The five key decisions Apple must make

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Having a new CEO take the reins from an iconic co-founder has not seemed to cause much turbulence for Apple. In fact, the company is stronger than at any point in its history. In its most recent fiscal quarter, the company sold more iPads than in any three-month period in its history; it also tallied June-quarter records for Mac and iPad sales and saw quarterly revenue rise 22 percent from the previous year to $35 billion. More to the point, Apple is now the most valuable company in the world in terms of market capitalization.

But Apple didn’t get to this lofty position by doing the same things over and over. Apple executives will be the first to tell you that maintaining the status quo is no way to stay on top. The company will continue to face challenges and questions in the coming year, and its responses to those will determine whether or not Apple will continue to thrive.

How to stay on top of the tablet market?

Apple invented the modern tablet market, and—for now, at least—still dominates it. But while would-be iPad competitors such as the Xoom and the Playbook have come and gone like seasons, more recent upstarts such as the Kindle Fire HD and Google Nexus 7 are chipping away at Apple’s once seemingly insurmountable lead.

Kindle Fire HD

The perennial rumor, of course, is that Apple will come out with a smaller version of the iPad to compete more directly with the increasingly popular 7-inch tablets. Steve Jobs once derided 7-inch tablets, saying that size “isn’t sufficient to create great tablet apps,” that tablets smaller than the iPad’s 10 inches make “clearly the wrong trade-off,” and that such tablets are “tweeners—too big to compete with a smartphone, and too small to compete with an iPad.”

Apple wouldn’t launch a smaller tablet unless it felt that Jobs’s concerns were no longer worth worrying about. (It’s not as if Apple has never changed course after a Steve Jobs pronouncement. Just ask anyone who ever owned a video iPod.) The rumor mill suggests that a smaller iPad would actually have a screen closer to eight inches than seven, which would help.

Deciding whether or not to launch a smaller iPad isn’t the only choice Apple faces. How should it price a smaller tablet, especially when you can pick up a Kindle Fire for $159 or a Nexus 7 for $199? Remember that the entry-level 16GB iPod touch costs $199 already. Apple has never felt obligated to compete directly on price—until the release of the original iPad, which shocked many with its $500 entry price. To price a smaller iPad competitively, Apple may need to limit its features, storage space, or processor speed.

What to do about digital entertainment?

Apple’s position in the music industry is assured at this point: The company has sold billions of songs since opening the iTunes Store in 2003, and its iPods have dominated the music-player market for more than a decade now. But the next battleground is the living room.

Apple TV

The company has been trying to come up with a compelling product for that part of the house for years, without much success. In fall 2006, Jobs previewed the first version of the Apple TV—then code-named iTV—which went on to launch in spring 2007. Since then, the Apple TV has been updated several times, most notably in fall 2010, when it became a much smaller device that focused on streaming media and connection with the rest of Apple’s ecosystem.

Both Jobs and his successor Tim Cook have said that the Apple TV is still a “hobby”—in other words, not as crucial to the company’s success as iOS devices or the Mac. But that hobby is still surprisingly serious: In July, Cook said that the device has racked up 4 million sales this fiscal year, and that the company is committed to continuing “to pull the string to see where it takes us.”

But the Apple TV as we know it may simply be a prelude. Rumors of a full-fledged Apple television set, complete with streaming content, have been flying for years now. But negotiating with content providers and existing distributors has proven difficult; having seen what happened to their counterparts in the music business, those companies have been decidedly leery.

At the moment, the saving grace for Apple in the living room is that none of its competitors have managed to gain much of a foothold there, either. But the company can’t afford to not be a player in what is sure to be a contentious—and lucrative—market.

What’s the future for the Mac?

One thing’s clear: In the near term, at least, the future of Apple’s laptops seems to rest on the MacBook Air. The new MacBook Pro is the first of Apple’s high-end line to adopt the Air’s thinner, lighter design, but that change wasn’t much of a surprise: Apple has long aimed to make its products ever-thinner, ever-lighter, and ever more powerful. The questions for MacBooks, Pro and Air alike, are how thin they can go and how affordable their solid state drives can get.

MacBook Pro

Apple has some decisions to make on the desktop side, too. The iMac hasn’t seen a significant physical refresh since 2007. The Mac Pro infamously scored only the most minor of updates earlier this year, after two years of stasis. Apple’s biggest Mac sales growth is in laptops, but it’s unlikely that the company would simply forsake the desktop market completely. The question is whether Apple can create compelling new hardware that transcends traditional product evolution.

How much should iOS and OS X intermingle?

With the last few iterations of iOS and OS X, it’s becoming increasingly clear that the futures of these two operating systems are closely intertwined. Over the last decade or so, Apple has become a company focused on its ecosystem, in which all of its products work together. Naturally, as that ecosystem has evolved, the exchange of ideas and features between iOS and OS X has increased. You might think that, in time, they’d eventually become the same.

But that’s not necessarily the case. In a talk at the 2008 AllThingsD conference, Jobs made a distinction between traditional PCs and devices like the iPad by comparing them to trucks and cars. And that comparison seems to have remained largely apt. Obviously, there’s a great deal of overlap between what the two types of devices can accomplish. But there are still times when a particular task calls for one or the other.

So don’t expect Apple to do anything radical like abandon the Mac platform. If anything, Apple’s recent release of two major OS X updates in the past two years shows that Mac development is as strong as ever. Borrowing features from iOS is just an indication that the old veteran OS X has something to learn from the fresh-faced rookie.

What about Web-based services?

Compared to Apple’s hardware and software products, services are not the company’s strongest offerings. iCloud is the fourth iteration of the company’s online service, following iTools, .Mac, and MobileMe. If you’re looking for evidence of Steve Jobs’s flaws as a businessman, this is a good place to start.

But the increased focus on iCloud in iOS 5 and Mountain Lion has made that service essential to Apple, especially now that the price barrier to entry has been removed. That means that Apple must solidify iCloud, making it more reliable and more competitive with the many alternatives that consumers have. Most difficult of all, iCloud must escaping the stigma its predecessors left behind.

iCloud is, in its most basic form, the mortar that holds Apple’s ecosystem together, and a wall is only as good as the stuff that binds it. Apple can’t afford missteps like prolonged, unexplained email outages. If people are going to be wooed away from the likes of Dropbox or Gmail, iCloud needs to be rock solid and offer compelling features that users can’t get anywhere else. The question is, can Apple provide them?

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