When you look over Apple’s history, and its brushes with disaster in the mid-1990s, maybe you can understand the reason for skepticism about the company’s ongoing success. But after nearly 20 years, one would think that such fears, or hopes, would fade away. No company that rises to the heights of Apple, and remains there for so long, could have gotten there by a fluke.

Despite the fact that sales have dropped for the past two quarters, Apple has sold more than one billion iPhones. How is that a fluke? Besides, iPhones are hugely profitable. No other mobile handset maker comes close, not even Samsung. Sure, Samsung sells more units than Apple overall, but not of the high-end smartphones. Even at reduced numbers, tens of millions of iPhones find their way into the hands of customers every quarter.

Also consider the iPad, where Apple has moved tens of millions since it debuted in 2010. True, sales hit the skids for a while, and they were lower this past quarter as well. But the sales mix has begun to favor the more expensive iPad Pro. The result is that total revenue actually increased. With iOS 10, Apple has removed compatibility from a number of older models, which may fuel spur upgrades this fall.

Continue Reading…

The common argument is that Apple’s gear is too expensive, that cheaper products would greatly expand the market and swat Android, Windows and other competitors. Yes, that’s the theory. But through all these years, Apple has largely avoided the cheaper stuff. Well, maybe the Macintosh Performa, in the days before Steve Jobs returned to the company, but they failed to make a meaningful improvement to the Mac market share, or Apple’s revenue. There were so many models with little or no difference, you needed a cheat sheet to figure them out.

Sort of the way such companies as Dell and HP continue to market their wares.

Now it so happens that Apple has actually delivered a fairly inexpensive product over the years, and that’s the $49 iPod shuffle. Sure, I realize there are cheaper music players, but it doesn’t matter. The iPod had its run and hardly matters anymore even though you can still buy them.

The iPhone has always played among high-end smartphones, in the same relative price range as competing gear from such companies as Samsung. Yes, it’s real hard to believe that there are expensive smartphones from Samsung, but it’s true. However, more often than not, a wireless carrier will discount even a Samsung Galaxy, so you get a two-for-one deal. Not that iPhones aren’t discounted, but Samsung appears to do it from the very day a new product is released. It’s a concession that most customers don’t want to buy them at full price.

Well, the critics want Apple to play in the low-end sandbox, with cheap iPhones to compete with $100 smartphones from Asia. But you have to wonder how any company can derive a profit from such cheap gear, even if it’s made of the lowest cost parts and assembled with minimal quality control. If you pay for junk, that’s what you get.

In fairness, there are affordable smartphones priced above the entry level that do deliver decent performance and reliability. But that performance level is probably that if a premium smartphone of several years ago, and even there, Samsung isn’t going to derive much in the way of profits. What profits are earned are mostly due to the sale of Galaxy-class gear.

Before March of this year, Apple’s usual method to sell cheaper iPhones was to continue to offer models from two years earlier. They traditionally sold for $450 retail, free with a two-year contract. Well, at least when the carriers offered such deals. But even the monthly payments are fairly low.

Now as Apple moved to bring iPhones to China and India, the critics suggested that few could afford to pay $450 for a smartphone. Despite those objections, sales have done fairly well overall, although revenue in China  is lower nowadays due to the financial headwinds.

Regardless, when the iPhone SE came out, Apple sort of broke the mold. Before it arrived, the cheapest iPhone was a 2012 5s at the $450 price. As a two-year-old gadget, it was a pretty good deal. Performance was decent, it had Touch ID, and many of you preferred the four-inch display. The current iPhone 6-family models may just be too large for many pockets and purses, and are certainly less convenient for one-handed use.

So Apple came up with a brilliant idea. Take the basic case of an iPhone 5s and stuff it with most of the parts of the iPhone 6s. All right, there’s no 3D Touch, but I suspect many of you won’t care. So you got most of the elements of the larger iPhones at the $399 starting price of the iPhone SE.

Now maybe a $50 price reduction doesn’t seem to be an awful lot, but it’s also true that the iPhone SE has been a surprising success. Sales are restricted by the fact that Apple has been struggling to meet demand. So there was indeed a need not just for a cheaper iPhone, but one with the smaller display. This is a market not well served by the competition that usually concentrates on displays of five inches and more.

To me, it’s too small, but that doesn’t matter. The fact that it has current parts means it can hang around for another couple of years and maybe hit a price point of $299 or even less some day. By the time it gets there, the costs of production will have hit a point where Apple can still earn a decent profit, at a level far higher than any other smartphone maker.

