A Pause In Apple’s Creativity

“A strong wind cannot blow all day”–Lao Tzu

Apple Inc’s (NASDAQ: AAPL) sold off yesterday after Steve Jobs introduced the new iPhone, the fourth generation of the product.  The market did not seem to think its new features were impressive.Jobs said the phone would allow for video chat, be smaller than its predecessors, and have a higher resolution screen. It is hard to say how all of that was below expectations, but it was.

Apple is the victim of its own success and of an inescapable business trend. No company can create an endless string of hit products quarter-after-quarter and year-after-year. There have to be a few pauses along the way.

Apple’s biggest success for 2010 is almost certainly the iPad, which has sold more than 2 million units. At that rate, sales could reach nearly 8 million for the year. With an average retail price of $500, the product could increase Apple’s revenue by $3 billion in 2010.

Apple has consistently impressed investors with a series of products dating to the iPod, which was introduced in 2001 and has sold at least 300 million units worldwide. In addition to it hardware products, it has set up software and content stores, the most notable of which are iTunes and the App store. These constellations of downloads tether customers to Apple’s products. All of this success has taken Apple shares from under $8 in 2001 to a high this year of $272.46.

Jobs is expected to produce one or two industry-changing products each year. Apple has nearly saturated the smartphone, personal computer, tablet, and multimedia device sectors. The does not leave much room in the consumer electronics business beyond cameras and video game consoles. There is no evidence that Apple wants to be in these markets. The firm has just entered the mobile ad business, but it is a small industry for now.

In addition to the new iPhone, Apple will probably introduce an iPad version 2.0 later this year. Upgrades to the Mac and iPod are routine. The iTunes and App stores have very few content worlds left to conquer. Rumors surface now and then that Apple will challenge Google Inc. (NASDAQ: GOOG) in the search engine business. That seems improbable give the amount of R&D necessary to create a viable service.

Apple has to have a break. It has reached the point of impossibility for building the next-best thing for consumers of electronic devices. The pause is inevitable but it is unlikely to be permanent.

Douglas A. McIntyre