Will Apple's hardware focus cause them to fall behind Google and Facebook?

Will Apple's hardware focus cause them to fall behind Google and Facebook?

Venture capitalist Fred Wilson spoke at the TC Disrupt conference in NYC and TechCrunch wrote a quick summary of what he said. Apparently Wilson thinks that by the year 2020 Apple won't be a top three tech company. I assume he's talking about market capitalization here, and currently Apple is the most valuable technology company in the world based on that metric. Wilson suggests that, instead, Google and Facebook will be in the top three along with another new name we haven't heard of yet. His logic? Apple is "too rooted to hardware", which is "increasingly becoming a commodity." Furthermore he's a big believer in the cloud and says, "Their stuff in the cloud is largely not good. I don't think they think about data and the cloud." So, is Wilson right?

I can understand Wilson's prediction that Apple ceases to be #1. After all, Facebook and Google are very powerful businesses, and they are both incredibly strong players in mobile advertising. I believe the advertising industry is now in the midst of a huge shift in spending away from radio and print and towards online, especially mobile. Just a few quarters ago people thought mobile traffic wouldn't easily be monetized. Today Facebook brings in 59% of ad dollars from mobile users and Twitter brings in 78% from the same segment. Mobile is huge.

If hardware does get commoditized further and Apple continues to rely so much on hardware, they'll suffer. But we have to remember that Apple isn't a hardware company. They're a product company. And the difference is important to understand.

Apple may seem to be a hardware company on the surface, especially based on their financials, but they have a massive commerce business with iTunes, apps, and more. Apple's iTunes business is so big that, if split off, it too would be a major tech company — #130 on the Fortune 500 according to Horace Dediu of Asymco. This business is growing and will continue to grow.

Additionally, I think Apple has proven its ability to manage a long term trend towards cheaper hardware (desktops, notebooks, MP3 players) while still selling premium priced products at high margins.

But I do see Wilson's point about the cloud. Apple can do so much more. They talk a big talk. Tim Cook says that iCloud is Apple's strategy for the next decade. But they haven't really done much with it yet. I still feel like I can't trust iMessage to deliver messages so I use Voxer, Skype and BBM. iCloud still doesn't even have the most basic file organization capabilities. I would seriously love it if Apple provided me with enough space, at competitive prices, to back up all of my iOS devices and photos.

Even still, I think it's a massive exaggeration to suggest that Apple doesn't think about the cloud. Clearly they do, but they haven't been on top of their game when it comes to execution. I can understand the argument that Apple's cloud folks perhaps are not the best in the business. They're not as good as Dropbox or Amazon or even Microsoft (gasp!)

Can Apple stay on top? This week the stock crossed back over $600 briefly. The market value of Apple is over $500 billion. Google is worth $347 billion and Facebook is worth $150 billion. If Fred Wilson is right we should all be buying Google and Facebook while shorting Apple stock. I'm with him on the former (I am long both stocks), but there's no way I'd be shorting Apple here.

I'm still pretty bullish on their long term growth.

Chris Umiastowski

Chris was a sell side financial analyst covering the tech sector for over 10 years. He left the industry to enjoy a change in lifestyle as an entrepreneur, consultant, and technology writer.

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There are 42 comments. Add yours.

Premium1 says:

I think Google could, Facebook not so much. With google seemingly having their hand in anything and everything, that helps them if one area suffers or fails they have multiple others to fall back on. Apple doesn't have that luxury. They are first and foremost a hardware company, and if that stalls or plateaus out, which seems like it could happen similar to the PC market, they do not have that super high profit margin raking in billions and billions.

SockRolid says:

When Apple breaks open the TV market, the 21st century will belong to them.
And no, I don't mean an Apple-branded TV set.

iLoveiStuff says:

I think it's funny how much people underestimate Apple, and their ability to stay current. Apple isn't going anywhere because they are thinkers well beyond their time. No one thought they'd be selling music players in 1999. No one thought they'd be selling phones in 2005. And no one thought they'd be changing the way we compute, again with tablets in '08. And no one knows exactly what will keep Apple's heart beating in 2-5 years from now.

