Apple Blog

what is the real risk for the iPhone business

Apple is one of the most written about and analyzed companies in the world and, paradoxically, it is also the most misunderstood by the media. The latest controversy that questions the future viability of Apple is the sales of the iPhone . Used for more than a decade as a thermometer of the company’s performance, in recent years it has become an obsession for the media and experts of the sector.

This obsession has been transformed into a collective madness that forces us to interpret every news item, tip-off from the Asian supply chain or rumour as confirmation of the imminent catastrophe of Apple, in the purest style of the Simpsons Bee Man . But how much truth is there about the fragility of the iPhone and its business?

When Apple’s business identifies with its flagship product

what is the real risk for the iPhone business
what is the real risk for the iPhone business

That Apple depends on a single star product is a concern (or accusation) that has been made to it throughout its history. It was the Mac, which now turns 35 years. It was the iPod, which began to exceed the Mac in income intermittently from 2006. Then the iPhone during its early years, giving way to the iPad in 2010 after its explosive growth of the iPad, which came to place it momentarily in the stardom. Since 2013 that responsibility has returned to the iPhone.

Nowadays, many people think that the iPhone is Apple’s Achilles’ heel . But they do so ignoring that in recent years this segment tends to give more space to other businesses of the company, especially Services and, even far away, the wearables included in Others. Businesses that alone generate billions of dollars a year. However, that same concern is not shown to other technology businesses that Apple is often compared to.

In AppleApple and the false myth of programmed obsolescence

In the case of Google, the revenue from the ads it has in its “property network” accounted for 83% of total revenue from ads in the last reported quarter. Likewise, the only search engine revenue stream that does not come from ads is only 16% of the company’s total business. And, interestingly enough, no one claims that Google is in danger because their entire business depends on one of these segments.

Actually, the iPhone is an optical illusion . One that is preventing us from seeing clearly what Apple’s business is really about. The company has been telling analysts and media for several years that its business goes far beyond the iPhone, focusing on services and reaching conclusions that are also wrong: Apple is not transforming itself into a service company, nor is it giving up on hardware.

This perpetual confusion is no longer Apple’s responsibility, as the company has long been pointing out its true business . You just had to pay attention.

Beyond iPhone sales

At the shareholders’ conference on November 1st, Apple left the financial world in shock by announcing that it would stop reporting the units sold of all its businesses. Mac, iPad and iPhone would only keep the revenue generated in each, thus imitating the rest of competitors who have never officially and regularly reported the units sold of each product category.

Although most attention was drawn to this measure, the company stated that it would henceforth report gross margins for both Services and Hardware, giving color to a financial variable that had always remained static. But let’s leave this aside, because is not so relevant right now .

.
At AppleApple and services: putting Cupertino’s strategy into perspective

To stop disclosing the units sold of its products, especially the iPhone, responds to several reasons :

  • Since the iPhone 7, revenue from this segment has been growing while units sold have remained flat.
  • The iPhone X ushered in a new era of revenue growth despite media outlets such as Bloomberg, which continually hammered at the failure of this model as being, according to them, “too expensive. All this despite the continuous claims by Apple that the iPhone X was the most sold terminal every week. A story that repeats itself with the iPhone XR.
  • The life cycle of an iPhone has been stretched considerably in recent years. iOS 12 has given oxygen to terminals like the iPhone 5s which is already six years old.
  • This increase in durability, which contradicts the conspiracy theory of programmed obsolescence, has favored the creation of a second (or third or fourth) hand market, commonly referred to as the gray market.

It is worthwhile to analyze more closely these last two points , since they have quite relevant repercussions.

The grey market of the iPhone

The first generations of the iPhone experienced a very short life cycle . Either because the user saw how the rate of improvement and its importance was significant in new models and worth updating, or because the support of updates was shorter compared to the current one.

Now the situation is different. Things like the iOS 12 stand or last year’s battery replacement program, as well as the appearance of interesting improvements in new models but not causing such an upgrade, have greatly stretched the life cycle of an iPhone. This means that the same user can use it for 3, 4 or 5 years without problems , delaying the time of renewal. In this case, two situations can arise:

  • When buying a new iPhone, give your old terminal to a family member or friend.
  • Another option is to take advantage of it to resell it and recover a part of the investment depending on its status.

