Why Apple may need to 'steel' itself

Profile picture for user mbanks By Martin Banks February 8, 2016
Summary:
Apple may be a stupendous financial and technological success, but could it also be the first example of how the old Steel Intensity Curve may start to impact not just high tech vendors but the wider reaches of the IT sector?
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A short while ago, Apple announced its Q1 2015-2016 results and there was, unsurprisingly, a fair amount of interest in the slowing in the company's growth rate, which got really quite close to stalling. There was even a Forecast Warning that iPhone sales growth is expected to start declining, following the lead set by the existing decline in sales growth for iPads.

There is now a growing level of speculation that the next round of iPhone and (possibly) iPad new product announcements, expected to occur on March 15th, will see a push back against this sudden skirting with financial negativity. The company is expected to launch two new iPhones - the 7, an upgrade of the 6 which will feature a new camera which will remove the current `bump' on the back of the device, and upgrades to the current iPhone 5 and 5S, for fans of the smaller, 4-inch form factor.

But while the Mac-erati have so far been stupendously loyal to the idea of buying everything the brand comes up with, there has to be a question as to whether this essentially stylistic change of removing the camera bump is going to be a big enough draw?

After all, how many people are expert enough to really need a camera that good in a phone format, especially when the current one is already reckoned to be as good, if not better, than many mid-price 'real' cameras? And even if they like the idea of it, is the cost of another new phone going to put them off, particularly if their current one is not yet out of contract and the functionality it provides meets all they require and more?

Troubling thoughts

Such thoughts start to address deeper, more troubling issues for Apple - and possibly a learning for many other vendors as well.

Last year, I wrote about the potential impact on IT vendors of an old and established industrial 'law', the Steel Intensity Curve, which is a tool for modelling the development and long term trends for the steel production industries. It proposes that, over time, each percentage point increase in GDP leads to less steel being required to achieve it.

When it comes to steel, as GDP grows, more and more of the reasons for steel consumption are already fulfilled. The bridges needed to be built are built, and they last maybe a hundred years and only need maintenance, which requires much less steel.

Apply that to IT devices and systems, however, and it starts make sense in another way. If, instead of steel, one thinks about functionality then it is possible to see what might be happening with Apple and its iPad/iPhone iProblems.

The similarity with the steel intensity curve is that the consumer need for new functionality reduces over time – probably in relation to GDP as per steel - if only because the greater the GDP the more disposable income there is likely to be, and therefore more chance that everyone who wants that functionality has already got it.

That in turn creates the problem that, if they get a tech device and it does the job(s) expected, why should people change to the next one? Well, if it does more of what they didn’t know they needed they will no doubt carry on being keen customers for a while yet. But otherwise they won’t, and if the next addition in functionality is of marginal value to them (as any addition increasingly will be) then fewer people will buy.

Evidence is evident

All the evidence suggests this is happening with Apple on iPhones and iPads.

Apple's Q1 revenue of $75.9 billion was a record, but only just when compared to the Q1 of 2015, when it posted a then record of $74.6 billion. And while it was a record, it is down on what analysts were predicting - an average of $77.1 billion for Q1. So it is growth, but at under 2%, it is not a patch on the year-over-year revenue growth of 22% or higher in previous years.

The signs are that the iPhone is starting to follow the trend of declining sales growth already set by the iPad. This is another device where built in functionality needs are actually quite limited and already fulfilled by existing iPads in user hands.

What is more, companies like Huawei et al, are eating some of Apple’s planned Chinese lunch by selling their own increasingly Apple-a-like phones etc in China, and doing very well. And Android tablets do well out there as well.

And Microsoft’s (ex-Nokia) phones have the same camera bump problem as the iPhone 6, but they would seem to be gaining some interest and market share despite that. Could this be because they now integrate through Windows 10 with just about everything that runs Windows 10, from tablets and laptops to whole server farms running serious corporate apps?

For business users who are getting past the need to be 'seen with' the latest Apple device that message - that business management-oriented functionality is possibly more valuable to them than the stylishness and street-cred of iPhones - may just be starting to get some traction in an important market sector.

The problem for Apple now maybe that they have hit the sweet spot and no-one needs any other new functions, even if they come up with some. The vast majority of the functionality now comes from software - both from the Web via the in-built browser and from the apps that continue to be developed for the beasts.

And while Apple is still an obvious prime target for apps developers, it is hardly that much of a hardship for them to switch targets to Android of Microsoft as alternatives.

On top of that, Apple has also produced something that lasts more than a year. It has to be said that Apple design and engineering are both very good.

So the only options are to build-in obsolescence – but that will also mean dropping the unit price a lot – or perhaps put some s/w self-destruct mechanism in them, but that would bomb the market if word ever got out – and it would.

Developing even more new features will be expensive and probably won’t have the right effect. I can’t think of anything my phone can’t do currently that I would love it to do. OK, maybe if I stare at it hard enough it would scrabble round my brain enough to be able to write my next diginomica contribution – but if that is not on the cards for March 15th, I doubt I'll bother planning any changes just yet.

My take

This may just be the first major example of the impact of the reducing importance of technology for technology's sake and the growing importance of what it does and why it might be needed. This may presage significant changes in the `where' and `why' money is made from IT in future.