Why Apple Is Running Out of Juice

As the company who created the tablet market, revolutionized music, and reinvented smartphones, Apple (NASDAQ: AAPL  ) seemed invincible. But times are different now. Since Steve Jobs' death, Apple's hold on consumers slowly eroded. The process certainly is not "overnight," but the evidence is becoming clearer over time: Apple's current strategy, and its app standards, need to change for the firm's continued success.

iPhones are missing out on emerging markets
Competitors running the Android operating system pose a great threat to Apple. Phones running Android operating systems, such as Nokia and Samsung (NASDAQOTH: SSNLF  ) , saw a jump in market share in the second quarter from 69.1% to 79.3%. iPhones, on the other hand, saw a market share decrease from 16.6% to 13.2%.

Source: IDC.

Part of Samsung's and Nokia's success comes from a focus on emerging markets. With their large populations and growing personal income, emerging markets provide many new smartphone customers. Nokia, for instance, sees special success in India with its Lumia line of phones. Excluding North American sales, Nokia sold 8.5 million Lumia phones in 2012. This year Nokia sold 5.2 million and 6.9 million Lumia phones in the first and second quarters, respectively, excluding North American sales. And that number is widely expected to ramp up as consumer incomes increase and as Nokia tailors its Lumia product family to fit the market. At present, Nokia is able to cater to a variety of income levels with its products, but I believe the firm has more revenue potential by more closely refining its products to compete in each income segment.

Samsung also appeals to global smartphone users, thanks to its wide variety of low-priced and high-end smartphones. Smartphones often sell for $390 – $450 in emerging markets, but phones like Samsung's Galaxy S Duos and Nokia's Lumia 920, which cost customers about $200 and $450 respectively, appeal to lower-end customers. That's why such an opportunity exists for both firms in the fast-growing nation of India.

Apple saw some success in its attempts in emerging markets. In June, Apple offered 18% cash discounts and 25% total discounts to customers in India. Lower prices helped increase monthly sales from 75,000 to 400,000 units. Despite this moment of success, the iPhone saw a continued decrease in non-American global shipments. Apple saw a 30% decline from the first quarter to the second quarter in non-American global iPhone shipments.

Furthermore, selling to emerging markets does not fit into Apple's strategy. Earning a 49% – 58% profit margin on its iPhones, Apple depends on high profit margins to make up for lagging shipments. Customers in emerging markets often call for low-priced phones, not up-scale ones. Therefore, if Apple wants to expand sales, it must reevaluate its low-shipment, high-profit market strategy, potentially considering a lower-end phone to grab up market share. After all, if a decade from now income levels (and consumer tastes) were to increase as expected in emerging markets, consumers will be far more used to Nokia and Samsung phones, offering these firms an opportunity to pitch higher-end products to the same customers.

Finally, note that revenues from smartphones comprise a considerable portion of phone maker's total:

Company

Mobile Division Total Sales as a

% of Net Sales in Q2

Apple

52.7%

Nokia

20%

Microsoft

10.4%

Source: Company 10-Qs.

Unimpressive apps
Designed to be "easy to use" with self-explanatory icons, Apple's iPhone apps created a new, unspoken mobile standard. As consumers become more tech savvy, the demand for such simple apps fades. Consumers now look to more sophisticated apps that can accurately collect and adapt to new data. Unfortunately, Apple has a history of dropping the ball. Apple's mapping blunder aside (where CEO Tim Cook recommended using other mapping apps instead of Apple's buggy one), let's take a closer look at Apple's Siri and Google Now, Google's personal assistant and search app.

Apple provides iPhone 4s and iPhone 5 users with Siri, the interactive voice recognition software that helps users search their devices and acquire answers. Siri impressed many users with her smooth voice and assistance. However, Google's (NASDAQ: GOOGL  ) technology may now push her by the wayside.

Google proves it can develop sophisticated apps. In the most recent Android operating system (Jelly Bean), Google Now is equipped with better voice recognition software than Siri. Further, the software improves with continued app use. Developers of Google's voice recognition software managed to cut errors by 25% from the last Android operating system, Ice Cream Sandwich. The technology imitates the method in which neurons in the human brain identify patterns and participate in thinking. This allows the software to better understand the user's accent and speech the more he uses the app. Google Now is available on both Android phones running Jelly Bean and Apple's app store.

Siri takes a more mechanical approach to its voice recognition. As the user speaks, the software compresses the words into a digital audio file. Then it compares that file to a statistical model usually on the cloud, allowing the software to convert the audio into letters. Therefore, Siri does not adapt to the user's speech and accent over time.

Beyond Google Now, Android app sales continue to grow beyond expectations. Google's app store brought in 38.5% of Apple's revenues, a great increase from the 10% Google brought in last year. iOS apps still bring in more revenue, 130% more than Google Play, but Google's current growth provides much promise. To conclude, here's a startling statistic: according to BGR Media, Google's app store users currently download 90% of Apple's downloads.

Google does not disclose revenue figures for Google Play. However, we do know that Google Play revenue continues to increase through third party reporters App Annie and Distimo.

If Apple wants to continue to impress users with its apps, like it did when Siri first came out, it's time for software upgrades.