Apple's history proves their ability to stay current. Their ability to shift from their most profitable business being desktops to laptops and iPods to cell phones and then tablets. It's a unique track record, so we can't look at what they're doing now and assume they'd be stuck doing the same as the market and the industry changes around them. History has shown us they're better than that.

I say all that to reply to your Apple TV comment...Maybe this will be a major part of Apple's business in the near future. Or wearables. Fitness. services. Or all of the above. I'm sure they'll know when just hardware is not enough to make a sustainable profit margin as the industry changes. And they'll adapt before the fruits of those changes manifest. I'm sure of it.

ericesque says:

While I agree with the sentiment, it has to be said that the cited history was helmed by Steve Jobs. Vision is absolutely essential to repeat that kind of success in entering new markets at the right time with the right products. While I think Tim Cook has done an excellent job keeping Apple on track, he has yet to prove his aptitude in that regard.

iLoveiStuff says:

I agree with you 100%. Tim and the team have unfathomable shoes to fill, and because of it no prediction on Apple's ability to deliver is completely relevant. We are not working with Steve Jobs' vision, which - let's not forget - was the backbone of Apple. While we're positive at this point that Apple has been left in good hands, Tim Cooks vision has not been tested as of yet.

Without a doubt, Steve had some doing in whatever markets Apple will enter next - whether it's television, wearables, fitness...all of the above; the true measure of competence for Tim, and the new team would be (like you said) in the timing, execution, and the end products.

Think about it.

What if Apple hadn't released the iPhone first, and proceeded with the iPad before working on iPhone? The mind numbing success of iPad was a result of everything Apple had learned about mobile through the iPhone. Would it have been anywhere nearly as successful as it is, and has been? Probably not. The revolution that was the iPhone taught people how to use the iPad years before it arrived, and the interface of the iPhone eased them into the multitouch future.

Anyway, I know I'm long winded lol but I like to talk... :) back to work I go... :D

ericesque says:

I'm with you. It was a real eye opener a couple years ago when one of the Apple vs Samsung trials leaked documents showing a prototype of the iPad that dates back to as early as 2002 (for reference, iTunes wasn't even out for Windows at that point!). All this to echo your point, Jobs almost certainly has had significant influence on any new product categories Apple enters in the near future.

Your second point also got me thinking along the lines of how Apple essentially trains us to use future products years in advance. The iPod taught us to carry a pocketable device. One that you can store all your music on. Then all your music and photos on. Then all your music, photos, and videos on. And on and on until they had essentially trained us to use their smartphone -- which in reality, existed in the form of PDAs at the time. But instead of dumping a full fledged PDA on the market, they broke it down to its basest form and built up the product and our expectations for a device that we would always have with us in step.

When you turn your attention to the present, I can't help but think one feature stands out among everything that Apple is doing that would be training us for the next big thing. It's Siri. When you think about a watch or a tv, the only feasible method of input is voice. Siri began with basic queries teaching us to communicate with a device that could respond conversationally. Apple expanded Siri's capabilities in each update training us to "ask Siri" instead of "Google it" in more and more contexts. Now she's integrating with vehicles. It's now normal to talk to a device and (usually) get the answer you're looking for.

Hopefully we witness the culmination of this training in time for the holiday season ;)

Tricorius says:

Apple does need to work on their cloud services. There is no doubt there. I don't think it's *quite* as bad as most people think, but there's a definite need for improvement.

However as far as hardware goes, there's always going to be a demand for good, premium hardware. I daresay the best "laptop" hardware on the market right now is between the Microsoft Surface Pro 2, the various Apple MacBook machines, and a couple of Lenovo products. Everything else is inferior. I still maintain that Apple makes the best Windows or *nix hardware out there right now (unless a touch-screen is imperative for you, but for me it is not).

