Countdown to Apple's Meltdown

(MoneyWatch) COMMENTARY As the hubbub builds around Apple's (AAPL) launch tomorrow of the iPad 3, the company's string of product hits has come to make it seem invincible -- and for good reason. Apple is arguably the most effective corporation in history, transfixing investors with what Reuters refers to as a "casino stock."

Despite this remarkable performance, there is more than a hint that the good times won't last forever. That's because the "Cupertino miracle" is attributable in part to a number of conditions that are bigger than Apple. More broadly, as history shows, today's sure bet is tomorrow's losing ticket. Housing prices are guaranteed to rise "forever," until they don't. Going back further, the "big three" U.S. automakers were once considered invulnerable, until competition from abroad and their own mismanagement made it clear they weren't. The world changes, and hallowed "truths" change with it.

This year's black

And for Apple, success is largely a function of that most mercurial, and hard to recreate, quality -- fashion. Indeed, the company has as much of a fashion-oriented marketing and sales approach as any apparel business, since design is the language of style. By definition, though, styles shift, often catching companies by surprise because they assumed their previous success meant they knew how to predict and control the market.

Ironically, the more popular something becomes, the more vulnerable it becomes to being unpopular. It's the reason why luxury brands try to shut down knock-off manufacturers. Not that the people buying a cheap, shoddy faux Gucci or Coach bag would actually pay the money for the real thing, so they aren't losing direct sales in that way.

However, as people in this particular industry have explained to me in the past, wealthy consumers buy luxury brands not only for the quality, but to reinforce their sense of exclusivity. Make the trendy item ubiquitous, and the buyers who helped created the elite status in the first place look for something else that isn't so ... common.

This could easily happen to Apple. It has already started to, in a way, with smartphones, where Android phones have taken the market share lead. All those who say it couldn't happen in tablets aren't remembering that they probably said the same thing about Android smartphones. They were just poseurs that happened to become wildly successful. (As for the argument that it's an unfair comparison because Google leverages many manufacturers, so what? Microsoft (MSFT) did that successfully for years -- and Samsung alone sell roughly as many smartphones as Apple does.)

Don't let those sales evade your eyes, just subsidize

Another potential problem for Apple that the Wall Street Journal points out is the iPhone subsidy crutch. Apple -- as is true with other companies in the smartphone space -- relies heavily on carrier subsidies. They make phones relatively cheap for consumers, though not for carriers.

The practice has proved to be a big advantage for Apple, which posted a 73 percent jump in revenue in its latest quarter, at the expense of carriers such as Sprint Nextel Corp. (S), which started carrying the iPhone last fall but doesn't expect to make a profit on the device until 2015.

True enough. Complicating that possibility is that Apple has been able to call a lot of the shots with carriers. But telecom companies aren't known for being meek. They like the reliability of service contracts, but probably aren't happy subsidizing the enormous percentage of industry profits that Apple appears to take. Some shifts in how the carriers do business could pull the ground out from under the company.

Time ain't on their side

Most importantly, things change over time. As Ecclesiastes so eloquently puts it, to each thing there is a season. The same is true for large companies. Not that sticking around for a long time is impossible. Of the dozen original members of the Dow Jones Industrial Average, 11 are still in business, or their direct descendants are.

Can Apple stay on top forever? Absolutely not. It might for months, years, or even a decade or two. It originally was a powerhouse in PCs and then did terribly, only to crawl back from the grave to dominance in a new area of products. But eventually it will decline again. It's just common sense and a whole lot of historic precedence. And when so many competitors are gunning for you, eventually could sooner rather than later.

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