Apple’s profit drop: post PC inevitability or sign of iSaturation?

Apple’s Q2 results contain something few would have thought likely a year ago: the company’s first profit drop in a decade.

Make no mistake, they’re still solid results. The Cupertino-based giant posted US$9.5-billion profit on quarterly revenue of US$43.6-billion. Sure that’s down on net profit of US$11.6-billion on US$39.2-billion a year ago, but most companies would still kill for that kind of money.

It’s flagship products are still growing too. The company sold 37.4-million iPhones in the quarter, compared to 35.1 million in the year-ago quarter. Apple also sold 19.5-million iPads during the quarter, compared to 11.8-million in the year-ago quarter.

“We are pleased to report record March quarter revenue thanks to continued strong performance of iPhone and iPad,” said Tim Cook, Apple’s CEO. “Our teams are hard at work on some amazing new hardware, software, and services and we are very excited about the products in our pipeline.”

There’s no getting around the fact that the company’s stock is well below its US$700 record high though and if its profit growth continues to shrink, it doesn’t stand much chance of recovery.

“Although we’ve achieved incredible results, we acknowledge our growth rate has slowed,” Cook said during an earnings call with financial analysts.

In a bid to keep shareholders at bay, the company announced that it would spend US$100-billion buying back shares and paying out dividends. It seems to have worked, albeit briefly. Its shares jumped briefly after the announcement before sliding back down to US$403.95.

“They bought themselves some extra time,” Silicon Valley analyst Rob Enderle said of Apple tapping into its cash reserves to pay off investors. “They are basically selling off Apple’s future to prop up Apple’s stock price in the short term.”

So why has Apple profit ascent suddenly halted? We have a few ideas.

The ‘Post PC’ paradox

When it introduced the iPad in 2010, Apple heralded the real beginning of the post PC world. Sales of desktop computers have been declining rapidly in the time since. People whose jobs allow them to escape their desks thanks to tablets wave their iPads gleefully around at this trend and, as the market leader, Apple gleefully waves its iPad sales figures around as evidence that it’s building the future of computing.

Here’s the thing though, Apple is still a desktop manufacturer and it’s far from immune to the decline in sales. It sold just under four-million Macs, compared to four-million in the same quarter a year ago. It’s not a new trend and it’s not one that’s going to stop any time soon.

Apple’s Mac division might not be losing money, but it’s making less than it has previously. No matter how well the company’s other divisions are doing, that’s going to make an impact.

Increased costs

Perhaps more significant though is the fact that Apple just can’t make its devices as cheaply as it used to. Relentless media coverage of the factories in which its devices are built means it’s had to be more careful about which suppliers it uses. Getting rid of a human rights issue was never going to happen for free. The same goes for choosing more environmentally sustainable suppliers.

It’s also had to ramp up its research and development budget to US$1.1-billion from US$800-million. A part of that is the search for new products: the iWatch for instance, but a part of that is also because it no longer has the lead it once did on its competitors.

The competition

For better or worse, Apple completely changed the smartphone and tablet space. At first its competitors could only follow the Cupertino giant’s lead. Gradually though, they’ve accelerated their own innovation efforts. Samsung has gone from being the company that everyone thought was copying Apple to the one with eye-tracking technology and the creator of a whole new and surprisingly popular device category (the phablet).

While the iPhone 5 is the best-selling smartphone in the world right now, it’s no longer the automatic choice. It overtook the Galaxy SIII to gain that position and there’s every chance the S4 will overtake it when it launches to the public.

That means that Apple has to fight for position in the smartphone market. It can not sweep away everything before it and its high end nature means there’s less space for it to grow. That means Apple has to spend more money developing better devices and more money marketing them.

Things are a lot better in the tablet space. Its year-on-year growth was impressive and probably buoyed by the release of the iPad mini. There is however going to come a point when Apple’s competitors deliver something spectacular and at that point, it may have to scramble because in the head of the average user ‘tablet’ will no longer equal ‘iPad’.