Apple, Inc. (AAPL) is among one of the largest tech companies in the world, as measured by market cap, and continues to dominate in the categories that it invented or popularized, such as the smartphone and the tablet. While it seems that Apple is at the top of its game, it still has key weaknesses.
- Apple has grown to become a household name and one of the world's most valuable companies.
- Despite its dominance in the space of mobile devices and computing, the company does face some key challenges.
- Among these weaknesses are its highly-priced products, entering areas of higher competition, and incompatibility with other software.
The Closed Ecosystem
Many of Apple’s loyal customers see the company’s tightly controlled software and services as a major strength of the company, as it allows Apple to control all aspects of the devices it produces. Overall, however, this puts an additional burden on Apple’s development cycle as software, security, and many other details become an in-house responsibility.
On top of this, Apple is in the business of running licensing agreements for its content sales, including Apple TV, Apple Music, and the App Store. From a management perspective, this muddies the water on what Apple should focus on.
The biggest revenue generation comes from hardware, but the closed nature of Apple’s ecosystem forces the company to be in all the other businesses as well. Contrast this to Samsung—by plugging into Android and the rest of Google Inc.'s (GOOG) ecosystem, Samsung can focus on iterating the hardware and innovating the design of its devices rather than having to police third-party apps or roll out operating system updates.
Pace of Innovation
The high product expectation for each new version or model that Apple has created may ultimately prove to be the company’s biggest weakness. Apple has developed an amazing brand that is associated with products that work perfectly and that are designed in such a way as to feel both advanced and natural at the same time. These high expectations mean that Apple can’t throw experimental products or services at the market without hurting its brand.
This inability to experiment makes it harder for Apple to innovate as rapidly as Google does in the services space or as fast as Samsung in the hardware space. So Apple has to depend on its leadership and employees being so far ahead of the curve that the slower release schedule still results in Apple leading the market.
So far, Apple’s been able to keep its edge in most of its major product lines, but the size of its lead is staying fairly stagnant. At the same time, other tech manufacturers have caught on and are themselves rolling out upgrades and new models regularly as well. For example, Samsung's Galaxy S line of mobile phones sees a new release every year or so now.
A couple of the other issues include Apple’s highly-priced products and entering areas of higher competition. Although the higher-priced Apple products have proven to be less of an issue in a surging economy, they could prove an issue if the economy takes a step back. As well, it’s relied on its brand image versus spending heavily on advertising, which could change in the future.
As Apple gets even bigger, looking to find new ways to grow its top line, it will likely enter more competitive markets—such as Apple TV, where it’s competing with players that focus solely on content, e.g. Netflix (NFLX). As well, its move into the payments market puts it in competition with the likes of Chase (JPM) and PayPal (PYPL).
The Bottom Line
There are hundreds of tech companies that would love to have Apple’s weaknesses as long as they also had its strengths to pull on. These include a massive war chest, a powerful brand, and much of the infrastructure still intact from its streak of hit products. That said, Apple needs to continue its high level of innovation. Apple’s competitors will continue to close the gap between its products and Apple's and eliminate the premium that Apple charges for its products and service offerings.