Gundlach is wrong: Apple is Still Innovating

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the most popular bear arguments against Apple (NASDAQ: AAPL) is that the company is not innovating anymore. Jeff Gundlach, CEO of Doubleline Capital, has been very vocal about this idea, and the concept has gained traction among analysts and commentators lately.

The notion of Apple losing its innovative drive can be quite frightening for investors, and it provides great headline material for financial media outlets, but that doesn´t make it necessarily true. In fact, I believe Gundlach and others in his camp are making a serious mistake here.

The Thesis

The main point for the idea of Apple not being innovative enough seems to be based on the fact that Steve Jobs is not around anymore, and recent product launches have included only incremental improvements as opposed to new ground breaking technological disruptions.

According to Gundlach, the iPad Mini is not an innovative enough product, as it’s only a size modification. He has even wondered if Apple will soon come out with new "tooty-fruity" iPad Minis in different colors and try to pass it off as innovation.

Please don't tell Mr Gundlach since we are taking opposite sides here, but I think he may be right about the new colors: Apple will probably launch new iPhones with different colors and sizes somewhere around midyear, which likely means the company is shortening its product cycle and taking an even more gradual approach to innovation in its existing products.

So What?

Since new Apple products haven't included big disruptive innovations in comparison with previous models, the risk is that the competition may be catching up with Apple. Samsung and other manufacturers have gained a lot of market share with their Android smartphones, and the Nexus 7 tablet from Google (NASDAQ: GOOG) has reportedly been selling very well.

Amazon (NASDAQ: AMZN) is aggressively pricing its Kindle products at ultra-low prices, and even Microsoft (NASDAQ: MSFT) is trying to regain some of the ground it lost in mobile with its new Surface tablets and its alliance with Nokia (NYSE: NOK) in the smartphone arena.

Competition is certainly increasing; both in terms of the players and the quality of their products. If Apple is not innovative enough, the company and its investors could be getting in serious trouble over the next years.

What's Missing Here

To begin with, we need to put things in perspective. Apple has launched three disruptive products that changed many different industries forever: the iPod in 2001, the iPhone in 2007 and the iPad in 2010.  The company has rewritten the handbook of corporate innovation over the last years, but that still doesn't mean that it launched a new revolutionary product per year.

Apple has done pretty well by including incremental improvements to its products until a new revolutionary product reaches the market. Those who are expecting big breakthrough innovations should not put so much attention on the iPhone or the iPad, looking for new products like an Apple TV or something in the area of wearable computers sounds like a much more likely scenario.  Besides, we need to be realistic about our expectations; no company can deliver new and revolutionary products on a yearly basis, not even Apple.

Competitors may have reduced the gap when it comes to technological aspects of the product, but that's usually the rule, not the exception and nothing to worry about. When an innovator launches a successful product, it’s usually much better than the competition in its first stages, but technological advantages are usually eroded, at least partially, with the passage of time.  

The quality gap may be smaller than it was a year or two ago, but that still doesn't change the fact that Apple is the undisputed leader in the premium segments of the different markets in which it operates.  Apple products are not only supported by technological strengths, but also by one of the most valuable brands in the world and a loyal customer base, and these are assets which can't be replicated by competitors.

What Apple has achieved with its new products should not be underestimated; making products which are smaller, faster and more beautiful is no easy task at all. If it were, the competition would do it too. Design, overall aesthetics and user experience are important for customers, especially for Apple customers, and the company is way ahead of the competition in that area.

Bottom Line

Apple doesn't need to reinvent the wheel year after year to be considered an innovative company. Small, incremental, innovations can be as effective when it comes to beating the competition. Even if other players have reduced the technological gap, Apple is still the high quality leader, a concept which implies not only technological aspects, but also traits like brand differentiation, design and aesthetics.

I'm not discarding new ground breaking innovations from Apple in the middle term. On the contrary, that's a very likely scenario, especially in new products like Apple TV or wearable computers.  But we can't expect those kinds of breakthroughs on a yearly basis, and that doesn't mean Apple is not innovating anymore.


acardenal owns shares of Apple, Google and Amazon.com. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Amazon.com, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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