Conclusion
As the firm misses the mark in emerging markets and falls behind in app innovation, we start to see the cracks in the fortress called Apple. As a well-established name brand with large profit margins, this firm's end will not come anytime too soon. However, it's not too far of a stretch to consider that Apple is off of its pedestal and now on the same playing field as the other major competitors. In short, Apple's running out of juice.

Editor's Note: The original article stated Apple invented the smartphone. They didn't, this version has been amended.

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Read/Post Comments (9) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 28, 2013, at 7:04 AM, d42chad wrote:

    Ok I can't get past the statement "and invented the smartphone". Apple might have revolutionized the smartphone as well as the touch screen but they definitely did not invent it....Sorry Marie. Ever heard of Windows Phone? Palm? Blackberry?

  • Report this Comment On August 28, 2013, at 7:19 AM, mgold77 wrote:

    Marie, you have to be careful what you write. Apple did not create the tablet market and did not invent smartphones. Misleading article. Bad journalism.

  • Report this Comment On August 28, 2013, at 7:28 AM, webguy76 wrote:

    It's simple really: the other companies are continuously delivering a better product and conforming to what the users want. Apple continues to string us along telling us what we want, when they really have no idea anymore. If you haven't seen an Android phone with 4.1.2, take a look, it is by far the best OS out there right now and you will love it!

  • Report this Comment On August 28, 2013, at 7:53 AM, Honesty007 wrote:

    Apple did not invent the smartphone. It made main stream, but there were smartphones before the iPhone. Just do some research please.

  • Report this Comment On August 28, 2013, at 8:08 AM, cdgoin wrote:

    Where are teh editors..? Geez. Might want to reread this article.. you lose credibitily from the start with comments like "phones running Android operating systems, such as Nokia and Samsung". Should be "Phones running the Android AND WINDOWS PHONE operating systems such as... " .. Nokia doesn't make Androids.

  • Report this Comment On August 28, 2013, at 8:11 AM, cdgoin wrote:

    Also as mgold77 mentioned.. First "Smartphones" with MP3 player, camera, internet and browers were Windows Mobile phones and were around for 4 years before Apple. Apple did the typical and didn't innovate as much as copy a bunch of other peoples ideas, and packaged it better. But as in the MAC era.. they they sit on their laurels and over price the item and lose out to the hungrier and less expensive competition. As for the iPad, Fujitisu was making touch screen tablets with Windows 95.. and again Apple just reinvented a product with newer hardware. and took credit.

  • Report this Comment On August 28, 2013, at 9:23 AM, spakklal wrote:

    Apple is still the leader in profits in the smartphone and tablet segment. When Apple releases new products next month and throughout 2014, you will notice Apple grow double digits. Recently Tim Cook told the following in the recent earnings call:

    "So, from a growth point of view for Apple, our key catalyst always will be new products and new services and these are both in existing categories that we're in and new categories. In addition to this, we have opportunities in distribution, from carrier relationships to expanding our retail stores, expanding our online store and continuing to expand the indirect channel. And we also have a market expansion opportunity, Peter mentioned enterprise in his comment and the share positions that we have there over 60% in both iPads and iPhones. And I think we are at the very front end of that. And so I think we have lots of growth opportunities.

    And then I don't describe to the common view that the higher end if you will, smartphone market has hit its peak, I don't believe that but we'll see and we'll report our results as we go along.

    And so, it was not a surprise to us. In terms of how other people are doing? I don't know. What I can I tell you is, the most recent data I've gotten which actually just came out I believe this morning is that, the iPad web share data shows that through the quarter, we accelerated further and are now iPad accounts for 84% of the web traffic from tablets, which is absolutely incredible. And so, if there are lots of other tablets selling, I don't know what they're being used for because that's a pretty basic function is web browser. "

  • Report this Comment On August 28, 2013, at 9:36 AM, Honesty007 wrote:

    It doesn't matter whether they make the most profit or not as far as the invention of smart phones and tablets are concerned. All it says is that they are making good products. Maybe better products than others, or products no better than those of others, but are good at marketing.

  • Report this Comment On August 28, 2013, at 3:40 PM, Voyceman wrote:

    Ms. Palumbo,

    On August 26th, you wrote, “…and I won’t like Apple, if they release a cheaper iPhone.” (Headline: “Apple’s 2 Core Problems”)

    On August 27th, you wrote, “…if Apple wants to expand sales, it must reevaluate its low-shipment, high-profit market strategy, potentially considering a lower-end phone to grab up market share.”

    These would appear to be diametrically opposed opinions. Could you please explain?

    By the way, I found your other comment of the 26th to be quite the revelation, “The solution for Apple is simple: release a new product.”

    Because, everyone knows that conceiving of, developing, and manufacturing a revolutionary piece of high-tech equipment, which will capture the hearts and minds of the consumer on a mass scale is just as easy telling someone that's what they need to do, in order to succeed.

    Just one more question: Your Motley Fool colleagues, Steve Heller, Eric Bleeker, Jamal Carnette and Andrew Tonner all seem to believe that Apple is a worthwhile investment.

    Who should the readers believe?

Add your comment.

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