Apple’s iPhone success, looking like a double edge sword

Apple announced stellar revenue growth this quarter, blowing estimates in all but iPhone sales. The market responded well spiking at a 5% lift in share price and settling back to 1.5% up.

iPhone provides Apple with a spectacular mass market conversion tool. Many PC users harbour a desire for Apple hardware, but stick with PC due to familiarity, hence why so many MAC users run Windows. iPhone provides a bridge to the MAC way, the MAC OS has gone from niche to mass market with the help of the iPhone, unpinning a major barrier to entry for most.

The challenge Apple are facing, though, is that the iPhone is but a single piece of kit, just one device, and something of a fashion accessory at that. Sure Apple have a strong history through their defence of the iPod franchise, similar in that it dominated (dominates) a category as THE device to be seen with, while establishing massive barriers to exit with iTunes. I’m just not convinced that Apple will be able to defend their dominance of a category the way they have with the iPod, for two reasons:

Firstly, to succeed in portable music you have to either make money from hardware or from the ecosystem you surround that hardware with. When Sony dominated with the Walkman it was all about hardware, but hardware isn’t defensible on it’s own. Apple have defended their position through building amazing hardware PLUS an amazing ecosystem in iTunes.

Secondly, the fundamental economic model of Mobile Phones is controlled by the Carrier, and as the device declines in desirability due to the ever advancing competition, the carriers will regain control of the negotiations, slamming the infamous margins Apple demands today.

That brings me back to the double edge sword.

iPhone revenues have outstripped Apple’s core hardware business, and any decline will be very visible. My guess is that the Market isn’t going to like that one bit, that’s what happens when you are a massively focused business enjoying 40% margins, the only way is down! Let’s hope they made some friends on the way up! 

Apple revenue by segment

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