Apple’s Future Comes Down to Four Crucial Questions

(Bloomberg Opinion) -- Apple Inc. reported some ugly numbers on Tuesday. Revenue in its fiscal second quarter dipped 5 percent from a year earlier — including a 17 percent slide in iPhone sales, the company said.

Yet investors sent Apple's shares higher in part because revenue wasn't as ugly as expected and because the company forecast no worse than a 1.4 percent dip in revenue for the three months ending in June. Hooray, I guess.

But investors have essentially written off this year for Apple. The company acknowledged in January that it hit what it implied were transitory problems for iPhone sales, largely attributed to problems in China — where, to be fair, Apple's sales declines have been concentrated.

In this odd period for Apple, then, I've sketched out four burning questions about the company's long-term future. Apple for sure will not tackle these questions, but they're worth asking. They get to the heart of what Apple is trying to become and whether a company that has been erroneously counted out repeatedly through its history again has the ability and foresight to plot a bountiful future.

1) Does Apple believe the iPhone sales decline is temporary? Apple's revenue from iPhones — more than half of the company's sales — fell by nearly $16 billion in the first half of Apple's current fiscal year. Gains from every other Apple product or service rose by a combined $8.5 billion. That's not a great recipe for growth, and this trend has been brewing for some time.

Look at the chart below, which shows growth stalling in the number of iPhones sold in rolling two-year periods. And Apple is not alone. Global smartphone sales have been declining as people hold onto their devices longer, which delays new smartphone purchases. Apple was able to ward off this reality for maybe a year, thanks to the pricier iPhone X models that went on sale in late 2017. But it can't fight gravity anymore.

Apple has never really addressed the most pressing question about its business: Does Apple believe this industrywide smartphone sag will end? If yes, when and what will be the catalysts to ignite sales growth? If not, how is Apple preparing for its most important product to stop growing? Apple's emphasis on its internet-related products such as Apple Music cannot fully replace the revenue decline from sliding iPhone sales (see below). So, what else you got?

2) No, really. What's the strategy behind internet-related services? Given the iPhone sales slide, how is Apple thinking about the financial role of its internet-related revenue and ancillary hardware such as commissions on app sales, the AppleCare warranty program, AirPods, Apple Music and the coming Apple TV+ web video subscription? There's no way these sales can fully fill the crater left by iPhone sales, or so I think. Is that what Apple believes? Is the business strategy to replace some of the lost revenue, and perhaps a larger share of profits, from falling iPhone sales?

But what is the long-term play? Ultimately if people aren't buying more iPhones, Apple won't have a fresh pool of people to persuade to spend more on apps, AirPods and other things that are a supplement to Apple's main hardware products — principally the iPhone. Is the goal to increase Apple's average revenue from each iPhone owner? Or, if Apple is trying to sell products to people who don't already own iPhones and other Apple products, how can it boost what seem to be paltry sales of Apple Music, AirPods, Apple News and more to the billions of people who don't already own its gadgets?

3) What's the plan to reach the next billion users? I think often of this 2016 interview with Chief Executive Officer Tim Cook on Indian television network NDTV. Cook was asked repeatedly how Apple products might be tailored to the unique needs of Indians. Cook seemed out of his depth, and Apple has mostly stuck with its global one-size-fits-all strategy. Since then, Apple has gone nowhere in India. Its revenue flatlined in what is perhaps the world's most important technology growth market.

Apple's failures there so far are emblematic of its challenges. Smartphone and internet growth are now coming from places like India, sub-Saharan Africa and Southeast Asia, and Apple is still treating much of the world like the U.S. and Europe. Meanwhile, companies such as Google, Netflix, Facebook and China's smartphone kings are tailoring their products, pricing and business strategies for India, Vietnam and other countries where growth is booming for internet hangouts and mobile technology. Apple has had admirable success in China without radically customizing its products. Can Apple repeat this in the rest of the world?

4) Do you have the right expertise at the company to shift direction, if you want to? This goes for both Apple's strategy with online services and selling outside the developed world. Apple is stocked with expertise in hardware development and supply chains, pedantic designers who come up with one amazing product a year and computer chip nerds. Also, Apple's executive team and board of directors look like this. It's a lot of Americans and Europeans, which is a sign of the company's relative global myopia. Does the company's employee base need different types of skills and experience?

Based on the company's forecast for the the next three months, Apple isn't in a tailspin as it has been for half a year. That's good. But even before the company's revenue warning in January, it was clear Apple had growth trouble ahead, although investors and Apple executives weren't fixated on it.

Now is the time for red-hot focus on Apple's road map for the future — or its lack of a credible one besides waiting out its troubled patch in China.

I did this to smooth out the effects from Apple's release every other year of a drastically redesigned phone. Apple stopped disclosing the number of iPhones it sells six months ago, just as those unit sales appeared to be set to decline consistently.

In the fiscal second quarter, Apple's revenue from Asia excluding Japan and what it calls "Greater China" declined by 9 percent.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.

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