Both alternatives are based on the longevity of the iPhone much higher than that of terminals such as Google’s Pixel (in theory, the ones that have better support). Many stores accept to buy back old iPhones at the time of purchase of a new one, which they put back into circulation if their condition allows it after some minimal maintenance.

These are the so-called reconditioned products, which many stores put on sale after buying them from users and changing the battery and some minor repairs. Something that Apple itself has been doing for several years and that this Christmas was renamed under Apple GiveBack, giving it quite a prominence in their stores.

Apple does not need to present a specific product for these needs if the grey market takes care of it. But it can help make it more fluid, hence its GiveBack

Both those that are passed on to a family member and those that are repurchased and reconditioned, are part of the iPhone’s gray market . A market from which Apple does not benefit directly and which certainly does not appear in the quarterly sales figures. But they do play an essential role for the company.

In AppleLo by Apple was a snack: Samsung and many other companies are facing difficulties in China

These iPhones allow you to get a competent cell phone at a much lower price than the one sold to the public. That is, to a customer who wants an iPhone but who is sensitive to its price (related to the elasticity of demand for the iPhone). Not everyone is looking for the cutting-edge specifications, the super-advanced camera or the Face ID unlocking. But they want a photo-solvent terminal, fast, with space and a big screen like that of iPhone 6 Plus. And above all, they want iOS .

.

The indirect benefit for Apple is obvious: a small monetization via services. It is known that whoever buys an iPhone, the first thing he does is to acquire accessories such as cases and buy apps or services. He is more likely to do so in the, let’s say, first month than when he is about to renew equipment. Although it is also true that whoever buys a refurbished or second-hand iPhone will not invest at the same level as whoever acquires an iPhone XS Max. But something is something.

Having said that, there is an even more important function for this grey market: to keep the user within the Apple ecosystem .

Installed base of devices, the strength and risk of Apple

In January 2018, Tim Cook stated that Apple had an installed base of 1.3 billion devices . In the same January 2019 shareholder letter, Cook said:

If we add these 100 million to last year’s figure, we will get a total of more than 1.4 billion active devices . Here we are counting the Mac, iPhone, iPad, iPod touch, Apple Watch, AirPods, Apple TV, HomePod. Obviously, the bulk corresponds to the first three which are estimated to be 100 million, 900 million and 300 million respectively. A single user could have one, several or all of these products, of course.

The installed base is a much more accurate indicator than sales. It is clear that it depends on it. But the installed base allows Apple to have a certain shield that protects it from the ups and downs of its products. We have just seen it by experiencing a drop in sales of the iPhone but having an increase in the base in absolute terms.

The installed base of devices is Apple’s strength and, at the same time, Achilles’ heel

When one focuses on analyzing that base of devices in use, Apple’s business makes much more sense. The Mac, iPod, iPhone, iPad, or whatever the flagship product is at the time, is no longer as relevant. What matters is the ability of the set to attract new uses. Given the loyalty and trust that the company earns with its customers, the probability that they will repeat the product when they renew is quite high and therefore the business becomes more secure and stable in the long term. In this light, Apple’s services are just the icing on the cake and not an end in themselves.

In the current state of bitten apple products for sale, that installed base is not going to grow steadily. It needs to find new products on a recurring basis that will attract users in large quantities. Otherwise, that device base will stagnate first and could shrink if too much time passes. This is the real risk for Apple’s business: the erosion of its installed base of devices .

.

While it is important that iPhone sales have stagnated and that we see drops, this should not be interpreted as the end of Apple’s dominance. At least, not until the device base in use starts to shrink . By then, it is quite possible that we already have a division of very advanced wearables , consisting of the Apple Watch, the AirPods and, of course, some smart glasses.

The iPhone has a future at idle speed, subject to the renewal rate of a device that can last longer with a simple battery change. But Apple is much more than the iPhone .

Apple on Instagram

Continue

Sharing Beyond Sales: What’s the Real Risk for the iPhone Business

Topics

Share

Comments closed

The best comments:

See 67 comments

Topics of interest

Similar Posts