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Is Apple's Halo Slipping?


Challenges, from inside and out, threaten to thwart the world's most watched company

Apple (AAPL) reported what was for any other company a complete blowout of a quarter, especially when having to write off an entire continent (Europe). During the quarter they made $6.5 billion in net profit for $9.32 per share.

Yet this was considered a huge miss.

Expectations for the company are so high and its margins are so vast that the Wall Street sell-side projections for the business got way ahead of even Apple's guidance. Given that this is the single most covered company in the world, there were a lot of eyes on it.

That said, I think there is a potential storm brewing for Apple. Its brand loyalty, and the halo effect that it casts, have been working very well for the company and are still in place. But the question is: Will it last?

Superior, Not Invincible

Contrary to popular opinion, Apple is not everywhere. Even the richest company in the world has limits. And as cool as its products are, and how revolutionary the iPhone and iPad were and still are, the markets in which it operates are now more mature and the competition has closed the gap in many areas. For all users? No. But for many, the value proposition of an iPhone 4S is not as high as it once was.

China is a major focus for Apple. Tim Cook spent enough time on the earnings call focusing on it. But the force of the low-end price points in that market is just beginning to be felt for everyone there. Baidu's (BIDU) recent gains in the cloud cannot be ignored for it highlights a potential disconnect, or at least ceiling, for Apple's growth in that market. A CNY 1000 Baidu smartphone, running Yi (which is its forked version of Google's (GOOG) Android that has apps, cloud services, and the best search services in China) puts the onus on Apple to justify charging nearly $800 for an iPhone 4S.

Add in the fact that Nokia (NOK) is still prized as a phone manufacturer all over the world, and it is building touch-enabled feature phones that will also compete with Samsung and other companies in that arena. Low-end Lumia 610s sold very well in the second quarter for Nokia. Microsoft (MSFT) and Nokia both plan on Windows Phone 7 level handsets to be around for awhile. Once Windows Phone 8 hits the streets, these phones will move down, becoming the entry-level phones with full access to the Windows/Nokia ecosystem.

Execution, Execution, Innovation?

The real question is one of leadership. In no way am I bearish on Apple as a company. Apple has superior products, excellent control of its supply chain, and command margins other companies can only dream of. It has become the kind of cash cow that Microsoft was in the 1990s. It has pushed Microsoft, frankly, to the position Apple was in when Steve Jobs came back.

As for Microsoft, it has been run by the wrong guy for years. Steve Ballmer is only just now realizing that his company needs to lead, and not follow in Apple and Google's footsteps. If this company is going to survive, it will have to completely open up its old business of selling Office and Windows and be the enabler of change.

Listening to the earnings call, I got the feeling that Tim Cook wants to lead the existing company that Apple is, as opposed to the company that Apple could still become. Complaining that it is too expensive to penetrate India, for example, is a losing position for a company with more than $100 billion at its disposal while Microsoft is building a multi-pronged strategy to connect India's education system and businesses to the cloud.

When Steve Jobs died, a lot of people wondered if Apple would continue to lead the technology revolution, or if it would just optimize what it currently has. Nothing at the latest WWDC suggested the former versus the latter. Apple's ability to execute is, itself, the real threat to Microsoft and Google. The company has no margin for error, just like IBM (IBM) and Apple didn't have any margin for error with OS/2 and the Mac in the '90s. The mighty fall and reinvent themselves. If Microsoft has solved some of its internal culture issues, then things could get very interesting.
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