Apple’s challenges and opportunities

Maxim S

Being too conservative during the economic slowdown

Apple is one of the largest, most profitable and richest companies in the world — the luxury many of its competitors don’t have. The economic slowdown many people anticipate for 2023 and beyond seems like the opportunity to invest to further differentiate from the competition and increase their lead, especially if the company has resources to do so, while many others are cutting their investments in R&D and products that do not guarantee immediate ROI. However, according to some reports, Apple is expected to cut investments and budgets in 2023. This is coming on top of some of the pandemic-related disruptions the company has been already experiencing, as well as reported strain on engineering resources across hardware and software divisions.

To be clear, these reports are purely speculations and nobody outside Apple knows for sure how the budgets would be cut or reallocated. It’s also a sign of very mature management when a company is deliberate with investments as opposed to rapidly scaling up and down based on the current enviroinment.

Nobody can predict exactly how 2023 will play out, but there is hoping the slowdown will be over sooner or later. The question is, how Apple — and any other company — would be positioned to meet the increasing consumer demand and expectations of innovative products, once it happens.

Apple silicon innovation slowdown

If we look back at the last several years of Apple’s products and announcements, Apple silicon has been the backbone of some of the most exciting product differentiators and features across the entire product line, and certainly with the Mac. It’s not an overstatement to say that proprietary semiconductor work Apple has been doing is now as critical to the experience of using Apple’s products as its software and services.

However, in the last several months, there have been multiple reports that Apple’s silicon advancements have been increasingly facing challenges:

The A16 Bionic chip found in the newest iPhone 14 Pro line of products has seen modest improvements over the A15 in terms of GPU performance. Reports speculate that initially, the goal was to introduce ray-tracing to the A16, but due to engineering issues these plans were scrapped very late in the process. Such missteps by the Apple silicon team have been called “unprecedented”.
According to another report, Apple has cancelled the development of the updated iPhone SE model that was originally supposed to launch in 2023. One of the reasons for this decision cited is struggles Apple is facing with the development of their in-house modem chips.
When Tim Cook initially announced the transition of the Mac lineup to Apple silicon in June 2020, he mentioned that this process would be concluded in two years. Here we are in February 2023, and Apple silicon Mac Pro is still nowhere to be seen. According to reports, one of the issues with the product has been the performance of the rumored M2 Extreme chip that is supposed to power the high-end desktop.

All these are rumors and we have to take them with a grain of salt. It’s obvious that even with the production and logistical genius Apple is known for, the company is not immune to the pandemic-related disruptions. There could be other reasons for these challenges, however, and that’s the loss of talent. Reports indicate Apple silicon teams losing many engineers and leaders to competing companies and startups. If such engineers are finding that working at Intel, AMD, nVidia, various startups, or other companies is more rewarding and lucrative, this sounds to me like Apple has a problem that is affecting the core of their product development process. Just a few years ago, few people disputed Apple’s dominance in consumer electronics silicon innovation, but now opinions have started to shift, as we’re seeing competitors catching up.

Loss of leaders

Turnover is natural for any company, but it seems that in the last few months, Apple has lost a lot of talent — including many leaders. Among those whose exodus caught attention from press are VP of services, the head of industrial design (which won’t be even backfilled), leaders in privacy, information systems, online store, procurement and hardware, software engineering, and more.

Rank and file employees are extremely important, but it’s leaders who are defining and overseeing the company strategy, its priorities and investments. In the time of geopolitical uncertainty, challenging macroeconomic environment, emergence of new business models and disruptive technologies vision and leadership are more important than ever, and if people with respective skills are leaving, that might result in making wrong bets.

It’s unclear to which extent the recent string of leadership departures stands out from the previous years and how it stacks against the recent hiring track record for Apple. We also don’t know if there is an underlying trend or each of these departures is an isolated case.

