WHERE'S MY IPHABLET?

Five reasons Apple has peaked—for real, this time

Near a new Apple store in Beijing, a woman holds a sign that says “My husband is not reliable, (he) doesn’t buy me an iPhone 5, (I’m) looking for a rich man”
Near a new Apple store in Beijing, a woman holds a sign that says “My husband is not reliable, (he) doesn’t buy me an iPhone 5, (I’m) looking for a rich man”
Image: Andy Wong/AP
By

Note: This article has been corrected.

Apple’s stock price hit an all-time high of more than $700 in September, but it’s currently trading below $600. Part of that decline has come since the company announced its latest products on Oct. 23 and pushed out two senior executives a few days later. And yet Apple may still be overpriced. There is mounting evidence—of the sort that technologists understand but markets often miss—that Apple has lost the narrative that took it from death’s doorstep to world’s most valuable company by market capitalization. That doesn’t mean it’s about to fail—just that it’s not destined to keep on growing.

1. The iPad Mini is a “me-too” device

The launch of the new, smaller iPad Mini on Oct. 23 signals a significant change in Apple’s strategy. Having defined a whole new product category—the tablet—the company is now playing catch-up with the tablet variants that its competitors are pumping out. Steve Jobs had previously said that Apple would “never do” a seven-inch tablet. Current CEO Tim Cook repeated that mantra on Apple’s recent earnings call, insisting that the iPad Mini’s 7.9-inch screen makes it a different class of device.

But that’s splitting hairs. The origins of the iPad Mini were uncovered in court proceedings between Apple and Samsung. Apple executive Eddy Cue, who ran iTunes since its inception and has just taken over Apple’s troubled Siri and Maps divisions, said in an email to fellow executives in January 2011 that “we should do” a 7-inch tablet. That email included a link to an article about why its more portable size made Samsung’s 7-inch Galaxy Tab a success even though the iPad’s apps and interface were better.

Reviews of the iPad mini are now in, and it’s not clear that—unless you’ve invested a ton of money in apps made for Apple’s iOS, or you really value the Mini’s slightly larger screen—the device is worth the extra $130 it costs over competitors like the Google Nexus 7, which is now selling 1 million units a month, and Amazon’s Kindle Fire HD.

So why did Apple build the Mini, when it has the cash to do just about anything it likes? The key, I think, is in that email from Cue. His logic—that a competitor had made an incremental improvement on Apple’s device and that Apple should follow its lead—is classic lazy-tech-company executive thinking. It’s precisely how Apple’s competitors have operated for most of their existence, and it’s the reason that they’re always struggling with relatively low margins on their products while Apple gets to charge whatever it wants when it creates a device that no-one else can match.

However, Cue said in his January 2011 email that he had put the case for a 7-inch tablet several times to Steve Jobs, then still CEO of Apple, and Jobs had “seemed very receptive the last time.” Unless he was faking enthusiasm, it shows that even under Jobs, the company was being forced to shift to a following rather than a leading role, as the number and inventiveness of its competitors multiplied.

2. The iPad is no longer best-in-class

If a larger tablet is your thing, Google’s new Nexus 10 tablet compares favorably with the latest iPad. It’s thinner, lighter, and has a better display and cameras. (The large version of Amazon’s Kindle Fire isn’t bad either, but it’s mainly for media consumption, while the others are also aimed at creative uses like word-processing and drawing.)

Importantly, Google’s Nexus 10 also costs $100 less than the new iPad. Google can afford to undercut Apple because while Apple’s business strategy is to make money off selling gadgets, Google’s is to sell them at cost in order to make money on the services available on them.

The two things the Nexus 10 lacks that the iPad has are a cellular network connection (it’s wifi only), and Apple’s app store. On the latter count, however, Google’s Android operating system is catching up, having just tied Apple for total number of apps available.

3. Apple is now desperate to compete with Google on Google’s turf—in the cloud

Apple CEO Tim Cook just ousted Scott Forstall, head of iOS software—which powers the iPhone and iPad—and John Browett, who was in charge of Apple’s retail stores. Forstall oversaw Apple’s debacle with its relaunched Maps app for the iPhone 5, as well as the sometimes-finicky Siri voice interface. But Apple’s weakness with maps points to a larger problem for the company, which is that it’s never been as comfortable in the cloud as Google, which is an entirely cloud-based business.

Increasingly, users are computing with rather than computing on their tablets. (That’s not my insight, and I’d be grateful to anyone who can identify its originator.) That distinction is made possible by the cloud. For maps, voice recognition, and other applications that require massive data-processing in the cloud, Google clearly outshines Apple. For giving you seamless access to all your documents, music, movies and so forth on every device you use—which requires storing that content in the cloud but doesn’t require such heavy-duty number-crunching—Apple and Google are more evenly matched. But Google is nonetheless more competitive in this sphere, because it has a laser focus on one thing: the software. It doesn’t care what device you use, as long as the device runs Google’s software. Apple does care: it wants you to use both its devices and its software. It’s harder to do both things really well.

4. Apple is no longer the only company creating new categories of devices

Many people—including me—have poked fun at Samsung’s Galaxy Note II, a phone/tablet hybrid. It’s slightly too big to be a phone and slightly too small to be a tablet, and has earned the derisive name “phablet”. But whatever you call it, the first version of the Galaxy Note was a surprise hit, selling 10 million units.

Recently I had a chance to play with the Galaxy Note, and had a discomfiting realization: I want one. I say this as an owner of an iPhone and an iPad and more iPods and MacBooks than I care to admit. The Galaxy Note is the largest device that can fit comfortably in my pocket. If you’re already used to conducting most of your business on a smartphone, the much larger screen is pleasant to use. And as an almost-tablet that I can have on my person at all times, it’s great for one-handed reading, which is the main thing I use any mobile device for.

The larger point is that our phones and tablets have become so personal and so vital that we want to be able to choose one that’s exactly right for our own particular lives. If you’re like Quartz’s commentary editor Mitra Kalita, you have a legitimate reason to want a physical keyboard. If you’ve got small hands, you might want a smaller tablet. If, like me, you’ve got big pockets and you hate having to spend money on upgrading both a tablet and a phone at regular intervals, maybe you’d rather just have a single device. And Apple is not necessarily the company that will invent it for you.

5. Apple is returning to its historical position: the top end of the market

Apple still has tremendous momentum. The iPhone, which comprises the bulk of Apple’s revenue and future growth potential, remains the most desirable phone on the planet, and the company has plenty of room for growth in gigantic markets in Asia.

Apple’s share of the tablet market has declined significantly in the past year, and the rate of smartphone adoption will slow even as competition increases. But Apple will remain the luxury gadget manufacturer to beat. Like BMW, Apple will always have healthier margins on its products than its competitors. But that doesn’t mean that we’ll all be using them. Before it started making phones, Apple’s role was to be the purveyor of an elite computing experience for which some were willing to pay extra. As it now returns to that role, its market share will continue to shrink and its stock price may continue to fall.

And maybe that’s a good thing. If there’s one thing that the history of Apple has taught us, it’s that the company seems to be most comfortable when it’s the underdog, catering to a minority. There it’s free to upset our expectations by concentrating on the needs of the user rather than the demands of the mass marketplace.

Correction (Nov. 1): An earlier version of this article stated that Eddy Cue had written his January 2011 email proposing a 7-inch tablet three months after the death of Steve Jobs, who in fact died in October 2011. A subsequent version said that the email had come shortly after Jobs’ resignation as CEO, which was also incorrect. These references were removed and a new paragraph (“However, Cue said in his January 2011 email…”) was added.