I would say the build quality of phones and tablets is also comparable. The build quality of the Surface tablets and (most) Nokia phones is very high. I'd say that Apple beats them slightly for mobile devices as well though.

I think it's also useful to point out that *if* Apple is diversifying a bit (for instance the iPayment system, whatever that ends up being) many of these new products could be *very* lucrative. Regardless, with diminishing margins, it's possible that hardware won't keep them at #1, but as usual "doom and gloom" posts are generally pretty one-sided.

Nathan Bael says:

For me the industry leader in cloud solutions is Dropbox. Of all of the services I have used, and I have used a lot of them, I have always kept my Dropbox account. All I basically use iCloud for is syncing things between devices and cutting the cord on iTunes.

Tricorius says:

I concur. Dropbox has done a *fantastic* job of marketing and also just building a solid service that works across platforms. Although lately I'm leaning more and more toward some Microsoft services. OneDrive and OneDrive for Business are really quite slick.

williamsbh76 says:

I can't comment much about hardware vs software vs services etc. I do agree that iCloud must be better moving forward because it sucks and sucks bad. Sadly, every computing device in my house and work is an apple product what do I rely on for cloud storage? Microsoft OneDrive... I have almost 100GB of family photos and video that iCloud cannot touch because of space limitations, expense, and lack of reliability.

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Jeff Kibuule says:

It's not fair to use stock valuation as a stand-in for importance when even financial analysts can explain why a stock will be high or low for a given period of time. Not to mention the fact that stock price is a poor reflection of how a company is *actually* doing.

Regardless, you can call Apple whatever you want, a hardware company or a product company but it's clear they have a weakness and we have yet to see how they are working to improve it. When nearly every other tech company is investing heavily in the cloud, Apple is nowhere to be found. And when you start so far back, it's hard to catch up. If Apple is a product company, then they need to work on their services as you can't have one without the other for very long.

MrJustastic says:

Doesn't Apple have a few Data Centres yet to open (or only recently opened)?

If I know Apple they are waiting to have all the infrastructure in place before they widen iClouds abilities. Which, considering the size of the proposed data centres, should hopefully bring iCloud back into focus

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MikhailT says:

How is that going to affect their cloud services? It'll provide them with extra capacity and bandwidth but nothing that Apple can't already get from Azure/AWS/etc that the current cloud services are dependent on.

aardman says:

I think Wilson said something in the line of "hardware inevitably gets commoditized". Which is completely, glaringly, embarrassingly wrong when you are talking about consumer goods. Especially consumer goods that people invest their identity and status in. How could he say such a thing when he and the people in his income bracket drive luxury cars, have Subzero and Miele appliances in their homes, wear designer clothing whose cost to produce is nowhere near what they paid for it, or maybe even own private jets? Perhaps all enterprise hardware gets commoditized but there are certain consumer products that have always had a significant segment that never ever gets commoditized. Furthermore, how can he claim that Apple hardware will be commoditized when in fact it has gone completely in the opposite direction these last few years? I mean now, more than ever, in the face of the twin races to the bottom in Android and Windows, iPhones and Macs are the acknowledged aspirational brands in their respective markets.

sanibel says:

Apple v. Microsoft: It was the hardware thing. Nothing's new; it was going to be Apple's demise but guess what happened? Still, it was Job's job. My question is rather personalized: Can Apple survive without Job?

sanibel says:

I should have phrased my question differently: Can Apple continue to be relevant without Job's vision? When he retook the company, Apple was a 3% market-share computer company.

GeniusUnleashed says:

And Job's got them to 13% market share over 10 years. Not the best growth. If not for the iDevices, he probably wouldn't be working there if he hadn't died. Apple has never gotten over 15% computer market share...ever.

Nathan Bael says:

Yes but he did lead the way on the iDevices, and basically put Apple where it is now. However, I think they will survive, perhaps not flourish as well as under Jobs, but still continue to do well.

