technologies Apple showcased, however, felt like attempts to catch up with other technology giants. Siri, its artificial intelligence assistant, was given the ability to translate languages on the fly, something that Google’s rival can already do. A demo of new augmented reality tools for developers was uncannily similar to one that Facebook’s Mark Zuckerberg showed off in April. The HomePod speaker was a direct response to the emerging threat of Amazon’s Echo.

Many companies have taken inspiration from Apple, of course, so perhaps it is due to take some back, but the question still stands: can Apple innovate in the software categories of the future – artificial intelligence, voice recognition, and augmented and virtual reality – in the same way it has in hardware?

Pundits said the new features Apple announced last week felt a little underwhelming. “Most of the updates were incremental rather than revolutionary,” analysts at Deutsche Bank said. “While these new products were interesting additions to the Apple ecosystem, they were not substantially different from existing offerings from other companies.”

CCS Insight said Apple had not presented a comprehensive vision of its future. While Google espouses the benefits of artificial intelligence, Facebook talks about bringing the world together and Microsoft waxes lyrical about cloud computing, “[Apple’s] presentation felt as though it lacked an overarching vision and narrative,” CCS Insight said. “Instead, it was a succession of distinct parts and associated announcements.”

This might not be a criticism of Apple. Cook used to boast that all of Apple’s products could fit on one table; that is no longer the case and it has to offer an ever-greater number of updates. The iPhone’s position as the central computer in many owners’ lives and Apple’s efforts to create an ecosystem around it mean that it has to tick an increasingly long box of demands.  

Cook has criticised virtual reality [VR] as an anti-social and awkward technology. But the new iMac computers announced last week were given a major power boost in order to support the consumers and producers who demand VR. Apple executives have expressed scepticism about smart speakers, and yet the HomePod device is just that, a clear attempt to take on the Amazon Echo in the battle for consumers’ living rooms.

There were also genuine improvements that present new opportunities for Apple. The iPhone will now come with a peer-to-peer payment service that lets users send money back and forth by text message, a clear opportunity for Apple to increase its growing presence in financial services. The new iPad software included desktop PC-style features that will burnish its credentials as a laptop replacement, a concept that Apple is relying on to reverse years of falling tablet sales.

Last year it spent more than $10bn on research and development, more than 10 times what it did when it launched the iPhone a decade ago.

Investors, at least, bet that Apple can handle its growing empire. Shares have already risen by a third this year and it now commands an $804bn valuation. Many now expect it to become the world’s first trillion-dollar company.

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