Apple's biggest problem: Apple

Apple reported Tuesday that it made $9 billion in its fiscal fourth quarter.

This is good.

The company also reported that it sold 45.5 million iPhones in the quarter, down from 48 million in the same quarter last year and marking the third-straight quarter of year-on-year declines in sales of its flagship device.

This is not as good.

The future of Apple is not about the future of iPhone. As we wrote Tuesday, it is about whether the company will create something customers don’t even know they want yet.

But as you’ll read, Apple faces some self-imposed challenges that are hindering this process.

A pipeline is not a strategy

A pointed question that UBS’ Steve Milunovich put to CEO Tim Cook on Apple’s earnings conference call isn’t likely to make anyone confident Apple is on the path to creating game-changing products. As Business Insider’s Kif Leswing flagged on Tuesday, Milunovich asked Cook about whether the company had a “grand strategy” that goes beyond just selling more iPhones. The answer from Cook was, more or less, “No.”

“We have the strongest pipeline that we’ve ever had and we’re really confident about the things in it,” Cook said. “But as usual, we’re not going to talk about what’s ahead.”

A pipeline of products is not a strategy for creating new ones, and selling tens of millions of iPhones — and millions of iPads and millions of Macs — is a viable path towards remaining a big cash-generating company, but not a strategy to remain the most admired, most innovative company in the world. Apple is not going to remain “Apple” by selling iPhones in perpetuity — if this is the path forward, Apple becomes Coca-Cola.

But it was Milunovich’s follow-up question that gets more to the heart of an issue that has defined, but now shows signs of hampering, Apple’s success: its organizational structure.

“In terms of your approach I guess to new products, do you have a strong sense of where technology is going and where you’re going to play?” Milunovich asked. “Or is it still enough up the year that you are willing to react fairly quickly, which arguably your organization allows you to do for the size of company you are?” (Emphasis added.)

Cook replied simply that, “We have a strong sense of where things go and we’re very agile to shift as we need to.”

Tim Cook
Tim Cook

Apple’s structural problem

The organizational structure Milunovich alludes to is Apple’s uniquely consolidated operation for a company of its size. Ben Thompson, who publishes the Stratechery tech and business newsletter, wrote a great piece on Apple’s organizational advantages and hindrances back in April.

As Thompson laid out, Apple is organized in a “U-form” management structure wherein the company is organized by skills — design, engineering, marketing, etc. — and each unit reports up to one person: CEO Tim Cook.

As a result, one profit-and-loss is realized for on one consolidated statement — there is no iPhone unit P&L or App Store P&L, there is simply how much money Apple did or did not make in a given quarter. The most granular information investors get is iPhone sales by region and revenue breakdowns by segment (and even then, we still don’t know what Apple Watch sales are, for example).

Apple’s structure also means Cook giving wishy-washy answers on whether Apple has a “grand strategy” or is content to react to market trends and stick with what’s working — rather than define the market — does not instill confidence.

Because at Apple, the buck stops and starts with Cook.

Steve Jobs doesn’t work at Apple anymore

And so while the myth-making around Steve Jobs’ time at Apple has literally become the stuff of movies, the on-the-ground, practical way Apple was organized around Jobs’ vision for whatever it was he thought was the next big thing powered the company’s runaway success in the early 2000s.

For a time it was Mac, but Apple didn’t really take off until iPod. Then came iPhone. And here we are.

Cook, for his part, has been vocal in recent quarters about the company’s desire to become a major player as a “services” business, or the products like Siri and the App Store that complement its hardware. In its most recent quarter, Apple’s services revenue totaled $6.3 billion, up 24% from a year ago.

And perhaps services — or the so-called “Apple Ecosystem” — is the company’s best future bet.

Services-as-a-solution

But as Thompson wrote back in April, the cohesive, singular structure that creates great devices like iPhone and iPad presents a problem when it comes to services.

“You only get one shot to get a device right, so all of Apple’s internal rhythms and processes are organized around delivering as perfect a product as possible at a specific moment in time,” Thompson wrote.

“Services, on the other hand, which are subject to an effectively infinite number of variables ranging from bandwidth to device capability to hacking attempts to data integrity to power outages — the list goes on and on — can never be perfect; the ideal go-to-market is releasing a minimum viable product that is engineered for resiliency and then updated multiple times a week if not multiple times a day. The rhythms and processes are the exact opposite of what is required to build a great device.” (Emphasis added.)

And this problem isn’t going away for Apple anytime soon — it is embedded in the company’s DNA.

Myles Udland is a writer at Yahoo Finance.

Read more from Myles here:

Apple’s challenge isn’t predicting the future — but creating it

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