Earlier this week, Apple became the first U.S. company with a market value above $700 billion. Its sales soared in the second half of 2014, and the iPhone 6 has been its most successful product. With the acquisition of headphone maker Beats, the creation of a new streaming music service, and particularly the highly anticipated release of its smart watch, the company seems to be charging ahead on many fronts.
Despite all that’s going right, however, new signs indicate that the tech giant could be in a vulnerable spot against competitors. Tesla Motors (TSLA), the electric carmaker, has reportedly poached 150 employees from Apple (APPL), according to Bloomberg. This is not a surprise in the competitive world of technology, but the scale of Tesla’s talent grab should be a wake-up call for Apple. That doesn’t mean the iconic company is in trouble, just that it needs to innovate aggressively to stay on top.
The problem is that the market share for Apple’s largest business segment — the iPhone and iPad family — while still high, declined by about 2% between the fourth quarter of 2012 to the fourth quarter of 2014, ending at 20%, according to data compiled by market intelligence firm IDC.
In addition, the popularity of the company’s phones in China, a large and attractive market with 550 million smartphone users, could be threatened by the recent entry of e-commerce behemoth Alibaba (BABA) into this segment. With lots of cash on its balance sheet for marketing, a popular online sales platform, and first-hand knowledge of how to navigate the Chinese market, Alibaba could give Apple a run for its money.
What this implies is that Apple can’t afford to become complacent. Even though the new iPhone has been wildly successful due to its larger screen size, it’s not dramatically different from its predecessors. Other than minor improvements, the iPhone 6 is almost identical to the iPhone 5S, which in turn is similar to the model before it. That is Apple’s big problem.
In order to maintain its position, Apple can’t afford to simply tweak or upgrade its existing line of popular products. It needs to create new lines that truly change the way we live and work. The beauty about the original iPhone was that it was unlike anything else at the time and, more importantly, it revolutionized our relationship with mobile phones. By creating a powerfully simple interface and turning the phone into a mini computer, Apple was able to differentiate itself and redefine the market. When the dust settled, it was Apple’s market.
To be sure, Samsung (KRX), a big competitor in the smartphone and tablet space, is also losing market share, but that’s cold comfort as the Google Android operating system continues to dominate the market and Windows phones threaten to take market share from Apple iOS. Unless Apple develops something that will once again change the world of technology, and indeed the way humans function, it could wind up being just another corporate giant whose greatest achievements lie behind it.
Luckily for Apple fans, there are signs that the company gets this.
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In his address at the Goldman Sachs Technology & Internet Conference this week, Apple CEO Tim Cook hit on several initiatives that his company is undertaking to expand its footprint beyond its tried and tested product lines. This includes the application of its iOS to the home, car, and personal health markets, the utility of the smart watch in managing our lives, the Apple Pay system that is becoming ubiquitous and simplifies the mobile payment process for consumers considerably, as well as Continuity – which enables Apple features to work seamlessly on multiple devices.
Of these, possibly the most disruptive are the smart watch and Apple Pay. The watch, once only a Dick Tracy fantasy, is a move towards greater miniaturization of smartphone technology and the ability to combine mobile calls, music, health and fitness tracking, mobile payments, smart device controls, and many other things literally on your wrist. Apple Pay enables you to store all your credit cards numbers securely and simply pay by waving your phone in front of a reader, thereby eliminating the need to carry wallets. While the technology isn’t new, the simplicity of Apple’s system seems to be catching on with vendors and consumers.
On Thursday, billionaire investor Carl Ichan predicted that Apple’s market value could hit close to $1 trillion, according to a letter posted on his website. That may or may not happen, and only time will tell whether Apple can withstand competition in a crowded market. As long as the company avoids getting complacent, it will prosper.
Sanjay Sanghoee is a business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as hedge fund Ramius Capital. Sanghoee holds an MBA from Columbia Business School. He does not hold any shares of Apple, Alibaba, Samsung, Google, or Microsoft.
Corrections, January 29, 2017: An earlier version of this article misstated that Apple’s market share for its iPhone and iPad business declined by about 3% during the last two years; market share declined by about 2%. Further, the article misstated that market share ended the fourth quarter of 2014 at 11.7%. It ended the quarter at 20%.
