Hey, everyone, it’s Mark. The iPhone had a strong quarter, but Apple is going through a behind-the-scenes slowdown. Also: The company nabs a top Lamborghini executive, and Meta looks to buy an eye-tracking startup.

Last week in Power On: Apple shows rare vulnerability as we head into an economic downturn.

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Apple’s Tim Cook. Photographer: David Paul Morris/Bloomberg

On the surface, Apple Inc. gave a reassuring and surprisingly strong quarterly report last week, especially considering all its supply chain challenges, the economic downturn and lingering effects from the pandemic. 

Apple reported third-quarter revenue of $83 billion, in line with estimates from Wall Street. The iPhone did particularly well, generating $40.7 billion and topping many projections. The company also said its earlier prediction that supply chain snags would erase as much as $8 billion from revenue was overblown.

But that’s about where the good news stopped. Three of Apple’s major product categories—the Mac, iPad and its wearables division—suffered sales declines from a year ago. While the iPad did beat analyst estimates, the Mac and wearables categories came in sharply below expectations. 

As I laid out last week, the Mac slowdown was no shock. In fact, I’m surprised analysts didn’t better anticipate the challenges when preparing their estimates.

The MacBook Air and MacBook Pro are Apple’s two most popular Macs. Sales of both of those machines probably came to a halt for nearly four weeks during the quarter. That’s because the M2 MacBook Air and MacBook Pro were announced on June 6—but didn’t actually go on sale until weeks later. The MacBook Pro arrived June 24, and the MacBook Air didn’t hit stores until July 15.

The release delay for those Macs probably meant a significant pause in sales for the company’s top-selling laptop lines. The result: Third-quarter Mac sales came in about $1 billion lower than in the year-earlier period. It’s also worth noting that more people were splurging on work-from-home equipment in 2021 than they are now.

I imagine Mac sales will rebound next quarter, and I remain optimistic about the category. The problems in the most recent period were probably more of a blip than the start of a downward trend.

The new MacBook Air. Photographer: David Paul Morris/Bloomberg

You should see a major bump from the new MacBook Pro and MacBook Air tucked into Q4 sales. And Apple will get more momentum from the launch of new Mac minis and high-end MacBook Pros later this year. By next year you’ll see a new Mac Pro, iMac and 15-inch MacBook Air. 

I am a little bit more concerned about the iPad and Apple’s several-quarter-long struggle to produce enough supply of its tablets. Anecdotally, it appears many consumers have failed to find the iPad they’re looking for over the past year at retail stores. I also think Apple has made the iPad Air and iPad Pro a bit too similar, which may flummox some shoppers. And I’ve already discussed the iPad Pro’s multitasking weaknesses. 

In its quarterly report, Apple blamed the product’s decline on lower sales of the iPad Pro. Over a longer time frame—the past nine months—the company attributed the sluggishness to lower sales of the 10-inch iPad and iPad Air. But Apple doesn’t seem to have a problem with demand. Supply shortages were the main culprit.

A bigger concern is what happened with Apple’s wearables and accessories business, which includes the Apple Watch, AirPods, Beats headphones, HomePod and Apple TV. While many of Apple’s other categories were hurt by the supply chain, war in Ukraine and the chip shortage, Chief Executive Officer Tim Cook specifically cited economic factors as a problem for wearables. 

He described a “cocktail of headwinds” hurting the division, including a “macroeconomic environment hit.” In other words, people spent less money on those products because they were worried about the economy. That wasn’t the case for the iPhone or other devices, Cook said. 

Cook did note that the AirTag launched in the year-earlier quarter, which might have made the latest sales look less impressive by comparison. An upgraded Apple TV also came out in 2021’s third quarter. But I doubt those accessories did much to explain the division’s $750 million year-over-year decline. 

The Apple Park campus. Photographer: Sam Hall/Bloomberg

I recently reported about Apple’s plan to slow hiring and spending in some categories, and there were some further hints on that front as well.

In an interview, Cook told Bloomberg Television that while the company will continue hiring and investing during the downturn, it will be “deliberate” moving forward. That’s probably just a PR-trained way of saying, “Yes, we’ll be slowing spending because we’re unsure how the next several months will play out due to the economy.”