GeniusUnleashed says:

If you're unfamiliar with Apple's history, he did the same thing with the PC, till MS came along and made a better software pitch to the masses and destroyed Apple's marketshare. History is cyclical and the same exact thing is happening now with their smartphones and tablets against Android. That was my point, that software will always beat out premium hardware when it comes to mass consumerism. I personally find nothing wrong with Apple focusing on a premium brand of electronics and staying somewhere around 25-40% market share for iDevices as soon as Wall Street pulls their heads out of their asses and stops expecting a Hail-Mary pass from Apple every year.

sanibel says:

@ GeniusUnleashed, you are ignoring the elephant in the room: iDevices leadership. That is the turning point; that's the real Job.

GeniusUnleashed says:

Apple was the leader in home computers, and look where it got them. Apple was the leader in smartphones, and look where it's getting them outside of America. And now, even their tablet marketshare is dropping as others start to catch up. Leadership is fine if the game they're playing is that of BMW and Mercedes-Benz (which I think they should stick to), ie. being leaders in Premium devices. But this ridiculousness that Wall Street is doing to try to make money off of them by propping up their valuation is just that, ridiculous. I liken it to inflating BMW's stock because they want them to come up with the hot new thing, when that's not what BMW does, they simply build premium devices and keep a small but steady/solid market share. They are dependable in that. Apple didn't invent the tablet, the computer or the smartphone, they simply make stellar premium versions of them.

sanibel says:

Essentially we're saying the same thing. Job was a force, both ideologically and creatively. He was unique; not perfect.

Obsidian71 says:

Watching Wilson right now. Not really impressed with him.

cardfan says:

Perhaps you should be..

johnnybabble1976 says:

Apple really needs to address the icloud situation it's horrible. I hate it

Dev from tipb says:

There is no question that Apple a) makes great hardware and b) struggles with middling to poor services. However, for Wilson's prediction to come to pass for the reasons he states, then services, and in particular, cloud-based services, have to become the market driving factor. Service differences must become so glaring (or device preferences so niggling) as to render nearly irrelevant differences in on-device hardware and software when people make purchasing decisions.

Not impossible, surely, but there are a few large assumptions required, both about future service development and changes in consumer psychology.

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GeniusUnleashed says:

Hmm...I see what your saying, but would refer you to Apple's Maps app, amongst others. Maps, Safari, Mail; all these apps are default and still not the top apps of their type being used on iDevices. I think their iWork suite is another example of them making sub-par software and other apps being used more on iDevices.

Dev from tipb says:

I agree...and I think the best thing Apple could do for customers would be to allow user-specifiable default apps. Many Apple apps (not Safari so much, but others certainly) have been able to be flabby and uninspired because they have a de facto monopoly. However, Apple has not seen any dent in sales from this policy yet.

That is a bigger danger to Apple than a pure services play - that more and more crucial components get fat and content, and alternatives forged from more competitive ecosystems leave them behind.

And no, it shows no signs of happening yet - but that's what RIM thought right up until the cliff's edge. That's why MS once-excellent IE6 was leapfrogged by others but struggled on *years* after it should have been replaced. Tim Cook has to keep one eye on services, sure; but more important is to stop the release of dreadful apps like Podcasts, and the slide of first party apps like Mail and Maps into the "meh good enough for a default" territory.

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GeniusUnleashed says:

Definitely. "It just works" no longer implies to a good portion of the stock apps. That was really their selling point against early Android adoption. Now that they don't have that any longer, they're going to have to step up their game.

Connor Mason says:

Facebook doesn't belong in the hardware business. They tried with the HTC First. All Facebook does is maintain a "we did this first and have you all in our clutches" social media site.

Google is definitely figuring things out on the other hand

GeniusUnleashed says:

"I can understand Wilson's prediction that Apple ceases to be #1."? When did they become number 1? And at what? Mobile sales...in America? Or do you simply mean valuation? Which is meaningless as we all know.

Here's why I think Apple will continue to hang around but always be on the lower end of the competitors in the next decade...they're not forward thinking when it comes to software, here are a few examples.

