Apple long ago established itself as a trendsetter, a company that prides itself on selling customers what they need before they even know what that is.
But as the company delves into new devices and services, including the Apple Watch, AirPods wireless earbuds and software that links Internet-connected home devices to a smartphone, some analysts are wondering whether Apple should rethink its strategy. These new products have yet to be widely adopted — and, even if they are, they show no signs of transforming Apple the way the iPod and the iPhone turned a niche PC maker into a top-selling consumer electronics giant.
“If we’re measuring innovation, Apple is over,” said Steve Blank, an adjunct professor at Stanford University and a former tech executive. “They are just turning into another commodity phone company.”
Apple has been riding on the success of its blockbuster product, the iPhone, for years. Introduced a decade ago, the phone represented 63 percent of Apple’s sales last fiscal year. But that year also saw year-over-year iPhone sales decline for the first time, even as the company announced in July it had sold its billionth iPhone. Apple missed its sales goals for the year, and CEO Tim Cook got a 15 percent pay cut.
“There’s a lot of pressure on them to come up with another product that can grow,” said Abhey Lamba, an analyst with Mizuho Securities USA Inc. “Otherwise, Apple will not be considered a growth company.”
Apple remains the world’s most valuable company, with a market cap of $626 billion — about $62 billion more than its closest rival, Google parent company Alphabet. Moneymakers like the Mac and the iTunes Store are so large that were they stand-alone businesses they would be among the biggest tech companies. Apple also believes the iPhone will continue to have a vibrant future.
“Everyone has their opinions at this point, but it could be that we’re only in the first minutes of the first quarter of the game,” Apple marketing executive Phil Schiller recently told tech news site Backchannel. “I believe this product is so great that it has many years of innovation ahead.”
Steve Jobs, the Apple co-founder who returned to run the company from 1997 until shortly before his death in 2011, was known as a master innovator. He introduced a series of dazzling products, including the iPod, iPhone and iPad, as well as popular services like the App Store, iTunes and Apple’s voice assistant, Siri.
Under Cook, the Apple Watch has been the company’s signature new product. AirPods, the wireless earbuds that have just gone on sale and that connect with Siri, have also drawn attention — mostly for shipping later than expected. These items generally require an additional Apple device, usually an iPhone, for full functionality. Other new offerings under Cook include the mobile payment service Apple Pay, streaming music library Apple Music and tools that help control Internet-connected home devices. None of those has come close to matching the iPhone’s success.
The company did not respond to a request for comment for this story.
The markets for these auxiliary products remain much smaller than the smartphone market, at least for now. Research firm IDC estimates the worldwide market for smartwatches was $5.9 billion in 2016, compared with the $404 billion market for smartphones.
Unlike some competitors, Apple releases its hardware products at an enormous scale, and they are sold in many countries. That can make it hard to incorporate changes into devices, analysts said.
“You get really constrained by your success,” said Bryson Gardner, a former Apple employee who left to start Pearl Automation, which develops car cameras.
Some of Apple’s new hardware appears incremental compared with the competition, which is flirting with futuristic technologies. Google’s newest smartphone, the Pixel, works with a virtual reality headset. Snap Inc., the parent company of Snapchat, unveiled glasses that record video.
Those products, however, were rolled out in far fewer countries than, say, the Apple Watch.
“It’s hard (for Apple) to take bets when you have to ramp up supply chain the way they do and scale the way they do,” said John Renaldi, a former Motorola vice president who is now CEO of Jiobit, a wearables startup.
Apple CEO Tim Cook took a 15 percent pay cut in 2016 after Apple missed its sales goals for the year.
Apple has touted services as a key growth area. Revenue in that division increased 22 percent, to $24.3 billion, last fiscal year, representing 11 percent of Apple’s overall sales. But those online services, like its music store or online storage, generally require its hardware to be able to access them.
“We remain very confident about the future of our services business given the unmatched level of engagement, satisfaction and loyalty of our growing installed base,” Cook told investors in October, according to a transcript on financial analysis site Seeking Alpha.
Apple hasn’t made a strong enough case for why the services it offers are better than what’s already out there, said Lamba of Mizuho Securities USA. For example, Apple Music had more than 17 million paying subscribers as of September. Rival service Spotify claims more than 40 million subscribers.
The services category also includes sales at Apple’s App Store. Apple typically gets 30 percent of the revenue from purchases of apps, most of which are made by outside developers. But the company could face competition for those sales as well, as other tech firms try to circumvent the App Store.
Apple is also bullish on a 3-year-old software product called HomeKit, which links Internet-connected lights, speakers and locks to Apple devices and Siri, allowing customers to control the appliances with their iPhone or voice. Rivals Google and Amazon are also betting on a similar future, releasing the Google Home and Amazon Echo — stand-alone, voice-powered home devices connected to the Internet. These have proved popular with consumers. Apple chose not to create a stand-alone device, though its HomeKit allows similar services via Siri and the iPhone.
Some analysts say Apple lost an opportunity to make Siri smarter, with better voice recognition and the ability to perform more tasks.
“They were first with Siri but managed to screw that up,” said Blank, the former tech executive. “HomeKit, that’s gone nowhere.”
Some Apple users also worry that Siri doesn’t work with some other Internet-connected devices. For example, Sonos speakers can play songs from Apple Music, but they are not part of Apple’s HomeKit and do not work with Siri. Apple did, however, put Siri in its Apple TV set-top box, another once-promising product that has lost its edge to competitors such as Amazon’s Fire TV and Google’s Chromecast.
Apple still has a strong line of existing products, such as Macs. But when the company unveiled a major update of the MacBook Pro in October, the response was less enthusiastic than usual. Customers, especially technology geeks, complained that the new laptops had fewer ports and should have included more processing power.
Chuq Von Rospach, a former Apple employee who has worked as a developer community manager for large firms including Cisco and Palm, said there wasn’t an entry level price-point for the Macbook Pros, which could put off students — potential future Apple fans. The lowest-priced new version sells for $1,500.
Von Rospach said he believes Apple should also refresh its Mac desktop line — which Apple did not do last year — even though desktop computer sales in general are declining.
Plenty of analysts believe that Apple has bigger aspirations. Neil Cybart, who runs the Apple analysis site Above Avalon, says Apple is in “transition.”
Devices like AirPods and Apple Watch “are positioned as accessories to our smartphone, (but) over time they have the potential to do much more,” he said. For example, venture capitalist Benedict Evans has said he believes Apple could be building up its technology to enter the field of augmented reality, where digital information is overlaid on a view of the real world.
“The more I look at the AirPods and Watch, the more I see building blocks for AR glasses,” tweeted Evans, who works for Andreessen Horowitz.
Others believe Apple is building a product or service tied to electric cars, which would mesh with the anticipated autonomous-driving revolution.
“It’s very difficult to say they are behind when you don’t quite see what is going on behind the scenes,” Cybart said.
Apple has remained mum on its future projects.
Chronicle staff writer Benny Evangelista contributed to this report.
Wendy Lee is a San Francisco Chronicle staff writer. Email: [email protected] Twitter: @thewendylee
