Apple's bad week: A sign of decline or just a blip?

The company's dominance in smartphones and tablets is under siege, but the worm can quickly turn

"Poor" Apple -- the bad news keeps coming. This week, research reports confirmed that Android dominates as a smartphone and tablet platform, Samsung devices bested iPhones in a respected consumer satisfaction survey, Apple Store employees lodged complaints about unfair wage practices, and working conditions at Apple's suppliers in China continued to draw fire. Just today, the U.S. Justice Dept. urged a judge to force Apple to let Amazon.com and Barnes & Noble link to their online bookstores from their e-reader apps, undercutting Apple's lock on app store sales from iOS apps. Some weeks, you just want a do-over. Then again, when you're the world's most valuable tech company, news like this probably doesn't sting quite so much.

With new Apple products not expected until the fall, the company is in a fallow period that leaves it vulnerable against competitors with more frequent product introductions. But recent market trends also raise questions about Apple's perennial unwillingness to compromise profit margins to increase sales. Maybe it's time for the company that cherishes its rogue rep to, ahem, "Think Different."

News that Samsung is eating Apple's lunch in China could be the tipping point. CEO Tim Cook has said that "over the arc of time," China is a huge opportunity. But Apple recently reported that revenue in China, Hong Kong, and Taiwan slumped 43 percent from the previous quarter and was 14 percent below the year-ago quarter. By contrast, Samsung now has 19 percent of the smartphone market in China -- 10 points ahead of Apple, which has fallen to fifth in market share. In a move to reverse its fortunes, CEO Tim Cook met this week with the head of China Mobile, which is the world's largest mobile carrier based on numbers of subscribers. It also doesn't currently offer iPhones and iPads, apparently due to a dispute over Apple's asking price.

Apple is losing to Samsung on the legal front as well, as the U.S. Patent and Trademark Office this week rejected claims of an Apple patent that figured prominently in lawsuits against the South Korean company. The 21 claims of the "pinch-to-zoom" patent were rejected in a "final office action," as the USPTO said they were anticipated by previous patents or unpatentable. A jury last August initially awarded Apple $1.05 billion in that suit (which covers more than just the pinch-to-zoom patent), although a review of the damages has been ordered.

While Apple has been pursuing a scorched-earth policy of defending its patents, it may have dropped the innovation ball. The latest American Customer Satisfaction Index ranked the Samsung Galaxy S III and Galaxy Note 2 higher than the last three Apple iPhone models. The latest iPhones aren't far behind, but it's "another indication of Apple's fading dominance in smartphone customer satisfaction," as ACSI puts it. iPhone users "don't see that much difference in satisfaction" between the iPhone 4, 4S, or 5, while Samsung customers showed a marked increase in satisfaction between the Galaxy S 2, released in 2011, and the Galaxy S III, released in 2012. "If the Galaxy S 4 performs well -- or even better -- in the eyes of customers, Samsung could threaten Apple's dominance in overall customer satisfaction," said David VanAmburg, director of ACSI.

In another sign of its fading dominance, even though sales were higher than expected, Apple's share of the smartphone market dropped in the second quarter to its lowest level in three years, slipping from 16.6 percent to 13.6 percent compared to the same quarter last year. Meanwhile Samsung's share rose to more than 33 percent, from 31 percent in the same period. That said, buyers may have postponed iPhone purchases, anticipating the launch of a next-generation "iPhone 5S" device in the fall. Apple's sales could also accelerate markedly if it launches a lower-cost iPhone, as is widely rumored.

Analysts are urging Apple to discount the price of its iPad as well. In the tablet market, as in smartphones, Apple lost share to Android in the most recent quarter. "To keep selling large numbers of iPads, keep the competition at bay, and protect its ecosystem, Apple has to recognize that the gravy train days of outrageous margins are over," according to Ezra Gottheil, an analyst with Technology Business Research. "Once it figures that out -- that there is a 'new normal' -- it has to compete, if not head to head on price, at least in the same neighborhood."

Strategy Analytics pegged Apple's current share of the global tablet market at 28.3 percent -- a dramatic drop from 47.2 percent the year before. However, as with the iPhone, Apple could get back on track later this year if it launches new iPads as expected. And Apple can take perverse comfort in the knowledge that Microsoft's tablet woes are of an entirely different magnitude. As InfoWorld's Woody Leonhard said, "The few numbers disclosed for Microsoft's Surface initiative point to an effort that's gone so far awry it's hard to believe the 'devices' part of its 'devices and services' strategy will ever get its head above water.... Clearly, Surface has been a multi-billion-dollar failure to date."

Make no mistake: Apple is a hugely successful company. Even with its smaller market shares, it makes about three-quarters of the profits for the entire mobile industry, as well as more than half the profits of the PC industry -- Apple is an unrivaled money-making machine. Growth at Apple may be slowing, but successful launches of new iPhones and iPads could reverse the company's recent losses against its rivals.

But as Peter King, an analyst with Strategy Analytics observes, "Minus cost cuts and discounts -- far from a given by either Apple or Microsoft -- there's no chance either company will shove Android aside as the share leader," and Google's operating system will remain dominant for the foreseeable future.

Still, the tide could turn against archrival Samsung, often posited by pundits as the new Apple, if reports accusing it of rigging benchmarks prove true. According to tests by the website Anandtech, "Samsung noodled around with the way it measured the performance of the Galaxy S 4 hardware to make it seem faster than it actually is." Samsung so far is sticking by its original report. Juicing performance numbers is not a new practice, but the new Galaxy S 4 smartphone has not lived up to Samsung's hopes. Korea's ETNews reports that "while Samsung is seeing high sales, they aren't quite as high as expected," according to a Samsung employee who wanted to remain anonymous.

How quickly the worm can turn.

This story, "Apple's bad week: A sign of decline or just a blip?," was originally published at InfoWorld.com. Get the first word on what the important tech news really means with the InfoWorld Tech Watch blog. For the latest developments in business technology news, follow InfoWorld.com on Twitter.

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