1. iTunes. It came out and it was pretty solid but they were locking it to sell their hardware, and didn't really care or realize how much money was to be had in music sales. They waited years to make a Windows version and waited even longer to have DRM free music that could be played on non-Apple devices. When they finally opened it up, it was too late, they let Amazon into the game.

2. App Store. They didn't want to allow 3rd party apps originally. They had zero vision for what the app store could become. They had zero vision of what apps were going to do for iPhone sales. If they hadn't finally given in to third party app developers, the iPhone would have never have taken off the way it did. And instead of looking back and seeing their ridiculously stupid mistake of waiting so long with iTunes to go to other hardware devices, which let Amazon take a HUGE market share of online music sales, they once again decide to close off app sales to Apple hardware only. This in turn opens the door for Google to create an app store that grows at almost double the rate of Apple's app store because Google understands that software is the key to longterm success. Imagine if Apple had allowed other phones to access it's app store and Apple took a 30% cut of every app sold on every Android device in the world. Cha-ching.

3. The Cloud. Damn they are bad at the cloud. Failed email service, failed iWork service, failures every time they try.
"Hey folks, if you buy a new device, we'll throw in iWork for free now."
"Hey Apple, I bought my new MBP two weeks before you made the announcement, any chance you could throw in that iWork suite?"
"Sorry man, you should have waited two weeks. Nothing we can do about it. But you should just buy it, we've worked out all the kinks."
"Yeah? FUCK YOU. iWork online is still in beta...and slow. No sweat, I'll just keep using Google Drive for the next 5 years, because that's how long I keep my Macs because you make such good hardware. That's 5 years I'll be giving them valuable information to make their online cloud system better than yours. Man you guys are stupid. What's your valuation at again? Oh yeah, $500 billion, and you don't want to make iWork free for all people who have supported you in the past and gotten you that $500 billion valuation? Yeah, you're dumb."

4. Ad sales and info. Apple watches Google rake in the moeny from information on Apple devices. After 5 iterations of OS's, they finally realize they are simpley handing Google Billions of dollars a year and try to take some of that money back by making a craptastic Maps app. /facepalm.

5. And finally...Mail.app. Enough said.

There's a reason why Samsung took off in America, they became trendy with younger people. Yeah, tehy blatantly stole Apple's ideas, but then they grew those ideas into other ideas, and then even more ideas of their own. Their OS is newer and and more interesting. iOS looks like the app store threw up on my phone. My mom loves her iPhone, my grandma can use it and likes it. I hate it now, just like I hate my mom's Chrysler and my grandma's Oldsmobile. I want something newer, fresher, something that pushes me to think, like a new video game. Something I don't have to "work around" to get to work, like we have to do with text message quick replies and attaching files in the mail app, or simply having a file system on our mobile computers (phones). Hardware is great for people who can afford it, but OS needs to match it and so far, Apple has proven time and again that they don't lead when it comes to software, they are pushed kicking and screaming by us to make changes. But maybe Tim and Jony will be different. Fingers crossed.

Nathan Bael says:

I actually see Jony as more of a problem when it comes to the software than a solution. Having him in charge of hardware is great, he does an excellent job of it. Letting him dictate software... not so great, imo. If nothing else, it stifles creativity.

GeniusUnleashed says:

I'm not TOTALLY unimpressed with the design of iOS7. Anything to get away from skeumorphism (spelling?), and he didn't have a ton of time behind the helm. I'd like to see what he can do given more time. Unfortunately, it seems just a blatant copy of Android merged with WM to me.

GeniusUnleashed says:

And P.S. googol and googolplex aren't in Apple's dictionary on my computer. Once again, software /facepalm.

khobia2 says:

This is more of the same Apple will die crap. These are the same kind of people who thought iPhone would be a flop. No company can remain on top forever but sticking to core values and making quality products both hardware and software can take a company way into the future based on those core values. I agree Jobs is a major lost for the company. But I imagine much of his vision for future products is still around. Hey you need someone to paint broad strokes and stay true to north. Let the talented guys come up with the gear within that vision. It is how it worked in the past and I suspect will work magic in the future. I refuse to give much credence to guys who keep crying wolf. Interesting they hardly ever say anything about Google's potential for failure. Sellouts.

