On Wednesday, Apple announced it would miss its holiday quarter revenue projection by $5 billion. And it did it in grand style. The company hadn’t halted trading on its stock since 2002. The event had the feeling of some kind of reckoning, requiring a shift in the way we understand the company and its star product. It’s almost as if Apple was telling us, “Hey, Happy New Year, we’re entering the post-iPhone era.”
In his letter to investors, CEO Tim Cook stressed the Chinese market’s impact on iPhone sales woes. “Lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline,” he wrote.
The placement of the qualifying word “primarily” in that sentence is significant. The large shortfall quickly surfaced a variety of anxieties relating to Apple’s iPhone business. Is Trump’s trade war with China already hurting Apple’s business? Is the company’s decision to raise prices on its products now coming back to bite it? Are people choosing lower-priced Android phones over iPhones?
I seriously doubt many iPhone users are defecting to the Android ecosystem. But I do think Apple’s iPhone problem boils down to a value equation that goes on in the brains of potential phone buyers and upgraders.
While we are on the downward slope of Apple’s iPhone bonanza, the company still relies on sales of the device for more than two-thirds of its revenue. In the future, Apple may focus on how many services it can sell through the iOS devices out in the wild, but today it must still worry about how much innovation per dollar is needed to get iPhone owners to upgrade every year or two.
It’s that innovation part I worry about. In 2014, Apple unleashed a lot of value with the iPhone 6 series. There was pent-up demand for larger iPhones, and Apple delivered. People suddenly got a lot more iPhone for the buck. “These are not only the best phones in the world, they really are a great value in the world,” Apple marketing chief Phil Schiller said at the time, and he was probably right.
The iPhone 6 started at $649 and the iPhone 6 Plus started at $749. For those who qualified for a subsidized carrier plan, the 6 started at $199 and the 6 Plus went for $299. Consumers went bananas for the devices around the world and upgraded rapidly. The company’s holiday quarter revenue in 2014 grew almost 30% from the same quarter the previous year. But fun like that can’t be expected to last. New iPhones for the following few years were really just incremental improvements to the iPhone 6. Accordingly, the big iPhone sales growth tailed off.
The next big revision was 2017’s iPhone X, which brought a new design, facial recognition, an edge-to-edge display, “the notch,” and a $1,000 starting price. Despite the imposing price tag, the X sold well in its first couple of quarters on the market, benefiting from an initial wave of buyers excited to get in on Apple’s 10th anniversary rethink of the device. And it’s a mistake to say that Apple decided to simply raise prices starting with the X. The margins it’s making on its current phones is roughly the same as it made on earlier iPhone generations. Apple made the decision to stuff more expensive technology into its phones, including Face ID sensors and the edge-to-edge displays it buys from Samsung.
Even if higher prices aren’t about a pure profit grab, the end result is that people aren’t upgrading to new iPhones as quickly as they used to. They’re finding good reasons to stay with the iPhone they already have. People in China may have an added incentives to stay with their old iPhone: The economy in China is slowing, and the brewing trade war isn’t doing much to improve Apple’s image in the country. U.S. brands in general, and particularly Apple, are not the coveted status symbols they were in 2016.
If lengthening upgrade cycles are indeed contributing to Apple’s doldrums, it’s fair to ask why new iPhones are not pulling at consumers’ purse strings like they once did. That gets into the value question. To make me want to jump to This Year’s Model, there has to be at least one or two really cool or really useful new features that will demonstrably change the experience of using the device for the better. That bar gets even higher now that iPhones have moved beyond the $1,000 starting price. Guess what? Animoji isn’t going to get it done. Not for me, and not for a lot of people. I personally know a lot of people who use iPhone 7 and 8 series devices, are happy with them, don’t engage in impulse upgrades, and yet have no intention of leaving the iOS ecosystem. They’re different sort of consumers than those who rushed to buy the iPhone X in 2017, and there are a lot of them.
Apple’s product marketing people have the schedule of features and upgrades for each new iPhone planned out years in advance. The company may need to accelerate the rate at which it pulls new and cutting-edge features into its devices. For some features, the groundwork might already be laid. For instance, that fancy Face ID camera system should do a lot more for us than just unlocking the phone and letting us create Animoji. Also, other phone makers are already building cameras and other sensors into the screens of their phones, eliminating the need for a notch. When will Apple do that? Maybe the company’s traditional “fast follower” strategy needs to be revisited; Consumers might not want to wait for the Apple version of a new Samsung feature to arrive a year later—even if Apple’s take is far more polished.
With any luck, Apple already has some good ideas on the roadmap for its 2019 phones. The next sea-change upgrade for smartphones in general is the addition of 5G radios. But Apple won’t make that move until 2020. Without something impressive in the meantime, people who are generally happy with their old iPhones might wait even longer to upgrade.