Apple has not launched a big-ticket, mass-market product since it released the iPhone in 2007. There is no visible breakthrough growth driver.

The smartphone market has matured, and AI feature-based phones will become commonplace. Apple is playing catch-up.

Microsoft will launch Qualcomm Snapdragon X Elite-based tablets and laptops in mid-2024, compared to Apple’s current M3 chipset, which is less powerful and does not support advanced AI functionality.

Apple needs to speed up its AI initiative; it will take time to catch up with OpenAI, Microsoft, and Google.

EU regulators have implemented the Direct Markets Act, which breaks Apple’s monopoly on the App Store. This could have long-term financial implications.

Techcrisp investigated the present state of Apple’s technology and business model in detail. Apple is a financially robust company; however, it will not be able to meet growth expectations organically in the next 2-3 years.

Financial Snapshot

Apple lost $368 billion in market capitalization in 2024, which has brought its valuation down to $2.6 trillion. As a result, Apple has lost its position as the world’s most valuable company to Microsoft.

10-K report of Apple’s Annual Results as of 30/9/2023.

Revenue: US$ 383 Billion. Americas- US$ 162 Billion, Europe US$ 94 Billion, Greater China US$ 72 Billion, Japan and APAC US$ 53 Billion.

Product Wise Revenue Break Up: iPhone 52%, Mac 8%, iPad 7%, Wearables 10%, Services 22%.

Gross Margin of US$ 169 Billion, in toto 44 %, Products 36.5%, Services 70.8%

R&D expenses US$ 29 Billion, Sales and other Expenses US$ 24 Billion , PAT US$ 96 Billion

Cash and Marketable securities US$ 173 Billion

Apple is robust financially, boasting high gross margins, profits after tax (PAT), and substantial cash reserves or equivalent resources. Irrespective of the stock market’s performance, Apple has the advantage of having enormous reserves that can be used to pivot its technology and business model to meet investor growth expectations organically or inorganically.

Next Big Product

Apple users and investors have been expecting a major mass-market product launch with a high ticket price and margins. Apple was supposed to launch an Autonomous EV with a US$100,000+ price tag and subscription model. This project has been shelved.

In 2023 / 2024, Apple entered a niche, mixed-reality market called “spatial computing” with Vision Pro headset. However, it comes with a hefty price tag of $3,500 and is too heavy to wear for extended periods. Not many software developers have created apps for the headset yet. Consumers expect the Vision Pro to be lighter, more affordable, and with more applications. This will take several years. Revenues will not cross single digit US$ billion for quite some time.

Health monitoring and analysis is a significant and growing market. Apple Watch was moving towards more sensor integration. However, Apple had to withdraw versions of its watch with a blood-oxygen sensor because of a legal dispute with medical device maker Masimo. The loss of the blood-oxygen capability will affect future functions that measure hypertension and sleep apnea. The watches are an essential part of the wearables, home, and accessories division, which generated over 10% of revenue last year, or nearly $40 billion. Health can be a long-term growth driver.

Apple’s R&D team has been working on a smart ring wearable device. There is increased interest in smart rings offered by Oura, Samsung, and Honor. This is a niche market.

Apple was expected to launch the next big product for quite some time; growth expectations will suffer unless it has something up its sleeve or goes in for an inorganic acquisition.

iPhone

Android phones command about 74% of the market share, Apple iOS 23%, and Harmony OS has grown slowly to 4% in 2023.

The total shipment of Smartphones globally was around 1.2 billion. The smartphone market has reached a 70% penetration rate globally. Growth rates in the high-end segment will be low.

Samsung shipped 234 million, Apple 228 million, and Xiaomi 150 million phones in 2023.

First launched in 2007, Apple’s iPhone requires a hardware upgrade for AI features to catch up with Samsung, which is currently a year ahead.

Chipset Technology, Apple vs Samsung

The Apple A17 Pro chipset powers the iPhone 15 Pro and iPhone 15 Pro Max.