Some people took Cook’s remarks to mean a slowdown isn’t underway. But it’s hard to be more “deliberate” without making changes. 

Within Apple, I’m told, the company is tapping the brakes aggressively. Headcount growth will be minimal—zero in some cases—and operating expenses, which Apple splits into “research and development” and “general,” will slow to a point of little to no growth, perhaps aside from inflation.

That’s a significant change from recent years. Apple has been adding roughly 5,000 to 12,000 employees annually every year since at least 2009. Its operating expenses have also grown rapidly, jumping by at least $4 billion annually for the last five years. 

While Apple will still invest in key areas like augmented reality and artificial intelligence—and probably avoid the kinds of layoffs you’re seeing at some tech peers—the reality is still clear: Apple is in a slowdown, and better-than-anticipated iPhone sales don’t change that.

The Lamborghini Huracan. Photographer: wolfango.it

Apple hires Lamborghini’s head of chassis development for electric car team. Apple has added a pretty exciting new member to its electric car group: Luigi Taraborrelli, the former head of chassis and vehicle-dynamics engineering at Lamborghini. At the high-end Italian carmaker, Taraborrelli also oversaw brakes, rims, suspensions and many other key elements of a car’s design.

After I reported news of the hire, some readers pointed out that Lamborghini isn’t exactly known for its quality. I understand that, but that’s not the point. This move isn’t exciting because of the brand name Lamborghini. It’s exciting because Apple has brought on another respected veteran from the automotive industry, indicating it’s serious about eventually shipping a car. 

The Apple car group is now loaded with former talent from Tesla, Rivian, Waymo, Aston Martin, Porsche and other carmakers—a sign it’s moving ahead with plans to get a real vehicle on the road later this decade. To me, the only major question that remains is if Apple will hold off until it can realize its fully autonomous dreams or follow the lead of Tesla, Lucid and others and release a high-end EV with (for now) limited self-driving features. 

Meta’s Quest 2. Photographer: Bing Guan/Bloomberg

Meta considers buying an eye-tracking startup, but will the FTC’s latest move get in the way? This past week I broke the news that Meta Platforms Inc. and other suitors were circling the eye-tracking startup AdHawk Microsystems. AdHawk makes advanced, low-power eye-tracking technology for augmented and virtual reality headsets that doesn’t require the usual cameras.

You can understand why this technology might be intriguing to companies pushing into the space. Meta, Apple, Snap Inc., Samsung Electronics Co., Amazon.com Inc. and Microsoft may all need ways to make AR glasses work with less power. I’ve been told Meta has been seriously thinking about making an offer in the next few weeks. 

But here’s the problem. Just a few days after our report, the Federal Trade Commission sued Meta to block their acquisition of Within, the maker of VR fitness app Supernatural.

It’s debatable whether Meta taking over Within would make the VR industry anticompetitive. After all, fitness isn’t a core VR feature yet, and the market is still fairly niche. 

But the move could put a chill on future deals. And that could affect the way the VR and AR industry takes shape. Major products like the iPhone have relied on similar sorts of acquisitions—Beats Music, Siri, C3 Technologies, Dryft and Prss—to bolster software and features. It may be hard to turn VR and AR devices into mainstream products without being able to scoop up key startups at reasonable prices.

With the FTC looming, you have to wonder if Meta will proceed with an AdHawk bid or simply assume that the commission will try to torpedo that deal too. 

Samsung’s Galaxy Z Fold 3. Photographer: SeongJoon Cho/Bloomberg

Aug. 10: Samsung poised to announce its next slate of devices. The company is set for its biggest launch event of the year—scheduled about a month before Apple’s iPhone 14 debut. Like Apple’s recent events, the Samsung launch will be held virtually. What should you expect? Updated versions of both the flagship Galaxy Z Fold and Galaxy Z Flip, new pro Galaxy Buds and fresh versions of Samsung’s smartwatches. Stay tuned for more coverage during the event. 

Q: What are your thoughts on the Meta Quest 2 price increase and what that means for the Meta Quest 3?
Q: Do you think Apple will raise prices this year in light of inflation?
Q: What’s the latest on the iPhone 14?

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