While some critics suggest that Apple is losing out because people are buying cheaper iPhones in greater qualities than expected, that’s not so. To Apple, a sale is a sale, and if they move more product, they make out better in the end. Indeed, the lower price may help attract more customers from other platforms. The smaller display is also more convenient for some, and, again, Apple is filling a market niche that the competition tends to treat as an afterthought, filled mostly by low-end gear.

I am not the target audience for an iPhone SE, but when my wife finally gets around to requesting a replacement for her iPhone 5c, Apple’s cheapest iPhone may just be what she chooses.

In past years, Apple has been criticized for spending far too little on R&D, especially when you compare it to the competition. Indeed, some companies just pour loads of money into projects that have very little potential, or just hope to throw money at insoluble problems in search of the fantasy of success. Google, for example, spends in the range of 15% of its revenue on R&D, and very little of it delivers a return as a retail product or service. Certainly there’s not a lot of revenue from Android, since it’s given away free to handset makers. I realize you can count the revenue from the Google Play app store as an indirect benefit.

Google’s main product, however, remains targeted advertising. So even Google Glass hardly seemed an appropriate venture to deliver ad revenue, or much revenue from the sale of the hardware, which was discontinued last year. In the past, Google tried to enter the mobile handset business with its boneheaded decision to squander $12.5 billion to buy Motorola Mobility. It was sold off at a fire sale price to Lenovo for $2.91 billion. What a waste!

In the past, Apple has been frugal about R&D, experiencing tremendous success with the Mac, the iPod, the iPhone and the iPad. The Apple Watch is still a work-in-progress and it may be several years before its ultimate success is known.

As people wonder what Apple is coming up with next, the R&D budget has soared. In the past nine months alone, it has spent nearly $7.5 billion on R&D. Obviously few outside of Apple or its suppliers knows where that money is going, but it’s certainly not to fund expensive vacations in the Bahamas or to buy fleets of corporate jets. It’s about creating possible successors to current products, or major new versions. It’s also about entering new product categories.

Now one rumor that appears credible is that an Apple Car is under development. This week, it was reported that veteran hardware executive Bob Mansfield has taken control of Project Titan, where hundreds of people are reportedly working on some sort of electric car. I would assume that it will sport an advanced self-driving capability as well should it come to pass.

A few artist renderings of what form it might take have been posted in the last year or two. But the ones I’ve seen aren’t terribly attractive. Compare that to the Tesla, which has Jaguar-style looks and state-of-the-art performance. So would an Apple Car be a high performance luxury vehicle in the same vein, or something more affordable and practical?

Obviously the fact that a car is being developed doesn’t guarantee it will ever see production. It might also serve as a platform or test bed for future iterations of CarPlay or other Apple inventions for existing motor vehicles.

The question not being considered when an Apple Car is mentioned is what sort of difference Apple might make when compared to existing cars. The Tesla has to be a huge factor, and its teething pains will no doubt serve as a lesson on what not to do. If Apple continues with what’s clearly a multi-billion dollar investment, there has to be an immediate payoff, and there’s not going to be much time to make mistakes. It’s one thing if the first version of a gadget costing a few hundred dollars isn’t fully formed. But a product that will cost tens of thousands of dollars has to be perfect on Day One, or close enough that minor ongoing updates will address software glitches and minor hardware oddities. Obviously it would have to meet safety standards around the world.

In addition to an autonomous driving system that actually works — and the existing ones are obviously buggy — Apple might consider ways to advance battery technology. While today’s Tesla vehicles have driving ranges in the 200-300 mile range, more or less, company CEO Elon Musk promises to double that range, to more than 600 miles, by 2017. In an interview last year, Musk also claimed that a range of over 750 miles could be achieved by 2020.

Tesla is notorious for being late, and for the initial versions of new vehicles to be raft with production problems and product defects. So it’s quite possible the extended range vehicles will be postponed.

Now the Apple Car has reportedly been postponed from an expected 2020 release date to 2021. If Tesla Motors succeeds in more than doubling driving range, no doubt with more efficient parts and superior battery technology, Apple will have to raise the bar somehow.

But that’s just one thing. What else might Apple be using that growing R&D budget to fund? What about building out a subscription TV service with a rich roster of original programming, to compete head-on with Amazon Instant Video and Netflix? It would take commitments of hundreds of millions of dollars and more to fund programming and an online streaming infrastructure beyond what iTunes can manage today.

Clearly Apple has more than enough money to build cars and produce TV shows, and cloud services are reportedly undergoing major expansion as we speak. There are no doubt other projects, such as augmented reality, are under development that even the best rumor sites, with their ears glued to the ground, have yet to discover. If Apple gets full value from all those investment dollars, the next few years are going to be mighty interesting.

