With no 'amazing' devices due at WWDC, Apple's Tim Cook feels the heat

Apple keeps saying it's got a strong product pipeline for 2014. Skeptics worry the innovators behind the iPhone, iPad have lost their mojo.

What does Apple CEO Tim Cook have up his sleeve?
What does Tim Cook have up his sleeve? Josh Lowensohn/CNET

Apple CEO Tim Cook hasn't been shy about teasing that "amazing" new products will come to market in 2014. But with the year nearly half gone -- and speculation that new gadgets won't be part of the lineup at the company's Worldwide Developer Conference next week -- the patience of even the most diehard Apple fanboys is wearing thin.

Well, not all Apple fanboys. "I've got a good feeling about this one," John Gruber, author of the popular Apple-related blog Daring Fireball, told his followers this week after Apple announced it would provide a live broadcast of the WWDC opening keynote on Monday.

Cook, who celebrates his third anniversary as CEO in August, promised several times over the past year that Apple would enter "exciting new product categories" in 2014. Earlier this week, Eddy Cue, head of iTunes and the man behind Apple's $3 billion acquisition of headphone and streaming music service provider Beats, upped the pressure by boasting that the consumer-electronics giant is working on its "best product pipeline in 25 years."

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That Apple won't be showing off any new hardware at WWDC isn't shocking. Over the past few years, the conference, which draws more than 5,000 developers to San Francisco, has served as more of a showcase for its software. Cook is expected to talk up new versions of its iOS mobile operating system and OS X computer software features, according to people familiar with the situation. He may even shed light on new projects like home automation or Apple's CarPlay automotive software.

Noticeably missing, however, will be any demonstration of a new iPhone or iPad, or an iWatch smartwatch or a drastically revamped Apple TV set-top box, the people say. So with another high-profile event passing by without a new device, the pressure mounts for Apple and Cook to prove that they can still introduce a revolutionary product.

"The biggest worry is that Apple is losing its mojo," said Apple shareholder Michael Obuchowski, the chief investment officer at Merlin Asset Management and a portfolio manager at Concert Wealth Management.

Apple may have transformed the smartphone and tablet businesses, but it's been more than four years since it reinvented the market with the original iPad, which was touted by former CEO Steve Jobs as a "magical" device. Under Cook, who took charge three months before Jobs' death in 2011, Apple's earnings and sales growth have slowed in part as it has largely leaned on incremental improvements to its core franchises -- the iPhone and iPad together account for three-quarters of sales.

Meanwhile, Google's Android mobile operating system keeps gaining market share as smartphone rivals such as Samsung introduce new Android-powered devices every few months. Apple is "still big, profitable, and growing," says Obuchowski. But "other companies are coming out with interesting ideas and taking focus away from Apple."

Worries that Apple has lost its edge aren't new and have plagued the Cupertino, Calif.-based company since Cook, who joined Apple in 1998, succeeded Jobs as CEO. Cook, handpicked by Jobs for the top job, has always been the operations guy, finding the most-efficient and cost-effective way to get Apple's products to market on time. He's never claimed to be a product visionary like Jobs or even Apple's head designer Jony Ive, and he's insisted he would run the company his own way.

But then, there are those promises he made.

"There will be new [product] categories," Cook told The Wall Street Journal in an interview published in February. "We're not ready to talk about it, but we're working on some really great stuff." He reiterated those comments during Apple's latest earnings call in April.

Some analysts believe Apple's next big thing will address the living room (a smart TV), body (smart devices like an iWatch), car (entertainment systems with Siri voice navigation), or change the way consumers pay for things (a mobile payment system that capitalizes on the 800 million iTunes account holders who already share their credit card data with the company).

"As time moves forward, there will be growing anticipation and perhaps trepidation about what new innovative products the company can deliver," said Walter Piecyk, an analyst for financial research firm BTIG.

Apple declined to comment.

Stuck in a rut?

The worry about the lack of new products in new categories has to do with one fact: Apple can't rely on its existing products to fuel its growth anymore.

Yes, the iPhone continues to be a blockbuster, with smartphone sales accounting for more than half of Apple's revenue in the quarter ended in March. But there are only so many potential new smartphone customers, and the marquee feature for the rumored new iPhone 6 is shaping up to be a larger display -- following a trend Samsung has pushed for years.

The iPad, its other major product line at about 20 percent of sales, has struggled, with demand falling short of analysts' expectations last quarter.

The bottom line: Apple's earnings growth has stalled after years of delivering 50 percent-plus growth.

Its earnings have fallen short of analysts' estimates in only three quarters since at least 2006, according to Bloomberg, and all three of those happened during Cook's tenure. To be fair, Apple, under Jobs, was infamous for low-balling quarterly estimates so it could easily beat them. Cook has done a better job of setting expectations.

Even so, Apple last year posted its first annual profit decline in a more than decade, causing investors to worry more drops could be ahead.

Half-baked efforts

In lieu of new devices, Apple has been bulking up its software and services. But its release of a homegrown mapping app for the iPhone was a debacle -- and is now listed as one of Cook's more notable failings. The app, designed to replace Google Maps, was half-baked when it was released in September 2012, offering misleading directions and incorrect geographical data. Cook issued an apology shortly after its introduction, saying he was "extremely sorry" for releasing a product that fell short of Apple's commitment to users. He also fired Scott Forstall, Apple's software chief, for reportedly failing to take any responsibility for the fiasco.

Unfortunately for Cook, Maps wasn't the only offering to fall flat. When Apple introduced Siri in the iPhone 4S in October 2011, it promised a virtual assistant that would learn and evolve over time. But as the novelty of a voice navigator wore off, Siri proved to be clunky, often failing to correctly understand queries. Apple continues to update and improve Siri.