Over-reliance on older industrial designs

Apple is not known for making changes for changes sake that would confuse existing customers. Apple also operates at an enormous scale which makes any changes to industrial designs very costly and risky. Thus it makes a lot of sense that the company would stick to their iconic, reference designs for products for long years. However, as rational as this is, longer-term customers might get bored with product categories barely seeing any design changes over long periods of time, which discourages upgrading or makes such upgrading less exciting:

Fairly recent redesigns of MacBook Pro and MacBook Air are great, but don’t offer any dramatically new use cases (on the magnitude of the now-retired Touch Bar, for example) over the older designs.
iPad lineup is sticking to the same or similar design language that was introduced by iPad Pro in 2018 (and even that old design’s key differentiator over the older design was primarily reduced bezels). Apple Pencil also hasn’t changed since 2018.
While more recent iPhone models have seen changes to the size of the bezels, edges, and the notch, it’s still fundamentally a design very similar to iPhone X from 2017. iPhone SE is based on the original iPhone 6 exterior industrial design that dates all the way back to 2014.

Increasingly, upgrading to a newer model of an Apple product feels like having very similar experience compared to the older model, only faster and snappier. We’re rarely seeing industrial design changes that enable completely new use cases (such as Apple Watch Ultra’s Action button, for example), as opposed to optimizing already existing use cases. And if such use cases emerge, they are mostly driven by software and components instead — things like Stage Manager, Apple Pencil Hover, AirPods intelligent sound processing, and others. In the meantime, there are undeniably interesting new designs found in products from competitors that enable new use cases, particularly around foldable and dual screens in laptops and smartphones, for example.

There is a thin line between doing R&D in public with wild designs and gimmicky features, and being too conservative with sticking too long to what’s tried and tested. The former is antithetical to Apple’s culture and brand, but the danger with the latter is becoming boring and not moving on with the times in the eyes of the consumer.

iPad’s continuing search for meaning

I’ve written earlier how I feel the iPad as a category is lost in search for its identity — and with the recent software features like Stage Manager and other features aimed at advanced workflows, this conflict becomes even more profound. iPad was originally intended to be powerful but easy-to-use computer “for the rest of us” — more capable than the iPhone, but way less intimidating than the Mac. It’s obvious that the iPad has fairly quickly sucked all the oxygen from that space and is now trying to identify what’s next for it. Is iPad now challenging and mimicking the Mac in terms of power and use cases? Or is there value still in being different, enabling unique use cases with touch, Apple Pencil, portability — maybe foldable screens? — that would not be possible with neither iPhone nor Mac? Vision, mission statement and directional guidance from Apple — including new first-party apps and accessories that would spotlight and enable these unique use cases — would help greatly. Otherwise it might feel at times that Apple has thrown in the towel in its quest for finding the category’s true differentiation and instead is merely considering iPad as the cheaper, less capable alternative to the Mac going forward.

Unclear vision for Apple’s services

First-party services are critical to the ecosystem and experience of using Apple products. Some of them, like iCloud, Apple Music, Apple TV+, are clearly successful, thriving and evolving fairly rapidly. Some others, however, are a bit of a black box — we don’t really know how successful they are and, what’s worse, what’s their long-term mission and roadmap and how they will be positioned to differentiate going forward.

I’ve written extensively how I feel Apple Arcade is barely scratching the surface of what it could be and how it lacks investment in AAA games. Is Apple Arcade still a cross-platform service (meaning, encompassing all products from iPhone all the way up to Apple TV), or is it now primarily an iOS casual games play? Competitors are emerging, including Netflix games subscription and Game Pass — what’s Arcade’s vision to stand apart?
Apple Card launched to good reviews, but there hasn’t seemed to be a lot of notable development since. Is this a growing service? Is there real ambition for Apple Card to be the absolute best credit card one could find in the US (and hopefully internationally one day — by the way, when is it scaling internationally?), or is it simply a nice but not game-changing accessory for Apple users?
Apple News+ has been reportedly struggling with gaining subscribers. What is the long-term play here? Is there a potential with encompassing other platforms beyond hand-picked publications and becoming a subscription vehicle for individual creators (I’m getting a lot of my news and analysis by paying creators directly nowadays)? What is the international expansion plan?
Apple Podcasts has seen some improvements lately and Apple Originals shows are great (there is a feeling Apple is paying attention to podcasts again), but what is the longer-term play? How successful Apple Podcasts Subscriptions are (anecdotally — not much), and what’s the plan to grow it? The times when podcasts were synonymous with “audio on the go” are long gone, and they are now increasingly a YouTube thing — does Apple have a plan to maintain relevance for their platform, especially among younger audiences?

