It has been a good while since I’ve provided any commentary on Apple. The last time I wrote about them was within a year of Steve Jobs’ death. At the time, I predicted that Apple would lose its shine. It wasn’t a mean-spirited attack on Apple, it was merely my belief that a lot of the innovation at Apple was directly tied back to Steve. I didn’t draw this conclusion from any “inside contacts,” and it wasn’t an outcome of several months of research. It was merely my gut feeling based on years of interactions with its products, and riding the history trail with them–as a consumer.

Today, Apple recorded their first profit decline since 2003. That’s right–for the last 13 years, Apple has seen quarter over quarter grown in their profit. The percentages varied, but in general they’ve ridden a really successful money train for a pretty long time. Although their $50 billion in revenue the last quarter is nothing to sneeze at, one must wonder what they’re going to do to keep the enviable position they’ve held for the past decade-plus.

As I write this (on the latest iPad Pro 9.7 [I also have the 12″ version.]), I look around at the other Apple products. At the end of my couch is a 13″ Apple MacBook Retina, and the latest MacBook, which was released a couple of weeks ago. I have a Mac Mini as my “upstairs” computer, which is attached to the Apple Display. Then there’s my Apple graveyard, which has an iPad Air, iPad Mini, and the MacBook that was just replaced. (In my defense, the iPad Mini was upgraded so that I could use it when I’m flying–as I can use it for my charts, to file my flight plan, and to monitor weather, etc. Oh, and let’s not forget my iPhone 6s, iPhone 6s Plus, and my four Apple watches. (Different colors and metals, don’t ya know?)

“What the heck is wrong with you, Joel?!” Plenty. But that’s another blog post.

So, why the dire prediction?

I wouldn’t call it a dire prediction. My prediction was, and is, that Apple’s innovation would atrophy with Steve out of the picture. It’s not that I don’t like Tim Cook. He’s a fine operational CEO. Yes, O-P-E-R-A-T-I-O-N-A-L. His background even reflects this prior to him ascending to the CEO spot. But Apple is a products company. And, unfortunately for them, they are a technology products  company. And , adding to the grief, they are a consumer technology products company. This is probably one of the most cut-throat industries in existence. As I write this, I cannot think of any other industry that is so cut-throat. Not only that, the industry is notorious for having minuscule margins…like low single digits. Not so, for Apple.

For Apple to stay at the top of their game (and industry), they must continually innovate their products to be significantly better than their competitors’ products. I don’t use the word “significantly” lightly here. It’s a well known fact that Apple charges a premium for their products. In order to do that, the consumers of those products must be convinced that the added cost (Apple Tax) is going to bring them a product that is better than all of the rest…or at least differentiated enough that they won’t blink an eye when they’re paying 20-30% more than “equivalent” products from Apple’s competitors.

Though I don’t have the numbers to back this, my belief is that a good portion of Apple’s growth during the years “post-Steve” was driven by products that Steve had a part in (either in conceptualizing, or shaping–I’m including iTunes in this), or emerging markets (China, primarily).

We have history…

Apple’s growth over the last decade has been driven primarily by its iDevices (iPhone, iPad), and services tied to those. Though it is true that its computers have maintained a respectable cadence, that segment of their products wasn’t what put them where they are today. And this lack of revenue-impacting diversity in their products is a dangerous place to be, for any company. How do I know?

Let’s look at the mobile devices landscape in 2007. There were really three dominant cell phone providers (the “Big 3” in the United States: Motorola, Nokia, and RIM (BlackBerry). Samsung was up and coming, but their handsets were hardly at the same level as the “Big 3.”

Of these three companies, one was stripped down to nothing and then sold to a Chinese company (Motorola–purchased by Lenovo), another was stripped down to nothing, split into two, and then sold to Microsoft (Nokia), and the third is on life support (BlackBerry). Every one of these companies’ have had executives openly state that their downfall was a lack of innovation, basking in complacency, and ignoring the iPhone threat.

It’s important not to discount the insight these executives should have had at the time. Apple had already decimated one industry (MP3 players), and had created a cult following with their computers–again. Apple had a history of disruption. Or should I say, Steve had a history of disruption.

The point of this history lesson is to demonstrate that no company is safe. Not one.

It gets worse…

Unlike the period between 2000 and 2010, the mobile devices space is getting even more crowded. We’ve probably all heard about products from Apple, Samsung, LG, and to a lesser extent, HTC. But how many people are familiar with Huawei or Xiaomi? Both are Chinese companies that produce–you guessed it–mobile devices. Not only are they producing mobile devices, they are producing mid-range devices at very affordable prices. Guess what, folks? That cut-throat industry is getting even more cut-throat.

