How Apple Became a Victim of Its Own Success
All your friends already own an iPhone. Americans love their iPhones. But at least for now, many of us are content to keep the devices we bought in 2013 or 2014, rather than shell out more than $700 for the latest iteration iPhone 6.
And that’s a big problem for Apple, which remains one of the world’s most valuable companies, but nonetheless said Tuesday that third-quarter sales fell 15% to $42.4 billion from $49.6 billion a year ago. The Cupertino, Calif., company also said profits also tumbled to $1.42 a share, down from $1.85, a year ago.
Wall Street was expecting as much. Analysts had pegged Apple’s quarterly profit at $1.40 a share. Indeed, this marks the second-straight quarter of sales declines for Apple, after a remarkable decade-long run of nothing but increases. Apple’s stock is off 10% in the past year. (Prior to reporting earnings, Apple shares closed down 67 cents, or 0.7%, at 96.67 on Tuesday.)
So what gives? Americans and everyone else haven’t given up on their gadgets. One Apple-watching Web site suggests the company may have recently sold its one-billionth iPhone. With a hefty price tag and universal appeal, the smartphones now represent roughly two-thirds of Apple’s overall sales, dwarfing its more traditional personal computer business and other sidelines like music, apps, and the Apple Watch.
But that success presents its own problems. For years, Apple could grow by winning converts to its sleek, user-friendly devices. Now having produced enough iPhones to accommodate nearly one in seven people on the planet, the company just doesn’t have that many more potential customers.
As as result, Apple has been relying more and more on long-time Apple fans to upgrade their phones — ideally once a year — or if not, every two years when Apple typically releases a new phone that represents a major upgrade on the past model. Lately, however, Apple has been having trouble getting consumers to shell out. As recently as 2013, only about a third of iPhones used by consumers were more than two years old,according to Consumer Intelligence Research Partners. Today it’s roughly half.
One factor is timing. The current top-line model, the iPhone 6, hit the market in September 2014 and Apple watchers are expecting an upgrade, the presumptive ‘iPhone 7,’ to be released in the fall. That made Apple’s job in the past quarter particularly tough. Consumers who really want a top-of-the-line phone are likely to wait, not buy.
But the problem isn’t just timing. One innovation of the iPhone 6 was a bigger, bolder screen, a feature that helped Apple compete with popular ‘phablets’ offered by competitors like Samsung. But not everyone was pleased. As recently as January, Apple said a majority of existing customers had held back, sticking with smaller models. As a result, earlier this year, Apple introduced the iPhone SE, a cheaper $400 model, with a smaller case that more closely resembled the size of the classic iPhone. The problem: A cheaper purchase price translates into less revenue for Apple, so for investors it was two steps forward, one step back.
Apple’s problems haven’t just been in the U.S. China, with its vast and still-growing middle class, has long held out great promise for gadget makers, Apple included. But if Apple’s smartphones are a pricey indulgence for comparatively wealthy Americans, they look even dearer to many Chinese, who’ve been swarming to cheaper, local imitators.
The upshot: Apple will have a big opportunity to boost revenue, if it can release a new phone with splashy, must-have features this fall. Even so, some are already speculating that the hotly anticipated ‘iPhone 7’ will turn out to be merely another incremental update, so the company can unveil more dramatic innovations in 2017. Either way Apple’s got its work cut out for it.