The last point brings me to the overarching trend that might be disrupting Apple’s first-party content services strategy at large. More and more people, especially younger, are getting their news, music, podcasts and other content on social media such as YouTube and TikTok. Not only it’s cheaper or free compared to dedicated services, but it might have a better selection of content (YouTube have tons of podcasts and shows Apple Podcasts doesn’t; TikTok, YouTube and other platforms have indie, obscure music Apple Music doesn’t, etc.) and it’s more convenient and fun to use because there is an entire social network infrastructure attached to it (e.g. it’s so much easier to share content with friends, and it’s better for discoverability). It might be becoming an increasingly tougher sell to convince young people to subscribe to Apple Music, Apple Podcasts, or Apple News+. If Apple plans to lead in this space, what is the long-term plan? Is it curation, exclusives or something else?

Underinvestment in lower-end

Apple has always been the company making high-quality, premium products, and it should stay this way — but it doesn’t mean it shouldn’t create lower cost, still high-quality products for lower prices that provide great value and access to the Apple UX and ecosystem for customers who can’t afford or don’t need high-end models. It’s not a secret to anyone familiar with business theory that two customers paying X dollars is often better for a company than one customer paying 2X dollars.

Apple has been doing this successfully with Apple Watch SE, iPhone SE, entry level iPads, and more. However, recently, there has been a report that Apple is no longer planning to release iPhone SE in 2023, and one of the reasons is “sales underperformance” of lower-to-mid-end models of the iPhone. If the report is to be believed, lots of people are rushing to buy the most expensive iPhones, while not many people are interested in iPhone 13 mini, iPhone SE or iPhone 14 Plus. I find this problematic for a few of reasons:

This could be a sign that many customers are considering iPhone as luxury rather than a necessity. There is no denying that many people are buying iPhones because of the brand factor, but there should be a healthy number of customers who are primarily interested in the ease of use, features, ecosystem and overall experience — things available in any iPhone model, not just the most expensive one — otherwise the business could face issues with the long-term sustainability.
iPhone SE should have a mission to be the absolute best smartphone anyone can buy for its price across the entire market — by offering the best hardware, software and services vs. the Android competition within the similar price range. If average customers who aren’t interested in Apple’s brand value are preferring similarly priced Android models, this is a sign that the Apple experience and the ecosystem isn’t as compelling and unique. iPhone business is obviously not dying and is not going anywhere, but having a healthy influx of new customers via lower-end products at the top of the funnel is an important engine for the long-term growth for both iPhone and the larger Apple ecosystem.

If reports are true, the answer to soft iPhone SE demand could be rethinking of the product to offer better value to price-sensitive customers. Killing the product or raising prices while selling very dated designs would probably not work out as great.

Obviously there is a factor of second hand market which Apple reportedly dominates, so even if the company doesn’t introduce lower cost iPhones frequently, there is still going to be an influx of new price sensitive customers. However, Apple won’t benefit directly from this influx via sales.

Continued attacks on Apple’s vertical integration

I’ve written previously how regulators (and competitors) around the world are increasingly poking at the heart of Apple’s differentiation — its vertical integration. We’ll continue to see this accelerating in the coming years. One of the biggest examples is EU’s Digital Markets Act and its direct influence on the App Store and Apple Pay in the region. By 2024, Apple would somehow need to allow third-party app stores, or sideloading, or a combination of the both, in EU markets.

I don’t expect this to make a dent in Apple’s revenues — not only Apple will continue to collect the money for distributing software on its platform even if through third-party stores, but I also anticipate that the number of Apple users enabling sideloading, let alone paying outside of the App Store, would be relatively low. That said, the mere fact of having third-party software outside of App Store (and the incentive by some actors to promote it extensively) is going to erode the quality of the experience of using Apple products for regular consumers — it will introduce a lot of confusion and complexity and will bring a number of security, privacy and fraud risks, particularly to non tech-savvy users.