Even though Apple’s long run of higher and higher sales every quarter has ended for a while, it does appear that Wall Street isn’t near as bearish about the company’s prospects as one might have expected. Now I don’t presume to understand how the market works, for I might well be a rich man today. Clearly there’s optimism about Apple’s long-term prospects, that the company isn’t on the ropes, and that there’s no prospect of red ink on the horizon.

That doesn’t mean expectations for the last quarter were high. They couldn’t be in light of Apple’s guidance. Indeed, the company’s financials for the June quarter actually exceeded most expectations. That alone was a decent achievement overall, even if some might have hoped for better sales numbers. Total revenue came in at $42.4 billion, with a quarterly net income of $7.8 billion. The Wall Street consensus pointed to revenues of $42.2 billion.

In all, a total of 40.4 million iPhones were sold. In the year-ago quarter, Apple sold 47.5 million iPhones with revenue coming in at $49.6 billion. So the decrease seems like an awful lot, but Apple is still moving more high-end smartphones than anyone else, and that includes Samsung. Unfortunately, the facts about Samsung are often obscured. They may sell more handsets overall, but most are in the lower price categories. To be sure, the flagship Galaxy S7 lineup had to be discounted when it first came out, which is hardly a show of confidence.

On the positive side of the ledger, maybe the iPad may be coming out of its slump, however. While sales of less than 10 million units were 7 percent lower than in the year-ago quarter, the results were still a million more units than Wall Street estimated. Total revenue increased 9 percent, which reflects the higher average sales price due to the success of the iPad Pro. This increase is the best in the last 10 quarters, so maybe there’s a reason for renewed optimism for the iPad’s success.

Unfortunately, it appears that the estimates of lower Mac sales from Gartner and IDC were pointed in the correct direction. Apple sold 4.3 million Macs, a decrease of 11% from the year-ago quarter. This continues a downward trend that is actually slightly worse than the rest of the PC industry. While you can speculate that sales might have been higher had Apple produced some compelling hardware refreshes this year, the problem may actually stem from the fact that older Macs still work quite well, that improvements have been very slight from year to year. Since macOS Sierra will support all Macs from 2010 onwards, and a couple of models from 2009, that leaves millions of Macs with a relatively long useful life.

On the positive side, the iPhone SE, the smallest iPhone, remains backordered as Apple continues to add production capacity. Apple’s growing services business grew 19% year-over-year, and App Store revenues reportedly hit a record. Apple continues to improve its ability to earn more money from existing customers, so even if hardware sales remain flat or lower for a while, other sources if income will help, in part, to compensate.

There’s not much to say about the Apple Watch. Again, actual sales are buried in an “Other Products” category, and can only be guessed at. It remains the most popular smartwatch, although independent estimates say that other companies are catching up.

In any case, Apple issued its usual conservative guidance for the current quarter, with revenue estimated at between $45.5 billion and $47.5 billion, with gross margins between 37.5% and 38%. These numbers are slightly above analyst projections that averaged $45.6 billion.

Clearly Wall Street noticed, as stock prices soared by some 6.5% in after-hours trading. After so many quarters where Apple’s share price routinely dropped after quarterly financials were announced, this demonstrates a surprising amount of optimism for Apple’s long-term prospects.

All-in-all, Apple finished the June quarter with $231.5 billion in cash. You can find more financials to consider at Apple’s site.

Despite the revenue headwinds, Apple remains in excellent shape with high sales and profits. They are thus the envy of the tech industry. No hardware maker comes close. Microsoft earns high profits from software sales and subscriptions, but, other than the Xbox and a small number of smartphones and tablets, is not strictly a hardware company in the way Apple is a hardware company. Indeed, Microsoft has written off billions of dollars to disengage itself from the wrongheaded decision to buy the handset division of Nokia.

Google’s efforts to make money from hardware have so far failed. Motorola Mobility, bought for $12.5 billion, was sold on a fire sale basis to Lenovo for $2.91 billion. The original move was the sort of slap-in-the-head decision that hardly made any sense.

In summary, it does seem that Wall Street has come to its senses about Apple, at least for now. While you can dismiss the supreme optimism of Tim Cook and other company executives as just corporate spin, it does appear that the company is in great shape financially. I’m also holding off any opinion about the next iPhone. The major reason is simple: It hasn’t been announced yet, so predictions that it’ll be a subpar upgrade are not worth anyone’s attention.