Apple's Dangerous Gambit With Qualcomm

By Rob Enderle January 23, 2017

Apple just filed suit against Qualcomm, a tactical move that showcases that Apple has a serious long term problem.  It hasn’t had a true successful new product since the iPad; the iPod is all but discontinued; its PC sales aren’t really contributing much anymore; and, since it lost most of the subsidies and sub $500 smartphones have gotten much better, it is facing negative pressures on both smartphone sales volume and sales price. This not only hurts its top line, but its bottom line as well. Tim Cook, Apple’s CEO, missed targets and took a hit on his compensation (forcing him to sell some shares) as a result. 

The company has been cutting costs aggressively, but if it goes too far, customers will catch on that they are increasingly getting an inferior product and, if that happens, they’ll flee the brand.  Apple can and does pressure its smaller suppliers to cut prices, but when it comes to companies who are also powerful, like Qualcomm and Intel, that strategy rarely works, so they are moving to anti-trust as a weapon. 

However, particularly when you have a lock in strategy with your own products and carry the highest margin in the industry, claiming a supplier has an unfair advantage is a very risky path because if focuses the regulatory agency, in this case the FTC, on both firms. The FTC could conclude that Apple needs to be fixed, regardless of its conclusion on Qualcomm.  In addition, this focuses financial analysts on Apple’s plight and shifts future projections from market performance, something analysts are used to forecasting, to litigation performance, which they aren’t.  For Apple, in particular, this is an ill-advised move and it resulted from completely forgetting how Jobs was successful in the first place. 

Let’s start with that last first. 

Apple’s Initial Success

Apple was very close to failure, even after the iPod was launched, largely because it thought of itself as a PC company. Plus, the iPod was initially designed to help its PC sales since, during the first year, it only worked with Apple PCs.  Since Apple PCs only accounted for a small percentage of PC sales, Jobs got a wake-up call when he had record sales that first Christmas, but also record returns because folks that got iPods for gifts couldn’t use them with their Windows PCs.   The next Christmas, iPods worked with Windows PCs and, ever since, iPhones and iPads have worked with both MacOS products and Windows products. 

The Apple watch was the first exception, and it has underperformed massively as a result.  While it wasn’t tied to PCs—Apple had moved on to become more of a Consumer Electronics company— it was tied to iPhones. Yes, Apple does have far bigger market share here than it did with PCs, but still a fraction of the overall smartphone market and a fraction in decline.  The end result was that Apple cut its total available market by over 50 percent and effectively locked out a ton of early adapters who existed on Android phones because they change faster and appear to meet the needs of those early adapters better.  

Apple’s success also resulted from the fact that Apple massively outspent its competitors on demand generation marketing.  But now you are more likely to see a Microsoft Surface tablet than an iPad placed in TV shows, and currently it looks like most of Apple’s demand generation is focused on Apple’s new wireless earbuds, which are actually really good, but look dorky and are again marketed against an iPhone base.  

So, the pressure Apple is feeling is largely because ti forgot what made the company successful, something that happened a few years after Steve Jobs was fired back in the 1980s as well, so you’d think they’d know not to do it again.  

Litigation

The problems with litigation and focusing on costs instead of demand are twofold.  You can only cut costs so much before your product reaches an unacceptable quality level and/or key vendors fail or decline to do business with you, and you can’t control the courts.  This last means there is a significant chance you will lose and that the related regulatory agencies, once engaged, will look at you as deeply as the firm you are challenging.   Recall that when Netscape opened up the can of worms against Microsoft they got Sun, Oracle, and Google to help.  Both Netscape and Sun failed, and Oracle and Google have faced a multitude of similar actions against them since.   If you look at the Microsoft of today, it is in much better shape, while Google is facing what appears to be a massive set of fines from the European Commission.  

I should add that, in addition, litigation is far from cheap against a well-funded firm and that firms like Qualcomm and Intel have massively funded legal departments.  Now, Apple did somehow get the FTC to file against Qualcomm first, but it was ugly coming during the transition week between U.S. Presidents, with a partially staffed panel (three instead of a five-person panel). Not only were the two supporting panelists slated to leave the FTC, but the dissenting member (who was both pissed and vocal about it) is slated to become the next head of the soon to be new group.   Given the FTC element is the foundation for the Apple action, this could all come crashing down once the new FTC panel is staffed, and neither the FTC nor Qualcomm will be particularly happy with Apple.   

Wrapping Up:

Apple has one of the strongest legal teams in the segment; however, when a company starts using litigation offensively, it generally points to a problem, or problems, with its execution.  While it appears to have executed an impressive coup getting the FTC to back its play, Apple apparently didn’t take into account the new head of the panel, and that could prove to be its undoing.   In the end, this likely has all resulted from a near complete disregard for the strategy that Steve Jobs created for the company and, I expect, a far better and more successful long term path for Apple would be to find a way back to that vastly more successful path.   Just saying…   




Edited by Alicia Young

President and Principal Analyst, Enderle Group

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