Once your business is no longer the innovative upstart and you become the establishment entity, how do you maintain an entrepreneurial and disruptive spirit that gets results? That's the question Apple had to ask itself this week, following an iffy earnings report.
This week, Apple posted the earnings results for the second quarter of 2016, and reported a year-over-year decline in quarterly revenue for the first time in 13 years. The company took in $50.6 billion in quarterly revenue and $10.5 billion in quarterly net income.
Despite the break in the company's decade plus streak of "record" growth, it's unlikely that the tech giant's standing as one of most valuable and authentic brands in the world will be dinged in any significant way. But it still has to figure out the best way forward.
During the earnings call, Goldman Sachs analyst Simona Jankowski asked Cook, "With the smartphone market now reaching a pretty mature growth base, how does Apple think of itself going forward? Is it a growth company, or is it a more mature tech company?"
Cook’s response to that query wasn't so much about the state of how the company views itself, but the smartphone market itself. "I think that the market, as you know, is currently not growing. However, my view of that is that's an overhang of the macroeconomic environment in many different places in the world. We're very optimistic that this too shall pass, and that the market and particularly us will grow again.”
The business is working with a base of more than 1 billion active devices, but the question remains, which product will be the next legitimate breakout? What space will Apple own like it has with the iPhone?
In the year since its release, Cook says that sales of the Apple Watch -- its most recent new product category -- met expectations, but didn't elaborate on those numbers, other than to say that the company expects to sell 40 percent or more of its "annual unit sell-through" during the December quarter, which makes it seem more like a holiday gift item rather than a must have.
Further establishing itself as a tech behemoth, Cook played up the role of Services, which includes the App Store and Apple Music, as increasingly adding to Apple's bottom line. "The March quarter services revenue was our highest ever. Services revenue jumped 20 percent to $6 billion. App Store revenue was up 35 percent to beat last quarter's all-time record, and Apple Music continues to grow in popularity with over 13 million paying subscribers today," he said.
Services is the path taken by other legacy tech brands such as the more-than-100-year-old IBM and Microsoft.
While Apple had its first revenue tumble in 13 years, IBM has been dealing with declining sales numbers for four years now. The company’s strategy in the face of these stats is to be a leader in both cloud software solutions and artificial intelligence, like Watson.
IBM’s CFO Martin Schroeter told The Wall Street Journal that “the bulk of our transformation is really around skills and shifting skills to these new areas,” and to that end, the company has staffed up in the two aforementioned areas alongside a raft of layoffs in other parts of the business.
IBM has also focused on acquisitions -- hoping for innovation outsides its doors -- plunking down more than $9 billion on 20 new companies. Schroeter noted, “that is more than IBM has ever spent in a 12-month period in our history.”
As for Microsoft, while it’s PC sales were down (even if Windows 10 updates apparently cannot be stopped), the company’s emphasis on the cloud, and especially adapting perennial favorites such as Office 365 into cloud solutions, has proven to work for the tech giant, with 22.2 million subscribers to Office, building on 12.4 billion last year, the New York Times reports.
But despite its gains in the cloud, the smartphone side of the business has plummeted by 46 percent, so it stands to reason that what Cook is saying about the mobile market applies everywhere, impacting some bottom lines more than others that may retain a bit more loyalty. Microsoft has diversified its business, however, looking forward with artificial intelligence with Cortana and chatbots, video games with XBox and augmented reality with Hololens. It's to be decided whether these new categories will take the company to new heights, or just be interesting side projects.
Perhaps, Apple will also drive innovation through mergers and acquisitions, a prospect that Cook seemed enthused about. "We're always looking in the market about things that could complement things that we do today, become features in something we do, or allow us to accelerate entry into a category that we are excited about."
Only time will tell what those categories -- perhaps virtual reality, self-driving cars or even original video content -- will be. But other companies were first to the party in those cases, and it seems like Apple will be playing catch up, rather than making the big splash this time.