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Why Apple is ailing

Since October the price of Apple shares have fallen from $700 to about $425. No one should be surprised—the company has been misstepping for a long time.  

Without the genius of Steve Jobs for neat, wholly-new products, it is going to take tougher management, and a change in the company’s core business strategy to match its past record of profitability.

Apple’s remarkable success was premised on being first and better with a succession of new products, dating back to the earliest computers to smartphones and tablets. It was greatly aided by a superior operating system, which provided a more elegant and user friendly experience than rival Microsoft offerings, and the fact Apple both wrote the software and designed its products.

Apple customers eventually evolved into an elite cult. Apple products became the device of choice for a large segment of high-income consumers, and more moderate folks, whose iPhones were an expression of everyday luxury that the BMW they could not afford did not provide.

Those factors permitted Apple to be both high priced and ubiquitous, yielding big margins and its huge cash horde; however, along the way, Apple made mistakes only its market dominance at the high end would permit a firm to tolerate.

It offshored and outsourced too much manufacturing, separating in critical ways product design and manufacturing. That slowed and screened the feedback from the latter to the former, causing troublesome glitches in new products—such as iPads that overheat and iPhones with inadequate antennas.

Those are the sorts of issues that are better avoided by keeping the manufacturing of critical components and product assembly under more direct control.

Also, Apple became a high cost producer of computers and handheld devices, and vulnerable to competitors that could offer a comparable consumer experience at a lower price. 

For years, Apple avoided that fate, because it competed with the likes of Dell, Honeywell and IBM -- all companies not much interested in cutting edge design or whose bureaucracies and other business interests made them less quick to respond to consumer’s wants and needs.

Apple led, and other computer manufacturers followed with cheaper mass appeal products.

However, equally important, Apple’s competitors depended on operating systems designed by Microsoft, whose numerous problems with antitrust authorities indicate, was more interested in stifling competition within the mass appeal software market than providing elegant and trouble-free customer experiences.

In a nutshell, Apple offered refined, consumer friendly products, while those run on the Microsoft platform were often clumsy and mediocre. That worked until the plane of competition shifted to handheld devices and Google entered the scene with Android.

I don’t want to get into the debate over whether Android or Apple smartphones offer the better experience. Having tested both, I admit both have their points. However, Droids offer at least a comparable customer experience, are made by several firms, and one among them, Samsung designs its own components and even manufactures phones.

In the automobile and other rapidly advancing industries, the most able competitors keep the manufacture of critical components, or at least systems comprised by those components, close and accessible to their product designers: Samsung does this. Apple does not.

Consequently, Apple produces a high priced, high cost to make product—Samsung does not.

This puts pressure on Google’s Motorola, which markets devices as devices as good as those made by anyone, to keep prices down, too.

The late Steve Jobs was able to circumvent this kind of competitive disadvantage by coming up with wholly new products but Apple’s competitive space is maturing, and the real work will be in refining handhelds, tablets and the like—merging uses and speeding up and enhancing the customer experience—not coming up with whole new products.

In that environment, Apple must bring home manufacturing and acknowledge the requirement of competing for the masses. Being a step ahead for the elite, and those who wish to look elite, by whipping out their iPhone, doesn’t cut it anymore.

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist. He is the five time winner of the MarketWatch best forecaster award. Follow him on Twitter @PMorici1.