On the other hand, Samsung uses the Snapdragon 8 Gen 3 to power the Samsung Galaxy S24 Ultra, which is based on the ARMv9.2-A instruction set architecture and has more AI-rich features. The Samsung Galaxy S24 Ultra has an impressive TOPS (Trillion Operations Per Second) rating.

For Apple to provide advanced AI features, the A18 Pro will likely be launched in the iPhone 16 series in September 2024.

From a Chipset perspective, Apple and Samsung are neck to neck. Samsung shall also be moving to a more advanced chipset this year.

AI Features in Smart Phones

Counterpoint, a research firm, predicts that AI-based smartphones will account for 40% of sales by 2027, and a cumulative 1 billion AI phones will be shipped from 2024 to 2027.

Google and Samsung have collaborated to enhance the AI capabilities of the Samsung Galaxy S24 Ultra. The AI features are powered by Google’s Gemini AI models, including Gemini Pro and Gemini Nano. Some of the features include Live translation (Audio and Text) on a phone call, Notes/Keyboard with translation, summarizing, spelling/grammar correction, auto-formatting, Voice recorder with transcribe and summarize features, Samsung Internet, summarizes web pages and offers translation, and powerful photo editing locally. If required, the device can leverage the more powerful Gemini Pro LLM using Google’s cloud resources.

Apple is set to launch iOS 18 with iPhone 16. The company claims to include enhanced AI capabilities, improved Siri’s functionality, and new AI-driven tools.

Apple’s AI strategy for LLMs and Smartphones is currently shrouded in mystery.

Huawei – Threat to China Market for Apple and Long-Term Issues in Other Markets

Huawei’s smartphone sales have grown significantly by 83 %  since late 2023. iPhone, China revenues dropped by 24% in just six weeks in 2024 ceding to new Huawei Smart phone. China is a US$ 72 Billion market for Apple, with iPhones contributing to half the revenue. This is a significant setback for Apple.

Huawei has set up an independent supply chain, a chipset, a new operating system, and a developer ecosystem to free itself from US sanctions. Last year, Huawei launched its smartphone chipset, the HiSilicon Kirin 9000S, and its operating system, HarmonyOS 4.0, developed as an alternative to Android. It includes Huawei’s AI assistant, Celia, which has enhanced voice recognition and language processing capabilities.

In the long run, Huawei may become a licensor instead of a product owner. Huawei has already used this strategy to achieve international growth before sanctions. Chinese OEMs could focus on Asia, Eastern Europe, and Africa and offer low-cost AI devices powered by an end-to-end Chinese ecosystem.

Smartphone technology has reached a saturation point in terms of user functionality. Users are not upgrading their iPhones with every release but doing so after 2-3 years.

Microsoft’s new play in the Tablet / Laptop Market with advanced Qualcomm Chipset

MacBooks and iPads have a dedicated following among creative professionals, developers, and users who prioritize design, build quality, and seamless integration between hardware and software. Apple’s products are known for their superior design and luxury feel. In the tablet and laptop market, Apple sold $57 billion in 2023, which accounts for 15% of total sales at a whopping 37% gross margin.

The worldwide tablet market was 128 million in 2023, while laptops were 184 million. It is a highly competitive market with a single-digit compound annual growth rate (CAGR).

Microsoft has been a minor player in the tablet/laptop market for a decade. However, by mid-2024, Microsoft plans to introduce high-end models based on Qualcomm Snapdragon X Elite processors and the new Windows 12. Qualcomm’s processor was designed specifically for Microsoft, significantly boosting AI and machine learning performance. The Qualcomm processor includes a powerful AI Engine that delivers up to 75 TOPS (Trillion operations per second).

It will outperform Apple’s M3 chips used in iPad and MacBook.

Apple uses its own M3 chipset based on the ARMv8.6-A instruction set. The M3 processor family features 18 TOPS (trillion operations per second), which limits its AI capabilities. Apple is working on an M4 chipset, which is expected to be released by the end of the year or early 2025.

