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Why it's almost impossible for Apple to match its past success

Apple CEO Tim Cook shows off some baggy pants
Apple CEO Tim Cook shows off some baggy pants
Scott Olson

Apple announced a new smartwatch on Tuesday afternoon, which is naturally big news both to the world of gadget fans and the business press. But the sad reality for Apple's public relations department is that no matter how well the company does on the product front, it is essentially doomed to disappoint the somewhat-crazed world of the stock market.

That's not because of any shortcomings in the  Apple Watch — it looks pretty cool — but because the iPhone is simply an insanely great business, the likes of which no company may ever see again. It manages to generate over half the revenue of the most valuable company in the world, completely dwarfing the Mac, the iPad, or the iPod. This is a special kind of business success. It's not just that iPhones are good phones (though they are), but that they sit at the intersection of a complicated web of factors that makes their success essentially impossible to replicate in any other product.

Everybody owns a mobile phone, but unlike in other nearly ubiquitous product categories (shoes, say) there are strong network effects that allow just two platforms to dominate the market.

If you buy an iPhone or an Android, you'll find a rich app ecosystem awaiting you. And as an app developer, if you build for iOS or Android, you'll find a large user base awaiting you. It's not inconceivable that some third platform would gain traction, but it would need to be drastically better than existing ones to displace the big two. Further enhancing iPhone's value, the competing platform is very fragmented from a hardware viewpoint. At any given time, Apple is only selling a handful of iPhones, allowing it to put in massive orders for components at very low unit cost. By contrast, a half dozen different firms are making Android phones and furiously battling against each other in a way that raises their costs. This much more efficient purchasing chain allows Apple to maintain price parity with other high-end smartphones without sacrificing much in the way of profit margins.

Last, but by no means least, a large share of the world customer base is on a mobile phone contract that encourages frequent upgrades.

The major mobile phone carriers in the US (Verizon and AT&T), and to an extent in some other markets, will give you a massive discount on a new phone every two years. If you peer deep into the math, these smartphone "subsidies" paired with exorbitant monthly fees turn out to be a form of very high interest loan that's a bad deal for consumers. But the subsidy framing works, and it gets people upgrading smartphones on a much more rapid pace than most other appliances.

This all adds up to a market opportunity that simply doesn't exist anywhere. The iPad, for example, is a very excellent tablet with most of the same virtues as the iPhone. But plenty of smartphone owners feel they can get along fine without a tablet, and plenty of tablet owners feel they can get along fine without constant upgrades. As a result, just a few short years after it's initial introduction, iPad sales are already slowing down and may slip further still as iPhones grow larger screens. This isn't a failing on the part of Apple's engineers, and it doesn't prove the company has lost the ability to innovate. If there had never been an iPhone, the iPad would be considered an extremely successful product.

But financial markets are relentlessly oriented toward growth. And to put up stellar growth numbers at this point, Apple can't just produce successful products. It's needs iPhone-level successes. And a new Apple Watch almost certainly can't deliver success on that level, simply because nothing can.

One reason Apple's iPhone announcements dominate the news