Apple Admits the Obvious

There's no topping the iPhone. As a business, there may never be.
Apple Admits the Obvious

At this point, it's only really a question if the iPhone is one of the best businesses ever created, or actually the best.

The numbers are simply staggering. The iPhone pulled in just over $200B in revenue for Apple last year. Just the iPhone. As a stand-alone entity, the device would be the 15th largest on the Fortune 500, just behind Cardinal Health and just ahead of Chevron. Yes, the iPhone is bigger than an oil company.1

That reminds me, a decade ago I wrote a post entitled: Apple, The Oil Company? Even back then, Apple was posting earnings that corporate America had never seen before. In fact, the only companies that were even close were the big oil companies. As such, my tongue-in-cheek point was that in order to keep growing the business beyond the iPhone, Apple might need to tap into the ground and become an oil company. In the intervening 10 years, they have yet to do that,2 but they have gone down a couple other paths that could have padded those top and bottom lines: cars and cash.

The car project, despite billions spent and years gone by... not so much. The various money projects have gone better, with Apple Pay seemingly taking over the world, but Apple itself becoming a bank has also hit some roadblocks.

Instead, Apple has shifted to Services. Last year, that business was just shy of $100B in total revenue – so just under half the size of the iPhone business. But it's growing far faster than the iPhone business is at this point. There are a few wild cards in here – notably, the Google default search deal, which the US Justice Department could end – but at some point in the next decade, it seems like Services will become the biggest part of Apple's business. That, in part is why Apple's stock is still valued so highly, trading back and forth with NVIDIA for the title of most valuable company in the world. Services is still growing (though also slowing) and has much higher margins than any hardware Apple sells (obviously).

And AI. The service to end all services, is now a part of Apple's narrative, albeit one that was clearly pushed out of the gate a bit prematurely.

Anyway, there's a hidden problem – if you want to call it that – in Apple's Services narrative: it's also heavily predicated on the iPhone. Yes, though many of the services work elsewhere, such as on the Mac and iPad – something which Tim Cook had to rather humorously keep reminding analysts during Apple's most recent earnings call – but as with everything else at Apple, it's largely driven by their most successful device. If the iPhone were to fall for whatever reason, Services would also start to sputter.

The same is true of many of Apple's other businesses – even other hardware. The Apple Watch, for example, would clearly be a shadow of itself without the iPhone. The AirPods would be in trouble. The Mac would probably hang in there fine, but the iPad might suffer from some dampening halo effects.

As iPhone goes, so goes Apple.

That's important context for the update Apple made last week to their 10-K filing. As Tim Bradshaw and Michael Acton note for The Financial Times:

Apple has warned investors that future products may never be as profitable as its iPhone business, as it pushes into unproven new markets such as artificial intelligence and virtual reality headsets.

The iPhone maker added the new warning on growth and profit margins to its latest annual report, in the list of “risk factors” facing the tech group’s business.

“New products, services and technologies may replace or supersede existing offerings and may produce lower revenues and lower profit margins,” Apple said, “which can materially adversely impact the company’s business, results of operations and financial condition”.

While they don't mention "iPhone" by name, per all of the above, it's pretty clear what they're talking about. Again, as the iPhone goes, so goes Apple. And with that in mind, remarkably, this was the first time Apple has ever issued such a warning. Yes, even though it has been obvious to many Apple watchers for a long time.

Essentially, this reads like an acknowledgement of reality. While Apple has taken a few swings to try to see if they might be able to create a new business that can rival the iPhone, nothing has come close. And while only perhaps the car project would have had a clear path revenue-wise, Apple surely must have hoped that the Vision Pro would at some point become the future of computing. That's clearly not happening as it stands right now. Maybe in a decade or more there are some wearables the can show us such a path, but right now Apple just needs to try to make the Vision Pro a viable business, period.

A month after that initial post about Apple's new quest for revenue, I wrote about the rumors of Apple going down the car path:

In order to truly move the needle, Apple has a handful of choices:

1) Become a telecom player
2) Become an energy company
3) Become a bank
4) Become a car maker
5) Create a new industry

People always point to and talk about number five. The problem is that Apple has really only done this once in its history: in the beginning with the personal computer. Apple’s other successes, including their biggest: the iPod, iPhone, and iPad, all were successes in categories that existed well before Apple entered the space.

The Watch, of course, will be the same story.

So that points to Apple going after numbers one through four on the list. Number one is probably inevitable but also something Apple probably wants to avoid because it would be a huge pain in the ass for a number of reasons. Number two is a good joke, but the least likely (though the solar interest is noted…). Number three has perhaps the clearest path right now with Apple Pay. But it is nascent and going to be a long road.

That leaves number four, become a car maker, the most likely.

Again, they tried. And failed. But there is one other industry I didn't include in my initial list but probably should have: healthcare. This is an area where Apple has actually had some success thanks in particular to the Apple Watch. Now, do I think Apple will become a health insurance company? I mean, stranger things have happened. But ultimately this is probably not in the cards for Apple for the same reason that they're shying away from banking: regulatory risk.

Instead, the future is likely to be far more boring for Apple: keep bolstering and augmenting the iPhone. Ensure the cash cow is well-fed and evolving to keep services growing. Maybe we get a fun, simple pair of Apple Smart Glasses. Maybe a future version of the Vision lineup leverages the iPhone. This suggests a future where Apple tries to make the sum of the parts equal to the whole. An acknowledgement that no one product will surpass the iPhone, but maybe many working in concert alongside the iPhone can make that matter less.

Maybe that bides their time until they can get to a product akin to what Meta and Snap recently showed off in the form of "real" AR glasses. But, rosy timetables aside, we're probably at least a decade away from this reality. And even then, do such devices really kill the iPhone? Probably not. They also probably work alongside it, much to Meta's dismay.

Meanwhile, work continues on some robotic endeavors. Maybe Apple buys into the Elon Musk vision that humanoid household robots will be the biggest industry in the future. Maybe they're Rosie the Robot. Or maybe they're Roomba.

Related: the AI work continues and ramps up as Apple brings more of it in-house. An acquisition feels likely here so Apple can get up-to-parity faster (and because there will be sellers as costs continue to ramp). But again, AI is likely a business that augments Apple's other bets. The ultimate service. But they still need hardware on which to run it and keep the whole flywheel going.

Does Apple try again in cars? Has the early success of Waymo re-inspired them? The vision of Cybercab? While Tesla may be off the table now, does Apple go after Rivian – a company which, the refusal to use CarPlay asideseems fairly aligned with Apple's way of doing things?

Everything needs to be on the table right now because if we fast-forward a decade from now and there are no answers to these questions, that's potentially a problem for Apple. The company is in a position of strength right now, but they're acknowledging this future potential for weakness. Such consternation over such a little device. The iPhone. The best business ever. What a problem to have.


1 Though ExxonMobil remains ahead of the iPhone -- but behind Apple.

2 And, in fact, are sort of going to opposite way at least in terms of environmental impact...