Apple Inc. (NASDAQ:AAPL) is still an extremely powerful company and one of the world leaders in consumer electronics products. Nevertheless, confronted by the inexorable reality of market maturation, it seems likely to settle into being another profitable but staid player in the electronics world, rather than the record-shattering maverick it once was. The one place where a spark of the old fire may still remain is in the App Store and the apps contained therein.
That Apple (AAPL) is beginning to face the consequences of market saturation is made clear by Barclays Capital’s rating downgrade on shares of the Cupertino, California firm earlier today. Barclays’ analytical staff noted that smartphone sales will soon be dented by market saturation, and the release of new iPhone models will be insufficient to offset this fall in demand. The new devices such as iWatches are not revolutionary enough to rebuild Apple’s explosive momentum in the heady days of the iPod and then the iPhone bursting on the scene.
Another factor to consider, however, is that the App Store is showing remarkable profit growth at the same time as hardware sales begin to slow. 2013 app sales totaled $10 billion, reaping profits of $3 for Apple (AAPL) thanks to its 30 percent commission. Though only 1/30th of the money garnered over the same period by iPhone sales, the gains are still hefty enough to indicate that some potential exists in the sphere of virtual products.
Even more startling is the purchase of the WhatsApp app by Facebook for $19 billion. Bought from a third party app developer headed by Jan Koum and Brian Acton, this messaging app demonstrates that a successful app design can be worth literally billions to large tech companies. A unified user experience, rather than the fragmented app market found on Android devices, is held to be one of Apple Inc.’s (AAPL) strengths, explaining the continued popularity of electronics running its iOS platform.
The question then arises as to whether Apple Inc. (AAPL) would be well served by paying attention to its App Store as much as it does its physical products. Such a strategy would involve not only making the system even more convenient for both developers and end users, but perhaps an active push to develop “champion apps” like WhatsApp for sale to other companies. Striking on the formula for success could be difficult, but the potential rewards are high, while app development costs are low compared to the design and production of physical products.
Migrating a larger slice of its resources to virtual rather than physical offerings would be a risky move for Apple, yet might also open the door to incredible bursts of profits that consumer electronics are unlikely to offer again until a truly earthshattering new product or system appears on the scene.
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