It’s unfortunate it’s come to this. From the customer experience standpoint, I’d argue Apple’s priority should be to do everything it could to maintain 100% control of their platform for the sake of their users (including app distribution and payment), even if it would mean letting go of some of the services revenues. It might be too late, though.

And of course, the longer term bear case remains the question of how far regulation can go. If Apple is no longer allowed to control software distribution and payments on their own platform, will it be denied the right to bundle proprietary silicon with its software or services one day?

Mixed Reality and implications for the wider ecosystem

The world’s worst kept secret is that Apple is about to make a major entry into the MR space with its rumored headset — and this might happen as soon as this year. There are many questions — and even skepticism — around this move, including debated lack of use cases that are compelling enough for the mainstream market, the lack of Apple’s investment in first-party AAA gaming (that’s been carrying VR so far), and rumored high price points. Some analysts argue it’s too early and the technology isn’t ready — as such, isn’t Apple losing its legendary discipline and patience by rushing to market too fast?

All these valid concerns aside, MR increasingly feels like a promising new frontier in personal computing, and Apple’s unique expertise in hardware, software and services could be critical to not just opening it to wider consumer markets, but also to evolving the broader Apple ecosystem. I’m intrigued by what rumored Apple headset could do to accessibility (particularly for vision impaired people) and how it can make technology even more personal, private and liberating in a way — while not being constrained by iPhone’s, let alone Apple Watch’s, small screens. Applications are infinite and fascinating — from Apple Maps overlays in front of our eyes leading the way, and working or collaborating anywhere using infinite virtual 2D and 3D screens, to things we can’t even imagine yet.

Because all Apple hardware and software platforms are pieces of a larger ecosystem puzzle, the introduction of a major new hardware form factor and a completely new OS would push Apple’s existing platforms into new directions as well. Apps for macOS, iOS and iPadOS would be designed with “xrOS” in mind. The same goes for services — FaceTime and iMessage should work across all products from the Watch to the headset, Apple TV+ content should be fun in MR, etc. The existing hardware, software and services ecosystem — beyond any innovations with the MR product itself — is something that would truly differentiate this product and is something that no competitors have.

Rethinking Apple’s approach to rethinking transportation

When Apple introduced the Mac in 1984, it didn’t create a premium, niche mainframe — instead, it created a whole new category of personal computers that would disrupt the mainframes. Apple then did similar with iPhone and iPad that gave access to personal computing for a fraction of the cost to a whole new market of users. These are prime examples of disruptive innovations. With Apple Watch, the company has created an entirely new category that doesn’t compete with traditional watches — its prime competition is non-consumption. Arguably, Apple’s MR product would do the same. New markets are being created.

All the recent rumors about Apple’s work on the car make me (and analysts like Horace Dediu) increasingly confused about the purpose. If hypothetical Apple Car is going to cost a premium, how can it disrupt the existing auto industry? If level 5 automation is hardly achievable anytime soon (if ever), how such Apple Car — still hampered by the need of having a steering wheel and pedals — would differentiate from the existing cars? What new markets such product could create? There must be an answer to what’s the “Apple way” here, but I’m struggling to see it. Yes, lots of semiconductor companies are investing heavily in the space — but what’s Apple’s unique differentiation there?

Perhaps “Apple Car” is not a product but a service that would liberate customers like myself, who don’t want to go through the hassle of getting a driver’s license and driving and don’t even want to own and service a car. But there are questions about the economy and sustainability of such service. In the meantime, cars increasingly seem like a wrong answer to the issues the societies and the planet are facing. We need to rebuild our communities to make them more walkable, and to invest in public transportation. Perhaps Apple’s ongoing struggles with searching for its car meaning, as well as setbacks with the self-driving software, would be an opportunity — it might incentivize the company to consider investing in micromobility and adjacent infrastructure and services. And as for the actual old-school cars and Apple’s presence there, CarPlay is already doing great.

Exciting accessories and new services

This is very personal, but I’m increasingly more interested in Apple’s accessories and services than in updates to their ongoing major product categories — the former are usually more fascinating. While some recent rumors have poured cold water on some of my expectations for 2023, I’m still hopeful we’ll see interesting new additions to the ecosystem in the near future.