Then there's the iPhone 5C, Apple's more colorful, lower-priced smartphone released in September 2013. Weak sales of the device, priced starting at $99 with a two-year contract, led to speculation that Apple would dump the phone. Cook has dodged questions about the 5C but admitted during Apple's earnings conference call in January that most people are opting for the higher-end iPhone 5S, also introduced last September, over its plastic-encased sibling.

"People are really intrigued with Touch ID," Cook said at the time. "I think that, associated with the other things that are unique to the 5S, got the 5S to have a significant amount more attention and a higher mix of sales."

It's unlikely any of the products would have fared better if Jobs was still at the helm, as much of their development took place when he was in charge. But because Apple has nailed it so many times with new products -- including various generations of the iPod music player and the iPad Mini -- it's notable and unsettling when such a pioneering tech company gets it wrong.

A lot to like

While Cook has made his fair share of missteps and has his critics, he's also done a lot of good at Apple.

Hired as senior vice president of worldwide operations, Cook worked his way up to chief operations officer before Jobs named him his successor. He's been described as a "spreadsheet lover," a workaholic who's addicted to energy bars, and as a sometimes-terrifying manager with little patience for slow-moving executives.

He's also been praised for being more even-tempered than Jobs and a better team player.

Investors have been pleased with Cook's tenure, calling him more forthcoming than Jobs and more responsive to investors concerns. In 2012, he used some of Apple's cash hoard (which was at nearly $100 billion at the time) to pay Apple's first dividend since 1995, and he has bought back millions of dollars in stock. In April, Apple said it was doing a seven-for-one stock split, effective June 6, and planned to increase share repurchases.

"It's much more engaged than it was under Steve Jobs," said Jonas Kron, director of shareholder advocacy at Boston-based Trillium Asset Management. Trillium, which holds a stake in Apple, manages about $1.5 billion.

Analysts believe Cook has closely followed a plan set by Jobs before his death. Many of the new products released under Cook's watch -- including the iPad Mini -- were likely approved or even started by Jobs.

"He knows Steve's heart, and he knows what Steve's goals were for Apple," said Tim Bajarin, a Creative Strategies analyst who has covered Apple for more than three decades."While he may not move as fast as some Apple aficionados like, he's smart enough to know not to bring something out until it's completely ready."

So far, most of Cook's biggest, most distinct accomplishments as CEO come from strategic moves and corporate responsibility efforts rather than from product releases. Last year, he inked a long-awaited deal to bring the iPhone to China Mobile, the world's biggest wireless carrier. That move is expected to boost smartphone sales, particularly as mature markets become saturated and growth in those markets, including the US, slows.

Cook also has made 27 acquisitions over the past 18 months, including its takeover of Beats -- the biggest deal Apple's ever made. While some company watchers were left scratching their heads, Apple co-founder Steve Wozniak characterized the deal as the company getting back to its music and "cool roots."

Meanwhile, shortly after becoming CEO, Cook instituted a charitable giving match, something Jobs had opposed. And he started offering disclosures about Apple's suppliers and partners, speaking candidly about environmental concerns and labor issues at partners' factories in China.

apple-wwdc-2014-setup-7210.jpg
Apple is expected to announce the latest version of OS X -- possibly called Yosemite, if signs at the WWDC venue are any clue. James Martin/CNET

Cook also made his mark on Apple by shuffling the leadership. In addition to Forstall's departure, he ousted retail chief John Browett -- an executive he had hired -- about six months into Browett's tenure at Apple.

He promoted Eddy Cue, Apple's head of iTunes and primary content deal broker, and added software design to hardware designer Jony Ive's list of responsibilities, among other top-level changes in October 2012.

His latest hire, former Burberry CEO Angela Ahrendts, joined earlier this month to overhaul Apple's online and physical stores, and has already garnered buzz as Cook's potential heir.

Still, investors remain cautious. Apple's shares hit an all-time high of $705.07 after the iPhone 5 was announced in September 2012. They've dropped 10 percent since then, closing at $633 on Friday.

Beyond iPhone

The next few months will be key. Cook will largely be judged on what revolutionary, not evolutionary, products are released under his watch and how much they boost Apple's profitability.

Apple is rumored to be working on an iPhone 6 with a larger screen, an "iPad Pro" that converts between a tablet and a laptop, an "iWatch" smartwatch that may be modeled on the iPod, and a new over-the-top Apple TV service.

Finding something with mass-market appeal will be no easy feat for Apple. It's a different beast today than it was even just three years ago, and even a new billion-dollar business barely moves the needle on a company that generated nearly $46 billion last quarter.

"Everyone says if Steve Jobs was still there, Apple would have new product categories," said Channing Smith, an Apple investor who oversees about $1.4 billion at Capital Advisors in Tulsa, Okla. "But I'm not convinced that would be the case at all."

Apple has an opportunity to release new services that better connect its devices and make things easier for users. It could, for instance, improve iCloud and expand its iBeacon program that helps iPhones be more context aware. It also could open up some of its services to other platforms like Android and Microsoft's Windows Phone, a move that would expand its reach. Allowing iTunes to work with Windows helped Apple's music store and iPod take off.

The company already has vowed to keep the Beats app running on rival devices.

But in the end, it goes back to the products and Apple's ability to recapture that "wow factor."

"I think a lot of Apple fans are just going to have to wait," Smith said.

Corrects the amount of cash Apple had at the time it declared a dividend to billion, not million.

 

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