The Biggest Risk to Apple’s Consumer Products Empire

by Ross Heart on December 3, 2012

family watching retro tube television, illustration of trends in technologyBy Ross Heart
A few weeks back I mentioned to See It Market founder Andy Nyquist that I was working on a post detailing the #1 risk to Apple. Well, a quick slide in shares from $700 to $505 brought a rash of hurried “Demise of Apple” articles, and piling on with the consensus isn’t my style. Now that we’ve seen a strong rebound off the lows, I’ll revisit as I think the company is at, or nearing, a crossroads meriting explanation.

Quick disclosures – this post is entirely about Apple the corporation. It will not attempt to correlate consumer trends to Apple’s current stock price or timing its market horizon. And, to be sure, I should note that I have recently been short shares of Apple in addition to having held multiple long positions; so I have traded both sides. At the time of this writing, however, I do not hold a position in Apple. Regardless, I do have the utmost respect and admiration for the innovation, creativity and brilliance of Steve Jobs and what he and their current team have meant for all of us.

So, Just What Is Apple’s Biggest Risk?

Generational Pushback. This is obviously long-term, but given how rapid technology’s pace runs, perhaps it isn’t. Sure Amazon and Google are risks, a less robust upgrade cycle and cannibalizing its own products are concerns, attacks on profit margins may exist, but long-term what matters most are the outsized trends like the one that drove Apple to its current perch.

So, what do I mean by Generational Pushback? Both Mom and Dad use an iPhone, Mom uses her MacBook Air to work at home, Dad jams to classic rock on his iPod while mowing the lawn, all the while the kids play on their iPads after coming home from a school that uses Apple products. First of all, that is one heck of a business! The pushback occurs as kids age, products age, and all of a sudden, one day Mom’s MacBook Air starts to look a lot like Grandma’s Oldsmobile to a restless 15-year old who isn’t sure following Mom and Dad’s technology footprint is so cool anymore.

This doesn’t take place immediately as the shine of revolutionary products, productivity advantages, and outstanding design will persist for quite some time. If I were a long-term shareholder though, obsessing over quarterly metrics, anticipating new product launches, and wondering how much thinner the product can get wouldn’t concern me nearly as much as the day kids eventually start to say no to the $500B behemoth. Kids are a fickle bunch, and at some point when trends start to wane and when successful substitutes emerge, a trend in technology can accelerate as quickly in reverse. I believe staving off those encroaching competitors is exactly the reason Apple has grown so aggressive recently in protecting their intellectual property and design advantages.

Why focus on kids/youth? Because they will always (almost always) dictate the trend and adoption of transformations in technology, music, and the like. Apple exploited this truth as they strategically set their sights on younger demographics and the college-aged crowd initially. They then parlayed a successful adoption of product with incredibly easy-to-use technology into a proxy for older generations to become hip once again, to tap into their youth. Imagine listening to Dylan back in the 60’s as a rebellious teenager, and Dad discovers Dylan’s music and bursts into your room with his own copy of the latest vinyl. Then you visit your Grandfather at Thanksgiving and he’s spinning his own record on his console stereo system (which doubles nicely as furniture, mind you). Need I say more? I believe wholeheartedly that Apple’s successful penetration of these markets is exactly why it currently teeters at this precipice.

Why is this generational pushback my biggest concern? Because Apple needs new product innovation to retain its leadership, and if the youngest generations do not embrace new ventures going forward, they will not gain traction, and the company cannot continue its growth regardless the current obsessions by more mature customers. Apple is the greatest and most successful consumer company we’ve ever witnessed, but they are not immune to the same factors that have brought many a technology company to their knees (ironically, a list that once included Apple).

I believe this tapping into youth and hipsterness is exactly the reason many Apple supporters are so feverishly defensive of Apple criticisms as the company connects its older users with a youthful spirit like no company ever has. It is the cherry red sports car a Baby Boomer can hold in their hand, text their kids with when they’re away at college, and reminisce to the Beatles with. To question the dominance of that car is a direct strike at its fountain of youth whereas a 14-year old won’t bat an eye when Apple’s reign is over. They’ll already have the next great thing down on their Christmas list.

Ironically, if kids roll over and don’t push back we may not get that next great thing, and it would be a terrible indicator for the future of the United States. We need innovation, we need pushback, we need competition, and we especially need outcast kids tinkering in garages and basements with dreams of taking on the king of the mountain. I cringe if we get to a point where we obsess over the established Apple, Zuck and Sergey, but scoff at those outcast kids as silly dreamers. We desperately need those kids more than ever. As that famous push-backer once sang, The Times They Are A-Changin’.

Disclosure: At the time of this writing Heart Capital did not hold any positions in Apple.

Heart Capital does not offer investment advice via this medium. Under no circumstance whatsoever do these postings, opinions, charts, or any other information represent a recommendation or personalized investment, tax, or financial planning advice.

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Twitter: @heartcapital  and  @seeitmarket    Facebook:  See It Market

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

  • Bill

    Interesting. And makes you think. But apple has changed the way you operate your life and the speed you do it in. Forget the hardware the phones, iPads. But focus how you make a call or use your app. To do everything. One click to access your life. These other software co. Dedicated lot of resources to it and its all aapl focused. 4 yrs ago i played and recorded music through macs. Now iPad. iPhone.
    Apple has a legion of fans. It seems a lot of them are other large company’s, not competition but they want to be on their team! They are assisting apple in every nook of life. Yes they need to sell so many phones for stock to hit 700. But besides that how do you and will always access your life on the road. Aapl. And they will keep that niche. And if you don’t think so you are still playing the records gramps.

  • D G

    I agree with your thought process but I get the feeling you only think of Apple as a momentum play and nothing else matters.
    What about the fact that Itunes itself makes more profits then the entire media industry already???
    What about the fact that in 4 years Apple will have 400 Mil users that have wealth and spend big $$$ on content???
    Think about Apple as your entire content provider. Think about what your cable company makes, your satelite company, your movie stream company makes and add them all up….and that sort of revenue is a fraction of Apples content revenue in the future.
    People that think this is purely about fun, flashy new gadgets never understood the Apple crowd in the first place. The reason Apple has a rentention rate UNHEARD of remotely matched is because of the SUPERIOR eco system.
    The proof is in the numbers not in any anecdotal opinion.
    Yes, Apple’s “gadget” sales will not increase 100% or even 20% year over year in the future but at that point 400Mil people will be on the eco system and beacuse those 400Mil are the MAJORITY of the wealthiest/highest education level individuals they will continue to spend BIG $$$ in that eco system.
    The revenue growth in the future is ALL about content!!!

  • dave houston

    When i hear some people talk about apple in the terms that they are “somehow different than past tech success stories i am skeptical. When cell phones started Nokia was the leader once thought unbeatable. Then it was RIM. Everyone either had a blackberry or where crack berry addicts. Now it’s apple. Tech changes so fast it’s very hard to see any company dominating sectors for long periods of time.

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