January 28, 2014 8:08 am

Apple plants seeds for the next big thing

Tim Cook©Reuters

Trumpeting its successes in the 30 years since the advent of the Macintosh computer, Apple last week urged customers to “imagine what we can do in the next 30 years”. 

Wall Street seems more concerned about what it is doing in the next few months. Apple’s shares fell more than 8 per cent in after-hours trading on Monday after the company, in a mixed set of results, warned that revenues would be flat or could even fall in the current quarter ending in March. 

Apple has not posted a drop in quarterly revenues since 2003, when the iPod was just two years old. Since then, the US company has been transformed twice over – by the iPhone and iPad. 

But with total revenue growth slowing from 73 per cent two years ago to 6 per cent in its first fiscal quarter of 2014, a sense of urgency is building. 

Tim Cook has promised that this year the company will enter another new product category. Asked by analysts if that was still the plan, Apple’s chief executive answered: “Absolutely.” 

Trying to predict what product segment is a game many play but few win. 

“Apple needs something big to grow the top line by 10 per cent,” says Adnaan Ahmad, analyst at Berenberg, in a recent note. “It needs to find $20bn in revenues from somewhere.” 

Where should investors be looking? 

A bigger iPhone

The most likely but least radical change Apple will make is to the iPhone’s screen size. A steady trickle of leaks from Apple’s Asian supply chain has suggested it is testing stretching the display from 4 inches to 4.7 inches – similar to Motorola’s Moto X but smaller than Samsung’s Galaxy S4. 

“A larger iPhone would help in some markets like China and other pockets of Asia where larger screens are favoured, no question about it,” says Carolina Milanesi, analyst at Kantar Worldpanel ComTech. “It would also help with all the chatter that they are ‘behind’ because they don’t have a large phone.” 

Even in western markets, Kantar data suggest small screens are driving iPhone owners into the arms of rivals. 

In the latter half of 2013, 26 per cent of US consumers who upgraded to a phone with a 4.5-inch screen or larger switched from Apple to Android. Some 23 per cent upgrading their smartphone picked one with at least a 5-inch screen, Ms Milanesi adds. 

Apple has already paved the way for a shift to bigger displays. Last year’s radical redesign of the iOS operating system removed some of the visual embellishments that might look awkward if scaled up by a fifth. 

A wearable device

If the iPhone becomes larger, a natural complement might be a watch-like device that can notify the wearer of messages and calls while the smartphone is in a bag or pocket. 

Sales of smart watches by the likes of Sony, Samsung and start-up Pebble remain meagre as companies grapple with challenges in design and battery life. But a recent study by Accenture found more than half of consumers are interested in wearable devices. 

Apple stepped up its experiments with wearable technology to a more focused product initiative last year, and has continued to hire experts in fields from fashion to fitness. Recent recruits, spotted through LinkedIn postings by tech blog 9to5Mac, have come from medical device start-ups that can analyse skin temperature, sweat or even blood chemistry through an unobtrusive, wearable device. 

Yet analysts are split on how many iWatches Apple might sell, and for how much. If priced like an iPod, at around $200 for the full-featured model, such a device would need to sell more than 50m units a quarter to match even the iPad’s revenue contribution.  “I don’t see the wearable device as the cure,” says Ms Milanesi. “I think this is an opportunity for them to lock more customers in or a lure to get [new] people.” 

Apple TV, reinvented

While every other Apple product was given a software overhaul last year, Apple TV has retained its pre-iOS 7 look. That may portend a more significant update to the $99 set-top box, says Ben Bajarin, analyst at Creative Strategies: “When you see long delays like that, something big is coming.” 

Hopes for a step-change to Apple’s TV business have been frustrated by content-licensing difficulties. Yet there are other innovations Apple could conjure with a living-room device. 

In depth

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Apple’s low-key introduction last year of certified peripherals that turn the iPhone into a games controller suggests the TV box could become a fully fledged video-gaming console, and the company could finally open Apple TV to external app creators at its June developer conference. 

“What if we are thinking about the hardware the wrong way and actually Apple’s growth strategy is new categories of apps?” asks Mr Bajarin. 

The “smart home” is another possibility for the evolution of Apple TV – potential underlined by Google’s $3.2bn acquisition of “learning thermostat” maker Nest Labs this month. 

Apple’s retail stores already dedicate shelf space to “internet of things” gadgets including Philips’ Hue lightbulbs, which can be controlled by an iPhone app. But each requires its own app and operates on different standards, presenting an opportunity to turn the iPhone into a unified remote control. 

In November, Apple was granted a patent for controlling a variety of “smart home” devices from what it described as a “relay server”. This would use data sent from a smartphone – such as its location – to flick light switches or open garage doors. 

Another Apple patent application published last year described a “smart dock” that would listen for spoken commands to a virtual assistant such as Siri or other audible prompts, such as a hand clap, to control home appliances. 

Opportunities in ecommerce

Apple’s directors may disagree with shareholder Carl Icahn, bottom right, over the handling of the company’s $142bn net cash pile, but it appears they all agree on the opportunity in the ecommerce world. On Monday, Mr Cook, top right, echoed Mr Icahn’s enthusiasm for an Apple-powered payments system, an idea the activist investor outlined in an open letter last week. 

Since June, Apple has been pitching retailers a system called iBeacons – already used by its own stores – that detects when an iPhone is nearby and can then trigger special offers from their apps. Combined with the iPhone 5s’ Touch ID fingerprint reader, iBeacons could be used to create a new kind of payment system. 

Dropping an unusually strong hint about Apple’s plans, Mr Cook told analysts on Monday that “the mobile payments area in general is one we’ve been intrigued with”. 

“You can tell by looking at the demographics of our customers and the amount of commerce that goes through iOS devices versus the competition that it’s a big opportunity on the platform,” he said. 

Mr Cook refused to be drawn on details but insisted Apple was not struggling to find opportunities for innovation. 

“We have zero issue coming up with things that we want to do,” he said. “The challenge is always to focus to the very few that deserve all of our energy.”

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