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Apple needs a 'next big thing'

Jasper Sky / sgb
September 10, 2014

Apple successively redefined the MP3 player market with the iPod, smartphone market with the iPhone, and portable computer market with the iPad. It hopes its Apple Watch and mobile payments will be new 'killer products.'

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Apple Watch
Image: Reuters/S. Lam

For years, Apple has dominated the premium end of consumer computing markets with gadgets that redefined their product class - iPod, iPhone, iPad. The company's highbrow design ethos has given it an exceptionally loyal following.

"Apple doesn't invent new product categories," Berlin-based communications designer Martin Dörken said. "Apple picks a consumer electronics technology, makes a top-end version, and sells it at a premium. Recently, they've put a lot of money into "smart home" systems - so you'll be able to control your house remotely from your smartphone.

"But with Google, Facebook, Amazon, Sony, and Samsung all sitting on huge piles of investable cash, looking for the next big thing, Apple isn't the only company contesting the premium niches anymore."

Market share is secondary

Apple's smartphone and tablet market shares are declining. The bulk of global consumer electronics growth is occurring in emerging markets in Asia and Latin America, where fewer customers can afford Apple's high-priced gadgets. Apple's share of global smartphone sales in Q2 2014 was only 11.9 percent, down 1.5 percent from Q2 2013.

But Apple isn't interested in selling hundreds of millions of cheap gadgets - it would rather sell tens of millions of expensive ones.

Apple iPhone 6 unveiling (Photo: Justin Sullivan/Getty Images)
Apple's iPhone 6 is incrementally better - but contactless payment may be a game-changerImage: Getty Images/J. Sullivan

"Apple doesn't care what its market share is as long as it wins as close to 100 percent as possible of the most profitable share of the market," Jim Edwards, technology columnist for Business Insider, said.

"Most smartphone makers are losing money," Edwards said. "Only Apple and Samsung are profitable, and Apple is making bigger profits than everyone else put together."

The high prices Apple charges translate into exceptionally fat profit margins. As long as millions of well-off customers continue to believe that Apple's gadgets are better than anything else on the market, the company will prosper.

The competition isn't asleep

But competitors have emerged with premium smartphones and tablets that are better in important ways than Apple's expensive offerings.

Samsung and HTC, in particular, have taken direct aim at the premium smartphone segment with their Galaxy and HTC One phones. Both have featured larger, more user-friendly screens than the iPhone in recent years - which is why the iPhone 6, unveiled Tuesday (09.09.2014), features a bigger, better screen than did the iPhone 5.

Apple CEO Tim Cook clutching an iPad (Photo: Justin Sullivan/Getty Images)
Apple CEO Tim Cook is under pressure to sustain the late Steve Jobs' string of successesImage: Justin Sullivan/Getty Images

Like earlier models, the iPhone 6 and the larger 6 Plus offer incremental improvements - a bigger screen, faster processor and better camera. CEO Tim Cook says its graphics compare to those of a high-powered games platform - a market dominated by rivals Sony and Microsoft.

The new Apple Pay software, developed in collaboration with major banks and card issuers, is probably the more important announcement.

Apple has now added near field communication (NFC) to the iPhone - a technology it had previously resisted.

Mobile payment using NFC is a technology that has long been talked about, but has not gained widespread acceptance. And Apple clearly intends to change that - and give users a compelling reason to use its software.

People buy smartphones for the applications that run on them - and those applications always run on a particular operating system. Consumers excited by Apple Pay must buy an iPhone to use it. But in that respect, Apple is sticking to a risky minority strategy.

According to Strategy Analytics, 85 percent of the smartphones that shipped in Q2 2014, including Samsung and HTC's phones, run Google's open-source Android operating system. Apple's proprietary operating system, iOS, is used only by Apple's iPhone and iPad.

The benefit to Apple is that its proprietary OS binds people into the "ecosphere" of Apple gadgets. Software designed for one Apple handheld device will run on any Apple device - and only on Apple devices. This makes it inconvenient for Apple users to buy non-Apple gadgets.

The risk to Apple is that people tend to stick to what they're used to, and 85 percent of smartphone users are getting used to Android. Android users will upgrade to more expensive smartphones as they get richer, and they are likely to choose high-end Android devices - like Samsung's Galaxy phones - rather than switching to Apple.

IFA 2014 Samsung Gear S smartwatch (Photo: REUTERS/Hannibal Hanschke)
Smartwatches' 'killer app' could turn out to be real-time health diagnosisImage: REUTERS/H. Hanschke

Moreover, even low-end Android smartphones made by Chinese makers like Huawei and Xiaomi, a third the price of an iPhone, are of increasingly high quality.

And while its worldwide market share is only around 4 percent, Microsoft's third-place Windows Phone has passed the 10-percent mark in some European markets by appealing to buyers looking for a premium experience without Apple's premium price.

"It's not obvious that in the future, phones will be expensive devices," said Edwards. "Why would someone pay $700 for an iPhone when they can get an excellent Android phone for $100?"

Apple always needs to find the next big iWhatever

Apple's challenge is to provide compelling answers to that question - or to redefine entire product categories with new premium gadgets. The product category up for redefinition at the moment is the wristwatch.

Apple's new Apple Watch, unveiled alongside the new iPhone 6, may well set the standard for elegance and functionality in the emerging smartwatch category, just as the iPhone set new standards in the mobile phone market seven years ago.

Compared to rival designs with curved screens, the design of the Apple Watch is almost conservative - though again, it's the software that makes the difference.

As impressive as the Apple Watch may be, many of the programs Apple demonstrated were simplified iPhone apps. And a smartphone, with its bigger screen, can do a lot of things a smartwatch cannot do.

So why would someone who already has an iPhone also buy an Apple Watch - and keep buying upgrades, even as a stampede of competing makers rushes into production in coming years?

The best reason could turn out to be health and fitness monitoring - with the Apple Watch featuring apps to monitor activity and dedicated workouts. That's an area where Apple has been making a big push, Edwards said.

Nestled against the user's skin, a smartwatch can measure the wearer's heartrate, and report it over wireless networks - something a smartphone cannot do. That's useful for remote monitoring of cardiac patients.

But that's just a start. If a future generation of smartwatches can add the ability to automatically monitor blood chemistry, a whole new world of preventive medicine applications opens up. The company that makes the very best mobile health monitoring devices will sell a lot of pricey gadgets.

It will not be entirely surprising if Apple turns out to be that company.

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