What Apple Must Address

 | Apr 25, 2013 | 2:38 PM EDT  | Comments
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Although I'm bullish on Apple (AAPL) and think that we're close to a bottom here, there were a number of negatives to take out of the recent earnings call. 

Here's my laundry list of the things they mentioned, which you should watch for further warning signs in the coming months:

  • Are they really going to stick stubbornly to this idea that they can't come out with a bigger iPhone?

"We can't make a 5-inch iPhone." Really? That's really what Tim Cook claimed on the earnings call. He said that Apple would sacrifice too much in going to a larger screen and it chooses not to. How is it that Apple makes mini and regular-sized iPads? What about those tradeoffs?  Clearly a larger screen is what many people want from future iPhones. Apple should provide it. More than likely, Cook was giving this as an excuse while they're working on something new to surprise the market.

  • Will Apple go after the low end of the market in iPhone?

Apple is losing market share in the smartphone space. This is a fact and was cited by Tony Sacconaghi on Tuesday's call. Cook obfuscated his answer. He basically said that Apple's doing just fine in the high end of the market and that the iPhone 4 is very affordable for the low-end of the market. But the iPhone 4 cannot be the affordable answer for the low end of the market if they are continuously losing market share in that part of the market. They need an answer here and they especially need it in emerging markets such as India, China and elsewhere. But even if they announced tomorrow that they were going after this market, guess what? Wall Street would slam their stock with worries that Apple is going to pull down its margins.

  • Can they reignite growth in China?

Despite all the talk about China for the last three years, Apple has really dropped the ball here. Two years ago, Ron Johnson was still the head of Apple retail and was promising 25 new stores in the Mainland by now. At the moment, Apple has 11 there. They've never explained why. But more troubling for Apple in China is just how quickly Android has proliferated there. Apple really miscalculated how much their products would sell in China.  They were overpriced and now Apple has to go back and fix that. The question remains open. Does Apple really know what the lower-end Chinese consumer wants? And does Apple know how to succeed in that lower end market?

  • Goodbye Macs and iPods?

We're starting to see this already. Macs were down slightly on a year-over-year basis. iPod sales declined much more quickly. Don't be surprised if you see both product categories really start to fall off the table in the coming quarter.  This underscores the importance of these mysterious "new product categories" they discussed bringing out this autumn and into 2014.  Apple could need these new revenues sooner than later.

  • Can they be as good at services as they have been at design?

We are moving into a new period for Apple. Good hardware and software won't be enough to satisfy users. Increasingly, these users want the best-of-breed services. To this point, Apple's done a mediocre job in services. This needs to change fast. Does Apple even recognize this issue? We don't know, but they will have to prove out that they can deliver top-notch services as part of their phones.

Apple has it in its power to get in front of all these potential problems. The question will be: does Apple management recognize their own weaknesses and that they can course-correct them?

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