Apple: Beyond the iHype

Apple entered 2008 seemingly unable to put a foot wrong. It was riding high on the effects of the iPhone hype generated the year before.

But 2008 has so far been very hard on the Cupertino giant. Its stock price has taken a nosedive, fears abound that the iPod market is saturated, unlocked iPhones represent a huge cash hemorrhage, and there are fears that consumers might be holding onto their hard earned pennies.

So where can Apple go after the iPhone hype?

Well, the first thing to get out of the way is any impression that Apple is in trouble. In the long-term, Apple is a pretty safe bet. It has the cash to weather financial turbulence that would crash many companies.

But for the short-term investor, Apple is no longer the cash cow it was last year.Apple stock, like Google stock, was enthusiastically embraced by investors (I use this term loosely) who knew little about technology but who were hoping to make massive guaranteed returns. The iPhone hype was stratospheric and surely that meant stratospheric profits. Also, I’m certain that investors had noticed iPods and Macs in the media and in the hands of users everywhere.

So what went wrong? What happened to put Apple stock into a tailspin? The problem seems to be that Apple has been caught in a four-way pin.

First, the hype for the iPhone was huge, but hype is always too short lived. Pretty soon people (in particular investors) want to see the next big thing. So far, that “next big thing” is elusive. I think Steve Jobs and the gang thought that the MacBook Air was going to take over where the iPhone left off, but that didn’t happen, and this leaves Apple with a hype famine.

Another problem for Apple is the success of the iPod. You can’t sell a product in the millions without soon eventually getting to a point where everyone who wants one, soon has two or three. The iPod has come to a point where capacities are huge, there’s video support, WiFi/web/email support and a nice big touch screen. Where the product goes from here?

I don’t know, and I’m almost certain that Apple doesn’t either. What’s left? Bigger battery? Larger screen? Greater storage capacity? Adding more bling?

Once the iPod touch entered the line-up, from then on the iPod started to seem like beans – they’re everywhere and all taste pretty much the same. To Apple’s credit, it was clever enough to make replacing the battery on the iPod difficult enough so that after a few years most people will chuck their old ‘Pod in the trash and buy a new one because the battery will have worn out. But even this built-in obsolescence won’t be able to support them at the current level of sales.

Then there’s the whole matter of people unlocking their iPhones and taking them to networks that Apple hasn’t authorized, a move which could cost Apple more than half a billion dollars over two years. I don’t think that Apple has before entered a market where it has had to suffer being ripped off as much by its consumers before.

Apple has put a lot of effort into keeping the iPhone tied to the appropriate network, but this seems to be a battle that Apple is losing. People want the iPhone but hate being tied to a network and having the OS shackled in such a way that will allow Apple to monetize each and every application users want to install. Not only is unlocking costing Apple, it also means it loses leverage with cellphone networks. Apple is also losing face, having entered into a battle with hackers that it just cannot seem to win.

Then there’s the matter of the economy. While it’s still far too early to speculate about a recession, all this talk of recession and consumers tightening their belts isn’t good for Apple. A recession would mean that iPod sales will plummet and people buying Macs will start looking at the cheaper end of the spectrum.

Growth over the ’07 holiday quarter was modest and this, combined with talk that Apple is cutting component orders, is making investors jittery.

It’s going to be interesting to watch Apple over the next year or so because it will give us data that can be used to judge the long-term health of the company. We’ll also get to see whether Apple will try to drum up another round of iHype or whether it has learned the lesson from the iPhone.

The next couple of quarters will give us an indication of just how bad the iPod saturation problem is likely to be for Apple. We’ll also get to see whether Apple will act as a recession indicator or not.

As always, it’s all eyes on Apple.