Apple's Dilemma

Apple Corp. is facing mortality--the mortality of the smart phone.  Not that the smart phone is going away any time soon.  It will be around in various iterations for decades.  But it's reached the point in the product cycle where it has become a commodity.  There are lots of different types of smart phones made by many different manufacturers at prices ranging from almost $2,000 to almost zero.  Competition has intensified immensely from the time the iPhone was introduced in 2007, and the iPhone is not always at the cutting edge of technology. 

Last fall, Apple announced that it would no longer report unit sales of iPhones, its most important product.  That was a bad sign, indicating sales were no longer exuberant.  Apple also significantly raised the prices of many products, and said it would endeavor to increase sales of services.  Then, at the beginning of 2019, Apple announced that sales in China were more disappointing than expected.  Not surprisingly, its stock has sagged. 

Apple is swimming against the current.  While it continues to make excellent products, it raised prices at a time when its prices were already at premium levels and the world's economy was slowing.  Even though its products include upgrades, none were astounding, must-have innovations.  Ten years ago, people were willing to pay premium prices for Apple products because they were superior to the competition, in terms of technical capability and quality of manufacture.  Today, other manufacturers turn out very high quality products, sometimes with better features than Apple has, at competitive or lower prices.  Apple seems to be betting that consumers will pay up for a brand name.  That's not ultimately a winning strategy.  Mercedes, which has never been a luxury brand in Germany, tried to do that in America by charging premium prices and creating an aura of exclusivity.  Although it succeeded for a while, its outsized prices attracted a flock of competitors.  Today, Mercedes is no longer a show-stopping dazzler, with some of its lower end models selling for less than many pickup trucks. 

Econ 101 teaches that when Apple raised prices, it shrank the pool of its potential customers because fewer and fewer people can and will pay escalating prices.  And hoping to sell more services is predicated on people buying more Apple hardware.  But if hardware sales are lagging because of price increases and a slowing economy, something has to give--and it has, in Apple's recent disappointing news announcements.

Most consumers don't use more than a few of the myriad features in iPhones and other high-end smart phones.  Indeed, most consumers don't even know what those features are.  When you can buy a smart phone for $100 or $200 that does the few things you care about well, there's no point to paying $1,000+ for a brand name.  Probably most millionaires in America drive ordinary cars.  You don't get to be a millionaire by burning up money on a brand name. 

Apple's dilemma is that it is a giant consumer products company trying to be a high-end luxury company.  That doesn't work.  Highly priced luxury products can only be sold in market niches that serve the wealthy.  Apple cannot afford to become a niche company, lest it lose most of its customer base.  The key to Apple's past success is that it appealed to a lot of middle class but aspirational people.  But those folks can't shell out thousands of dollars a year for computing devices plus wireless service plus other services.  Instead, Apple should take a close look at Toyota, another company known for excellent products made with very high quality of manufacture.  While Toyota vehicles are not always at the cutting edge of technology, they have a strong, loyal customer base because they deliver value--excellent quality at reasonable prices.  While Apple can try to use clever marketing to boost financial performance for the next quarter, or two or three, its long term prospects won't be well-served by hoping that consumers will embrace its cute logo and ever increasing prices.