According to Geekbench, a cross-platform benchmarking tool that measures a processor’s multi-core performance, the scores are Snapdragon X – Elite 12000 and Apple M3 – Max 9532

Microsoft will have a high-end AI-enabled Chipset offering for the Tablet and Laptop market by mid-2024, while Apple will release an equivalent only by 2025. Some loyal customers may shift, and revenue and margins will come under pressure.

Apple AI Initiative

“Ajax” refers to the company’s initiative to create a generative AI system.

Ajax runs on Google Cloud, meaning Apple is not relying on its infrastructure.

Ajax is said to have 200 billion parameters. Apple is investing heavily in AI technology, spending around US$1 billion annually.

Apple remains a laggard in its AI initiative; competitors have monetizable offerings with a two-three-year lead.

New EU regulations, App Store Monopoly, and EU fines

EU has fined Apple over €1.8bn for stifling competition from rival music streaming services.

EU also ordered Apple to repay €13 billion in allegedly unfair tax breaks from Ireland.

The Digital Markets Act of the EU took effect this week, creating a new challenge for Apple’s “walled garden.”

This new regulation will allow customers to download software from outside the App Store for the first time. Users can also select alternative payment systems.

Presently, Apple charges a 30% fee on all App Store sales.

The new regulation poses a significant risk for Apple as it fragments its business model and can result in a considerable revenue loss. The iPhone software is now divided into two parts, one for users in the European Union and one for everyone else.

Under the DMA, it will also be illegal for platforms to favor their services over those of rivals. They’ll be barred from combining personal data across different services and prohibited from using data they collect from third-party merchants to compete against them.

The EU’s move comes as it imposes new scrutiny on the iPhone maker, particularly over the company’s $85bn-a-year services business, which has a 71% gross margin.

Other nations, including Japan, South Korea, Turkey, and the UK, are closely monitoring the EU regulations and contemplating their own versions.

US Department of Justice

The DOJ has been working for five years on its case against the company and is now getting closer to filing a suit in March 2024. Its antitrust enforcers allege that Apple has imposed software and hardware limitations on its iPhones and iPads, making it harder for rivals to compete.

Apple Services

Apple’s Service revenue for FY 2022-23 was US$ 84 billion, with a gross margin of US$ 60 billion.

Google pays Apple billions of dollars annually to maintain its position as the default search engine on Apple’s Safari browser across various devices like iPhones, iPads, and Macs. This is part of the “Google Search Default Deal” agreement between the two companies, which may be scrutinized by EU or US regulators.

Apple Music is a streaming service that provides access to a vast library of songs, albums, and playlists. Its primary competitors are Spotify, Amazon Music, and YouTube Music, and no significant growth is expected.

Apple TV+ is a subscription-based streaming service that features original TV shows, movies, and documentaries. Its competitors include Netflix, with over 223 million subscribers; Amazon Prime Video, with 200 million subscribers; Disney+, Max, Hulu, and Paramount. Apple TV+ has an estimated 20-40 million subscribers worldwide and operates in a highly competitive market, with competitors having large content libraries. Apple TV+ currently has a limited catalog, which will take time to grow. Additionally, the streaming industry has a high customer churn rate, and no significant growth can be expected.


iCloud: A cloud storage and computing service that allows users to store files, photos, and backups in the cloud and synchronize them across Apple devices. This can be a growth area, especially since it allows iPad,iPhone, and Macbook users to upload and share data on the cloud. 


Apple Arcade, Apple Fitness, Apple News, and Apple Care are other offerings.

Apple Pay is a mobile and digital wallet service that enables contactless payments using Apple devices. According to market reports, partner Goldman Sachs wishes to discontinue this business.


Apple can increase its revenues in this segment by more innovative offerings.

Conclusion

Apple must accelerate its course correction and find a new growth engine within 2-3 years to avoid an existential threat.