Apple at $2tn: What Next?

By Chris Anderson

On 19th August 2020, Apple became a $2tn company by market capitalisation. Stocks in the company are currently trading at more than $460, an increase of over 125% from around $200 this time last year. How did it get here, and where is the company going next?

It’s hard to look past the legacy of Steve Jobs, long-time CEO and visionary leader of the company, who died in 2011. In the years that followed, Apple never lost its position as one of the leading tech companies in the world, but it was widely perceived as wavering slightly, and detractors wondered if it had lost its way. The company which prided itself on doing things differently – a claim whose veracity remains hotly debated, but which remains nonetheless a core component of Apple’s self-identity. However, it went through a dry spell of originality, as the flagship iPhone product line began to look increasingly stale.

However, the company has recently experienced something of a renaissance. There are numerous factors at play here. The release of Airpods in 2016 caused, with hindsight, something of a “cultural phenomenon” in the words of Apple CEO Tim Cook, and the company sold an estimated 60 million units in 2019. true wireless earbuds did exist before this point, but the widespread adoption of this product went some way to restoring Apple’s position as a trendsetter. The decision to remove the 3.5mm headphone jack from the iPhone was widely criticised, but without this bold move, it seems unlikely that true wireless earbuds would have taken hold in the way they have. Apple was returning to Jobs’ philosophy that the customer does not know best, and that they should instead be led by companies.

The refreshed Mac Pro in 2019, returning to the standard tower format rather than the so-called “trashcan design”, was succour for Apple’s enterprise customers, who had been clamouring for a return to more upgradeable, modular designs. The new design also had significant thermal advantages over the previous iteration, which was first introduced in 2013. At the same time as appeasing its enterprise customers, Apple also offered a wheel kit for the Mac Pro – at a price of £700. At the surface, this may seem like a foolish move, but in retrospect it now seems part of a thoughtful strategy. The market of people looking for wheels on a desktop computer, which always has to be plugged into a wall socket, is tiny; regardless of the price, few people were going to buy these wheels in the first place. However, they served to reinforce Apple’s image as a luxury company, and the widespread publicity they received compounded the effect of this marketing ploy, probably even beyond the expectations of Apple’s marketing team.

Reinforcing the company’s luxury pedigree would prove particularly important, as 2020 saw the debut of the 2nd generation iPhone SE at the relatively low price of £400, making it one of the best-value smartphones in the budget category (albeit at the upper end of this category). Providing such a competitive budget offering while retaining the image of a luxury company is a fine balance, and offering £700 wheels is, ultimately, a sensible way of doing this.

Apple’s main competitor in the smartphone market is Samsung, whose flagship Galaxy S20 begins at £799, placing it clearly in the luxury division. In the tablet world, the competition is even closer, with the Samsung Galaxy Tab S7 receiving widespread positive reviews, with many in comparing it favourably to the iPad Pro. Yet the iPad continues to wildly outsell the Galaxy Tab: according to Statista, in 2020 Q2, Apple held 32.2% of the tablet market, with Samsung in a distant second at 18.1%. Despite offering competitive products in similar price ranges, Samsung does not carry the same sense of luxury as Apple – its best-selling phone is not its flagship Galaxy S20, but the budget Galaxy A51. Samsung is, of course, nonetheless a very successful company, but its brand identity is much more confused than Apple’s. 

Clever marketing is part of the explanation for the spectacular growth in Apple’s stock prices in recent years, but it’s not the only factor. The iPad product line has recently reached a stage of maturity and is experiencing a spike in popularity: although the product line is still somewhat confused, with the iPad 7th Gen and iPad Air 3 competing in roughly the same bracket, the iPad Pro has finally become a viable laptop replacement for the majority of users (although its price remains prohibitive), thanks to the introduction of intelligently-designed cursor support, improvements in multitasking, and additional improvements introduced in the upcoming iPadOS 14.

WWDC 2020 (Apple’s Worldwide Developer Conference, the most important annual event in the company’s calendar) was also a roaring success. Although the in-person event was cancelled due to the ongoing Covid-19 pandemic, the company produced a slick two-hour film, which made for encouraging viewing. The event received widespread positive coverage, both for its production and its content. Craig Federighi, Apple’s senior vice president of Software Engineering (affectionately nicknamed Hair Force One for his distinctive silver locks) featured heavily, with Apple capitalising on his charisma to produce a highly engaging virtual event. Federighi’s role in the company, combined with Tim Cook’s presence, contribute to a general perception of good governance. Cook’s performance in recent congressional antitrust hearings in the US will win him no Oscars, but has apparently done little to harm the company’s fortunes or to undermine the view that he is a safe pair of hands.

Finally, there is the move to Apple Silicon. For many consumers, this announcement will mean little, but it is arguably the most important fact to come out of WWDC. For some time now, Apple has been working on perfecting its own processor architecture. The iPhone SE’s impressive performance is one result of these efforts, and likewise, the iPad Pro’s A12Z Bionic chip is an extremely powerful processor, offering excellent speed and reliability despite the fanless design of the tablet. On the basis of these successes, Apple is now moving the remainder of its products (both desktop and laptop Macs) away from Intel’s processors, which have been in place since 2006, replacing them instead with proprietary processors, known as Apple Silicon.

Though it is important to temper expectations, the implications of this move could be enormous. Firstly, it is a significant blow for Intel, whose fortunes have already been harmed by AMD’s recent developmental successes, particularly in the realm of laptop processors. The move also offers Apple a great deal of opportunities: the excellent thermal performance of Apple Silicon chips, honed through mobile-focused R&D, may offer Apple the opportunity to make even thinner and lighter laptops. These chips may also enable the company to reduce its prices (or to increase its profit margins), as Intel’s processors are notoriously expensive, and are increasingly appearing to be bad value in the context of fierce competition. Intel’s advantage has historically been based, at least in part, on the idea that developers are able to optimise their software for the architecture of Intel chips; WWDC included an impressive demonstration of a Lara Croft game which had been recompiled automatically, and was running smoothly on an Apple Silicon chip, indicating that even this advantage is on its way out.

Perhaps most importantly, Apple Silicon offers the company flexibility. As noted above, Apple likes to portray itself as doing things differently. By taking even more control of its supply lines, Apple is cementing its position as master of its own destiny. With mature and well-developed product lines, a strong team of senior executives, and a clear, impressive plan for the coming years, it is little surprise that confidence in the company is at a high point, and this is reflected in the sky-high valuation and stock prices. Many companies fall into routines and lose their edge after a while. But Apple seems to be having a second wind, and I for one am excited to see where the company goes next.

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.

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