Apple doesn’t need to innovate. It’s still far too profitable

(Originally written February 21st, 2017)

Apple needs to innovate. At least, this is what countless detractors have been lining up in recent months to advise the Cupertino firm. According to their many, many warnings, Apple has lost its magic, lost its way, lost its focus, lost its edge, and lost the ability to innovate. As a result, it’s in danger of losing ground to its competitors, and perhaps even at risk of going the way of an AOL or Compaq. This is why it has to start innovating and innovating fast, since otherwise it’ll experience more of the knocks it suffered last year, when its revenue fell for the first time since 2003.

There may be some truth to this verdict, insofar as there’s little denying that Apple hasn’t announced a truly revolutionary product since the original iPhone. However, to denounce Apple simply for going a decade without producing a game-changing device is to severely misapprehend not only the company’s current position, but also the nature of innovation. It’s to assume that groundbreaking innovations are what a healthy, successful tech company should manufacture as a matter of course, when in fact they’re almost always the result of very special circumstances.

Innovation is how Silicon Valley solves problems, in the sense of meeting consumer needs that haven’t yet been met and plugging gaps in the market. Yet just as importantly, it’s also how it solves problems of a more financial and existential nature, with tech companies from IBM to Nintendo historically turning to innovation in order to resuscitate struggling businesses. Indeed, it was the flagging of Apple’s own fortunes that pushed Steve Jobs to return to the Californian firm in 1997, when it needed a $150 million investment — from Microsoft no less — to remain afloat. With Jobs back aboard, and with the need to recover from bigger-than-expected losses, it started aggressively down the path that would eventually lead it to the iPod, iPhone and iPad.

These products were all daring, risky moves into nascent markets. They had no guarantee of success, and even promised to “derail” the company if handled poorly, yet they almost had to be made if Apple wanted to regain the success they’d enjoyed in the ’80s. In other words, ‘innovation’ was another term for ‘economic survival’ or ‘economic adaptation.” It wasn’t something that was entered into for its own sake, but because the alternative, as the old saying goes, was to die.

And really, despite all the fuss that’s been made recently about Apple suffering negative revenue growth, and about the slowing down of the global smartphone market, it’s not even close to dying. Yes, it suffered three consecutive quarters of decreased sales and profits in 2016, yet this has to be put in the context of the largest quarterly profit in history it reported in January 2016. Coming in at $18.4 billion, and breaking the $18 billion record they set one year previously, it set a benchmark that only miracle workers or madmen could hope to beat year-on-year. It was so high that, even with the 13% dip in revenue and 42% dive in profit of Q2 2016, Apple still brought in revenue of $50.6 billion and profits worth $10.5 billion.

To put $10.5 billion of quarterly profits in perspective, it’s still the kind of margin that’s surpassed only by energy companies like ExxonMobil and Royal Dutch Shell, and it’s still enough to make it the 27th biggest quarterly profit of all time. And even if it could be argued that it points to a disconcerting gradual decline, Apple announced the 4th biggest quarterly profit of all time at the end of last month, in addition to its biggest revenues of all time and the highest number of iPhones sold in a single quarter. Clearly, these aren’t the financial results of a company that needs even remotely to innovate in any major, paradigm-shifting way.

No, the only companies who need to innovate in any dramatic way are startups and/or those in danger of making a loss. This is borne out by a quick survey of firms who are currently being praised for their ingenuity. Tesla, for example, are often regarded as the most innovative tech company operating in the world today, yet they suffered losses for 13 consecutive quarters before turning a profit for the first time on the back of their pioneering Model S and Model X cars. Similarly, the cloud computing firm Salesforce was voted in second place on Forbes’ list of 2016’s most innovative companies, yet they’ve never turned an annual profit since their establishment in 1999. Not only does this explain why they’re expanding at a rate 25% every year, but it also underlines just how costly and risky it can be for a company to throw the entire weight of its resources behind innovation.

And the thing is, even without major innovation, smartphones and tablets are now such firmly established and fundamental parts of our lives that Apple can be guaranteed to continue making healthy profits for the foreseeable future. Contrary to the naysayers, all they need to do is continue refining — rather than reinventing — the iPhone and iPad so as to keep pace with their rivals, and they’ll continue being profitable.

It’s for this reason that it’s a massive category error to expect them to come up with a mind-blowing new product, since innovation is more about responding to financial imperatives than to technological ones. Instead, we should be looking to startups for the next big thing, and we should also be looking at our own greedy, semi-addicted desire to be wowed with every press conference and news cycle. Apple may be guilty of nurturing this desire with their own branding and mythology, yet we have to accept that because they remain a highly profitable business, they have no need for earth-shattering innovation, at least for the time being.

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