I’m a huge fan of the original HomePod and was very baffled that it was discontinued a few years ago — thus I can’t be more excited that the updated large HomePod is now on sale. There are questions about how this new HomePod is supposed to do better on the market compared to the old one while being nearly identical in price and functionality, but the mere fact that Apple is not giving up on the premium sound in the home makes me happy. It’s also a good sign for Apple’s increasing investment in the smart home space, which is overdue.
Similarly, I love my AirPods Max and am hoping we’ll see the refresh soon. Even things like updated colors and a newer H-series chip would go a long way in instilling confidence in Apple’s interest in the space. I also believe that we should pay very close attention to the evolution of the AirPods line to learn about Apple’s ambition in the MR space.
What could be a greater compliment to new HomePod and AirPods than an update to Apple Music? It’s seen a number of great improvements recently, and there have been rumors about the introduction of the classical music service — hopefully in 2023?
I remain hopeful — although not too hopeful — we’ll see the evolution of Apple Arcade and more investment into AAA or at least non-casual games. I believe it’s only a matter of time until Apple concludes it needs to be a major player in the space.

Mac Pro as the new high watermark for personal computing’s power

Mac Pro’s ambition has always been to be the pinnacle of raw power and performance across the entirety of Apple’s hardware ecosystem, and I’m expecting the first M-series based Mac Pro to raise the bar again. How will it push the envelope in terms of performance-per-watt? Which new use cases would it enable? Mac Studio is already amazing, but how can Mac Pro be even better? In a way, per John Gruber, the Mac Pro is Apple’s equivalent of a race car — very few people would buy it, but it still needs to exist to showcase Apple’s engineering and design chops and to excite and encourage Apple’s brand ambassadors.

I’m troubled by the rumors that Apple is facing issues with the M2 Extreme chip and that the Mac Pro wouldn’t be as dramatically more powerful as previously expected — but I’m hopeful the company would still find a way to impress. There are also talks about possible external GPU support in the upcoming Mac Pro, which would be a massive development for the M-series chips.

On-device Machine Learning and AI differentiation

With everyone talking about ChatGPT, Midjourney and other applications of recent developments in AI — and with major players like Microsoft and Google massively investing in this space — it increasingly feels that we’re rapidly approaching the point in time when AI genuinely becomes indispensable technology that will change lives of most people on the planet. It’s a paradigm shift.

It’s unclear how Apple would leverage these new technologies and how well it’s positioned to do it. There is a case to be made that the amount of computing power, calculation and data that’s needed for leading AI consumer applications can only be achieved in the cloud, where Apple doesn’t have a silicon or software differentiation — although this could be an opportunity for some strategic infrastructure partnerships. But it’s clear that Apple’s leadership is not asleep at the wheel and fully understands the impact and importance of AI-driven innovations for its products. Apple has been long investing in on-device ML and AI and fully controls its custom silicon roadmap. It took Apple no time to announce the support of Stable Diffusion on Apple silicon, which is a great sign that Apple (to no one’s surprise) is paying very close attention to this space.

On-device ML and AI is a clear differentiation and area of strategic investment for Apple. People deep in the Apple ecosystem own multiple devices, all powered by custom Apple silicon, which theoretically can form private mesh network of devices that constantly talk to each other and do powerful local AI-related processing, all in privacy-preserving way. We will see in the coming years how this strategy plays out and how competitive it is against what cloud-based companies are doing.

15-inch MacBook Air

When Apple introduced the redesigned M2-based MacBook Air models last year, a number of people said that the only thing that stops them from ordering these amazing machines is small screen size. According to rumors, these people should be happy, as the 15-inch MacBook Air is coming — hopefully, this model will incentivize a great number of people to upgrade or switch from Windows.

In my view, the current M2 MacBook Air is pretty much an almost-ideal notebook computer for everyone outside of niche markets where extreme processing power is needed. Having a larger screen model would make M2 MacBook Air just perfect.

Apple’s challenges and opportunities — 2023 edition (2024)