Apple on the defensive

18 Oct, 2012

Apple on the defensive? That is hardly a familiar posture for a company that has dismantled one part of the consumer electronics, tech and communications world after another over the past decade.

But next week's expected unveiling of a smaller, seven-inch iPad is not only the least well-kept secret since the launch of its original touchscreen computer: it is also the clearest evidence yet that Apple is trying to consolidate its gains, and other companies – notably Google and Amazon – are the ones on the offensive now.

A smaller iPad, if indeed that is the subject of the event Apple has called for next Wednesday, is best seen as the company shoring up the defences of the most powerful ecosystem the consumer technology world has seen. The iPhone, which turned the handset world upside down, and the 10-inch iPad, which is starting to eat into the PC industry, were game-changers. But a seven-inch iPad will be disruptive of precisely nothing.

Rather, it is a symptom of Apple's need to round out its product set and ward off rivals. Seven-inch screens will account for a third of the 202m tablets sold next year, according to IHS iSuppli. The war between tech ecosystems – which has seen Google and Amazon move into hardware as Apple pushes deeper into internet services – has ushered in a new competitive phase. Leaving an opening could be costly.

The message has not been lost on Wall Street. An almost 10 per cent drop in Apple's share price in the past month is a sign of the concerns that look set to return with increasing frequency. The main engine of Apple's rise, the iPhone, will soon come against the limits of its growth in the developed world, if not with the next product cycle then the one after that. Profit margins can only decline as the iPad becomes a bigger part of the mix and rival tablets narrow the gap. Apple faces growing scepticism that it can transform the television – one of its biggest hopes. So where is the next wave of innovation to lift the company higher?

Apple is not at its best when playing defence. Exhibit A: the fiasco that followed the premature introduction of the company's maps service with the latest version of its iOS software. This was an obvious piece of the puzzle that Apple needed to put in place as it repelled Google from its mobile platform.

The stumble has highlighted a wider failure as the company has sought to take control of the "killer apps" on its devices. Siri, the voice-activated search service designed to leapfrog Google, remains a gimmick. Video-conferencing service FaceTime has failed to make a dent in Microsoft-owned Skype

With hardware, Apple is at least on surer ground. It may not be the first with a seven-inch screen, but it has the chance to steal its rivals' thunder by setting the standard for such devices.

That does not excuse it of the need to solve two related problems faced by the putative iPad mini: its price and purpose.

This has to be more than just a smaller iPad. As Steve Jobs once argued, the full-scale apps that run on a 10-inch touchscreen – and which have made the iPad a challenger to the PC – will not be as easy to use on a small device.

Instead, smaller tablets are ideally suited to consuming digital content. Will Apple's new device be more than a low-cost variant, cannibalising sales of the original iPad? That leads to the thorny issue of price. At $199, Google's Nexus 7 and Amazon's Kindle Fire have left Apple little room to defend its iPad profit margins with a small screen. The internet groups justify giving away hardware on the grounds that it stimulates the content consumption that supports their core businesses: advertising and ecommerce.

Valid or not, this is not an argument Apple can make: it has stumbled in advertising and has always maintained that the iTunes store is run at break-even to support its core hardware business. If it can't come up with strong hardware differentiation, Apple is itself now threatened with business model disruption.

If the gadget that Tim Cook holds up next week is nothing more than a cheaper, smaller iPad, it will send a worrying message to his company's investors. What will be next? Lower prices on 10-inch iPads as Amazon and others move upmarket? Cheaper, entry-level iPhones as growth moves to the emerging world?

For now, Apple's still-improving profit margins point to its enviable position on top of the tech heap. But each new product that fails to change the game – an iPhone 5 that was merely good enough, a maps service that tarnished the company's reputation and forced an apology – is a reminder that there is no substitute for real innovation. A small-screen iPad will do nothing to silence the doubters.

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