Apple needs cutting down to size, experts say

Happy birthday: Apple made 106% of global smartphone profit in the last quarter of 2016.

Exactly ten years and a day have passed since the first iPhone was launched. Apple now utterly dominates the smartphone market. Is the power of the biggest technology firms bad for us all?

‘An iPod. A phone. And an internet communications device.’

In January 2007 Apple’s CEO, Steve Jobs, said these words. Then he repeated them. He went to say them a third time, but cheering drowned him out. Apple had not just created three new devices. It had amalgamated them into one portable item.

‘Every once in a while, a revolutionary product comes along that changes everything,’ Jobs said. The iPhone was born. Ten years on, it has become the most profitable product in history. More than a billion iPhones have now been sold.

This has made Apple into a fearsome global behemoth. It sells just 12.4% of the world’s smartphones, but it has been the most valuable company in the world almost continuously since 2010. Its operating margins are over 40%. In 2015 its revenues reached $235bn.

And yesterday the most respected newspaper in the business world, the Financial Times (FT), said Apple may continue to expand. App sales are rising in its iTunes stores, with growth accelerating in China. It could once again reinvent itself: ‘that Apple car may drive off yet’.

But is this healthy? Apple and the other technology superpowers (Google, Amazon and Facebook) now benefit from an unusual phenomenon: they experience accelerating returns as they grow.

This means they are becoming more powerful as they get bigger — rather than more vulnerable, like their predecessors in more old-fashioned industries. ‘A new product often has to be two or three times better in some dimension — price, speed, convenience — to dislodge a locked-in rival,’ wrote the economist W. Brian Arthur, who first noted the trend 20 years ago.

The FT says it is ‘rooting for’ those trying to cut Apple down to size. The big four’s dominance, it notes, has coincided with worrying global trends: ‘modest developed-world growth, diminished investment, stagnant productivity and stubbornly high corporate profit margins’.

Perhaps ‘a more violent tech economy might benefit consumers and stimulate growth’. So is the dominance of these companies a problem?

Fruitless

They are too powerful, say some. The marketplace should never be rigged in favour of the big players. They become comfortable and unaccountable. Their dominance kills competition from the hungry start-ups that bring fresh ideas. And consumers end up with little choice but to use the same technology as everyone else.

Nonsense, comes the response. Apple is dominant for a reason: it has created affordable, reliable products which have improved our lives. If we did not like iPhones we would not buy them. And do we really want to stop using Google to search for information? Let these companies be successful, and they will keep producing the things we want.

You Decide

  1. Has the iPhone improved your life?
  2. Is Apple too powerful?

Activities

  1. In one minute, write down every reason you can think of why people buy iPhones. Then discuss in pairs: which reason do you find most convincing?
  2. In pairs, think of another product which changed the way people live. Prepare a short role play set at the time it was invented. One of you should be excited by it, the other worried.

Some People Say...

“Companies can never make too much profit.”

What do you think?

Q & A

I don’t own an iPhone, so can’t I just ignore Apple?
Apple’s products have a knock-on impact on other products which you may use. For example, if one of Apple’s competitors loses money, it will mean it cannot make new products which you might want to buy. On the other hand, maybe the next iPhone will be better in some way and you will want it.
But does it really matter how many hundreds of billions of dollars one company makes?
Companies like Apple and Google have not only changed the global technology market — they have made a huge impact on the world economy. This may be good: they have made work more convenient for many people, for example, which may help you to make more money. But they may also have helped to make people redundant — which could make it harder for you to get a job.

Word Watch

Billion
In July 2016 Apple CEO Tim Cook announced that the company had sold its billionth iPhone.
12.4%
According to a study by financial services company Canaccord Genuity, using figures gathered in the third quarter of 2016.
Most valuable
By some measures, Google overtook Apple twice last year. But Apple’s market cap — its value in stock market trading — is $618bn. Google’s parent, Alphabet, is valued at $540bn.
Operating margins
The proportion of a company’s revenue left over after it pays its costs. A healthy margin varies between industries, but 40% is very high. In 2015 research firm IHS estimated that the iPhone 6 was creating a 69% margin.
$235bn
£193bn. This dipped in 2016.
Rising
Last week Apple said these had gone up 40% this year, to more than £16bn.
Accelerating returns
As Apple grows, customers become used to its interfaces; competitors must pay more to enter the market; and others’ innovations are judged against its products. This leaves Apple better placed than before to make new breakthrough products. See Become An Expert for W. Brian Arthur’s original explanation.

Subjects

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