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One bad Apple earnings report doesn't signal a mighty fall

After 13 years of growth, an Apple earnings report showed a decline. Also in Searchlight: Amazon and Facebook revenues soar; 'Snowden' preview goes online.

March 26 marked the end of an era -- though we didn't find out about it until Tuesday, when Apple released its...

numbers. After more than a decade of growth, the maker of the iPhone and iPad saw quarterly revenue drop -- 13% from the January-March quarter of 2015.

The decline triggered an 8% stock-price loss for the world's most valuable company in after-hours trading Tuesday and "rotten Apple" headlines on the Web.

A dip in iPhone sales -- 51 million in the first three months of 2016 versus 61 million in the year-earlier period -- is being blamed for most of the losses, and Apple CEO Tim Cook cited tough economic conditions and a strong dollar crimping overseas sales. But while a break in a 13-year winning streak does account for a fair bit of "noise," said John-David Lovelock, an analyst at market research outfit Gartner, Apple will continue its reign in the technology realm.

The global smartphone market is saturated, he said, so that's why people aren't buying more iPhones.

"We don't have net new adopters any longer," Lovelock said. "It is getting into a replacement market: I have a phone. I am going to replace it and upgrade to the newer, later, greater model."

Apple earnings report, diverging views

The problem is, people aren't doing a lot of replacing yet -- especially in China, where news reports of an economic slowdown has caused people there "to put their hands back in their pockets," Lovelock said. But they will replace their phones, and Apple will see profits grow again. "It's just going to take a little bit longer."

Not everyone agrees. Bloomberg View columnist Leonid Bershidsky said Apple's business model -- charging a premium for slick products -- is not working the way it once did.

The problem begins with the price, which can go up to $700 for some models. Apple holds 90% of all global smartphone profits, but just a 20% share of unit shipments, Bershidsky wrote the day after the earnings news broke. Mobile phone operators for years put up with the upfront cost for the phones, and then subsidized sales to their customers. But Bershidsky predicted Apple will have a tougher time making the sale.

"Essentially, it sells the same phone as other manufacturers -- and, in some cases, an inferior one -- at a much higher price, lulling buyers with tales of a comfortable ecosystem that includes all kinds of apps, media and life hacks, such as an easy payment solution or unlocking hotel rooms' doors with one's phone," Bershidsky wrote.

That won't work for most people, he contended, especially when new and cheaper models are entering the market, including a number of lesser-known Chinese brands that have begun competing for market share outside of their home turf, such as Huawei, Oppo and Vivo. 

Getting the shine back

Apple may be better off leaning on its $6-billion-a-quarter services business for growth, The Wall Street Journal reported Wednesday. Credit Suisse analyst Kulbinder Garcha, cited in the article, predicted earlier in April that 30% of Apple's gross profit will stem from services by 2020. Today, services account for just 15%.

But Apple hardware shouldn't be counted out, wrote Jackdaw Research's Jan Dawson in a blog post Wednesday. Though sales of iPad and Mac computers have also slowed, there are signs of rebounds -- and for the Apple Watch, released just a year ago, it's too early to judge.

The most important thing to take out of the news blur, Dawson wrote, is that the ebbs and flows of iPhone sales are "temporary and cyclical." The rush for big-screen models, released in late 2014, is over, and "demand is now simply returning to its prior trajectory."

Frank Gillett, an analyst at Forrester Research, wrote to me in an email that while quarterly revenue is "not a big deal in the long run," Apple may have to muster the sheer innovation that has won it rarified success in the past to stop the decline in sales.

"Only a distinctive iPhone or new product category innovation at mass scale will bring back big revenue growth," Gillett wrote.

CIO news roundup for week of April 25

It was hard to avoid headlines trumpeting the Apple earnings report this week. Here's what else was in the news:

  • Facebook faced up to a sluggish technology market -- and tripled its revenue. The social media giant released its first-quarter results Wednesday, posting $1.51 billion in the first three months of 2016, up from $512 million in the same period last year. Twitter didn't fare nearly as well, reporting revenue of $595 million Tuesday, short of the nearly $608 million analysts expected. The company did see its number of users rise to 310 million, 2 million more than expected.
  • The cloud gave Amazon its wings. The company had its most profitable quarter ever, posting $513 million in net income for the first three months of the year, compared with a loss of $57 million in 2015. The strong results are thanks largely to Amazon Web Services, the cloud computing business that has become the leading provider for startups, government agencies and other organizations looking to outsource IT operations.
  • Corporate customers of Wells Fargo will soon be able to log into their accounts using eye prints. The bank plans to implement the biometric security technology by July. The system works this way: Customers take a picture of their eyes using an iPhone camera, and software then translates the image into digital code, which is verified against a template. Biometrics in financial services is expected to rise in value from $126 million in 2015 to $2.2 billion by 2024.
  • The trailer for the upcoming film Snowden hit the Internet Wednesday. Director Oliver Stone, of Platoon, Wall Street and JFK fame, based the biopic on Edward Snowden, the former U.S. government contractor who leaked documents about the National Security Agency's surveillance program. But the preview seems more slick Hollywood spy drama than true story. Snowden opens Sept. 16.

Check out our previous Searchlight roundups on Intel's job cuts and Facebook's "chatbots."

Next Steps

FBI cracks iPhone encryption, Apple vows stronger security

Apple Pay doesn't pay for Apple, but it does draw users

Time will tell? Readers debate business uses for Apple Watch

Dig Deeper on Leadership and strategic planning

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Do you see Apple's earnings as a reflection of the tech market as a whole? Why or why not?
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I'd think this has far more to do with the normal ebb and flow of the market. Apple has had a fine, long run, but changes are constant, competition is everywhere and consumers are fickle. Everyone has already bought their phone. Since evolution is far less interesting than revolution, Apple needs the next game-changer.
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Apple is having the same problem that all the other phone vendors will -- there's just not enough big jumps in innovation to require new phones anymore. Apple had the biggest share of the innovation, so they are the ones who get damaged the most when it slips.
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Apple is merely the 500 pound canary in the coal mine. The market is saturated, prices are overblown, competition is everywhere, and no one really needs to shell out another $500 for the newly-colored bezel even if it is an eighteenth of an inch thinner. We're seeing slow, steady evolutionary changes now and they're just not as interesting than revolutionary change. 
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So what will the next revolutionary change be?
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