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d ha says:

Never understood how people can be so ignorant and allow someone else to care and store their personal data.

I don't use the cloud. Never will.

I don't trust anyone with MY data.

Like giving my 17 yo the keys to my new truck.

People are just too lazy to take responsibility for their data.
Mark my words, it will bite them in the butt when they can't get to their data. And it does and will happen.

Now as for FRED's insane comments. Been hearing that crap since 1984.
Everybody is fucking nay sayer.
Whatever.

Facebook? What? irrelevant anymore. The generation that was using it, is leaving it in droves.
Drones? Really? FB is so yesterday. My kids quit using it a year and a half ago. Only Mothers, and grandma using it.

Google, goggles, drones and whatever? They are like Toshiba in the 80s competing with Sony.
They got nothing. Remember Netscape? Probably.

Google will fall under it's own weight, and their lack of marketable, functioning merchandise.
They've GOT NOTHING! Oh yeah a browser and Ads.
One trick pony.

Apple, who knows? I never guess till I see what GETs announced. And when Apple announces, it is always good.

jkeitz says:

Has Facebook even turned a profit yet? It seems that all this discussion of Apple hardware ignores the crucial aspect of Apple content business, iTunes. Now that we have the Amazon tax, I get everything (media wise) from iTunes. As long as they keep tying people to their ecosystem (and don't start to suck) Apple wins.

d ha says:

Kudos.
It is the nay sayers, been around since the "LISA."

Trappiste says:

Apple cannot even get, or, sorry, care to get, basic mapping to work on iDevices in 2014. So what hope is there, really? This company is running on borrowed time. When you prioritize profit over the user experience nad the needs of your customers, you lose, sooner or later.

DrewBear says:

"...Apple isn't a hardware company. They're a product company."

Or you could describe them as an experience company. This is something that the "good enough" crowd has never understood. Yes, Android may be good enough for the tech tinkerers or those who truly can't afford Apple's premium pricing. (relatively low compared to other premium products, what Rene calls affordable luxury) But there is a very large minority (in the billions) who value the intuitive, easy-to-grok Apple experience along with the best before/after-purchase store experience. Build quality, content ecosystem and fairly comprehensive (although still imperfect & incomplete) cloud services also contribute to products that people love to own & use.

As for market cap and stock valuations, ultimately it comes down to profit growth. Apple’s profit is now too large to grow 60-70% per year, but it is still growing fairly steadily. The punditry is enamored with fuzzy market share estimates, but the stock market eventually rewards profit share. Apple does not lead in computer, phone or tablet market share, but they do make the most profit in all of those product categories.

A venture capitalist values companies in a very different way than most investors. Wilson’s two biggest hits were early investments in Twitter & Tumblr. Both companies struggled to actually turn a profit. Tumblr was acquired by Yahoo, so they got a reprieve. But eventually even Yahoo will want to see them become profitable. Twitter is already being punished by the market because they are not growing as fast as expected.

Google and Facebook make 90+% of their profits from online ads. Those ads are now shifting to mobile devices, but they’re still selling ads. It’s a very profitable business and, as Chris pointed out, still growing. But consider that Apple has in 7 years started and grown two products (iPhone & iPad) from $0 to $120+ billion. That’s nearly double Google & Facebook revenue combined! In 7 years! Stop and think about that.

The most recent meme is that the iPad has already peaked in 3 years. People said the same thing about the iPhone a few years ago. The fact is both represent product categories that are just starting and have a long growth arc ahead of them. The iPhone 10 and iPad of 2020 will be very different than what we know today. I’m confident Apple will be selling $200+ billion worth of iOS devices in 6 years, still far outpacing Google & Facebook ad revenue.