2016 has been a year of rapid change, with Brexit, climate change and the rise of China grabbing the headlines. However a rather startling news emerges from Cupertino, California.
Apple, the most valuable company on Earth (in terms of market capitalisation) revealed its second quarter results recently, and shockingly, for the first time since 2003, revenue has dropped for the company by a significant 9%. The decline which wiped $38 billion off Apple’s market capitalisation, was majorly due to a decrease in sales of the company’s iconic iPhone in China and the United States. Apple’s health is usually taken as an indicator of the American technology market as a whole. This is why Apple’s earnings sent shock waves throughout the industry. Now the question to be discussed is: Is the decline in Apple’s revenue an indicator of the health of the American technology industry? Lets find out..
The current forecasts by S&P Global Market Intelligence predict that America’s technology sector should expect a fall in earnings of approximately 7.2%. This alone might project that the technology industry as a whole is facing a decline. Fortunately the situation is not as grim as it might seem. Of all the companies in the technology sector, Apple (AAPL) is estimated to be the largest contributor to the IT sector’s expected fall in earnings in 2016. If Apple is excluded, the estimated earnings decline improves from 7.2% to 2.1%. Though Microsoft (MSFT) and Samsung have also faced a dip in earnings, we can safely rule out an industry – wide decline. But why are high-value companies like Apple and Samsung facing a decline in revenue? And should we feel alarmed at these developments?
There are many reasons companies like Apple are facing reduced sales. Perhaps the chief reason is due to these technology companies’ over-reliance on the sales of their smartphones. For example the revenue from the sales of the iPhone constitutes approximately 58% of the total revenue of Apple. On the other hand, developed markets like the United States and China are virtually saturated with smartphones. This is why Apple and Samsung have experienced a decline in sales in the developed markets and a boom in sales in developing markets like India.
Another important reason for the decline in sales is the inability of these companies to persuade their customers to upgrade their smartphones. This is why Apple’s sales have received a bigger hit than Samsung’s and Microsoft’s. This is due to the fact that unlike Samsung and Microsoft, Apple runs only one line of smartphones which it upgrades in an annual cycle. Convincing the consumer to buy a new phone every year is indeed a challenging task. Other factors include the current global economic health. International developments like Brexit have reduced the demand for smartphones in Europe in general and the U.K. in particular. To remind you, Europe is the second largest market for smartphones after North America.
However, on the whole, there is no need for anyone to be alarmed over the dip in earnings of the American technology industry. The industry is in a period of transition from the developed to the developing markets. The decline in demand of new products from the United States and China will be offset by increased consumption of technological goods from developing countries. The current situation has arisen due to variable factors which were mostly unavoidable. However companies will have to improve their product lines and their marketing strategies to revitalise confidence of the investors in this sector or else the industry will lose its much touted sheen.