As the Chinese manufacturers start to mature the product offerings, it won’t be long that they gain entry to the U.S. market’s cell phone providers. In their own right, they are emerging disrupters, I believe. And I do not think they will reduce their brands by white-boxing their products. They have one goal: beat Apple.

What do you think is next?

Well, my belief is that unless Apple does something really outstanding with their next iDevices, their revenue will continue to drop–as will their profits. They could try to pump up their revenue by lowering their margins (lower cost products will likely sell more–the secret sauce is finding a balance that will actually maintain their profit growth, which isn’t easy). The theory is like this: sell a product that costs $.50 to make for $1.50. Sell ten of these, the revenue is $15, and the profit is $10. Lower the price to $1, and sell 25 of them (again, the theory is that more will sell at a lower price), their revenue is $25 (higher!), and their profit is $18.75 (higher!). But, their margin has gone from 200% to 100%. (Obviously, I made up these margins–if there are companies with these margins, I want to invest in them!)

I think it’s safe to say that companies that lack innovation in a market that is highly competitive will not do well. Everything I’ve read about the new iPhone (the iPhone 7) leaves me with a thought of, “Yeah, so?” Dual cameras, a glass back, elimination of the headset adapter (this is a feature?!)…and??? To be fair, Apple is always very quiet about their product plans. To a fault, some would say. But the point is that it seems as though they’re not really focused on “big bang” changes, versus small incremental changes. That works in a market where the competition isn’t innovating, or where there aren’t cheaper products with a close feature set. That’s not the mobile device market.

What about their other products?

Apple has done some really cool things with their iPads. The new “Pro” versions of the iPads are really nice. The 12″ is, for my needs, easily usable as a notebook computer 95% of the time. The other 5% is generally working around lousy websites, or bad iPad applications that lack feature. That’s not an excuse, it’s a reality.

Apple’s notebook computer solutions, however, are really, really dated. The MacBook Pros need a refresh. Badly. They’re quite heavy, and they don’t really have anything over their latest competition. One of my Wintel machines is the latest Dell XPS 13. It beats my MacBook Pro in every way I can think of. Coupling this with Windows 10, it is actually more enjoyable to use. I don’t know what it is with Apple’s latest OSX updates, but they are big, buggy, and not really anything that I’d say places Apple in a favorable light.

Apple’s MacBook is a nice device. I really like it. But, the volume (quantity sold) isn’t going to be enough to make any measurable difference in Apple’s bottom line. They keyboard is bleeding edge, for sure. But it takes a lot of practice to master the technology. It’s sometimes maddening. And, there are many that don’t want a machine that has only one port–which requires an adapter to use 99% of the peripherals on the market. As much as I think USB-C is a great technology, having only one port on the MacBook is hard…do I want to power the device, or do I want to use a thumb drive?!

Apple’s other products (Apple Watch, iPods, Apple Display, Other Accessories) are certainly not going to be enough to sustain the ride they’ve had the past fifteen or so years. And the rumored “Apple Car” isn’t even something I can quite grasp at this point. Talk about a departure from their background. And, by the way, that’s not innovation, it’s diversification. And it’s a diversification in to another industry that has a notoriously high rate of failure.

Apple’s online offering is garbage at this point. iCloud is among the most boring and featureless offerings I’ve used. Their email is “meh,” and their online apps leave me with a question of, “Why?!” Where Google and Microsoft have had a pretty good success offering storage for files, Apple’s approach lacks third-party integration capabilities, and it feels overpriced. (Particularly when their competition in that space offer gigs of data storage for free.)

I think Apple’s music and applications solutions do okay, but again, I can’t see how they can sustain the giant. Their streaming service is on par with Spotify, and their curated music is nice–what there is of it, anyway. Some of the “stations” are the same “play these twenty-five songs, repeat” solution that their competitors provide. Yuck.

Outlook?

Fortunately, I’m not an analyst that does this type of thing for a living. Though I think I’m right to say that Apple had better start to do something to get their innovation back, they could very well have something hidden that will take everyone by surprise. I personally doubt that is the case, if only because their competitors don’t lack the same desire to innovate.

Apple’s stock will not be in a freefall anytime soon. But if their next iPhone isn’t something that makes people take notice, it will certainly be a stock that people will wish they’d shorted.