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Apple isn’t doing so well anymore. For the first time in more than a decade, revenues fell by five per cent year-on-year, and it’s the company’s main profit engine, the iPhone, that’s to blame. Apple doesn’t give precise numbers anymore (always a sign of trouble), but iPhone sales were down 15 per cent, to around $52 billion.
CEO Tim Cook said the “miss” of Apple’s original expectations was “disappointing”, but highlighted record income from services, and the strong performance of the iPad, Mac computers and wearables. During the past quarter, which includes the all-important holiday season, Apple made roughly $84bn in revenue, well below the $89bn to $93bn range originally forecast by Cook last November.
Still, while the results were poor, the Cupertino-based tech giant did better than Wall Street analysts had feared, after Cook had issued a rare revenue and profit warning at the beginning of 2019. Since then, the company’s shares have tumbled around 30 per cent in value. On the stock market, Apple is now worth $250bn less than the record $1 trillion market valuation it reached in August. So is something rotten at Apple?
The good news first. While the iPhone is not doing great, its troubles were not much of a surprise – and the growth from other products remains strong. Just take services, where Apple has a whopping profit margin of 62 per cent, way stronger than most analysts had anticipated. “This – coupled with the large user base of Apple – shows that Apple is far from being doomed,” says mobile market analyst Carolina Milanesi.
Or, as Cook puts it, Apple has set itself up “for the long term, and this quarter's results demonstrate that the underlying strength of our business runs deep and wide.” Driving the Apple money machine is the company’s active installed base of devices, which is now at an all-time high of 1.4bn and keeps growing. “That's a great testament to the satisfaction and loyalty of our customers, and it's driving our Services business to new records thanks to our large and fast-growing ecosystem,” argues Cook.
The iPhone, however, is clearly in trouble. It’s not so much the battery replacement programs driving longer ownership cycles, or diminished carrier subsidies in some developed markets. And it’s not so much about Apple products being sneered upon in China – partly due to Donald Trump’s trade war, but mostly because of competition from local rivals big and small, ranging from Huawei to a bevy of other manufacturers that produce much cheaper phones of a reasonable quality.
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The main issue is that the iPhone also isn’t doing so great in Europe and Japan, both down on a year ago, while the rest of the Asia-Pacific region is barely growing. One much-needed boost could come later this year when Apple is expected to push into India. But analysts warn its products are too expensive for India’s consumers, where the GDP per capita is roughly four and a half times lower than in China.
So since Apple sharply raised its prices, and with iPhones simply not better than rival devices anymore, unit sales of iPhones are plummeting. It's forcing Cook into having a rethink: he now says that Apple may cut iPhone prices, especially in markets that have been hit by the strong dollar.
From this point on, nobody should be counting on iPhone growth, says Ovum smartphone analyst Daniel Gleeson. “The issues with China caused a massive impact on this specific earnings report, but the iPhone market is saturated and CEO Tim Cook admitted in his investor letter a few weeks ago that people are not upgrading their phones as regularly now as before.”
Until now, Apple had been able to dodge the bullets targeting the global smartphone market, which has become mature in many parts of the world. Most iPhone owners are loyal fans, and hefty price rises seemed to keep the gravy train rolling. But there is a limit to what even Apple can ask customers to fork out for new devices, and this limit may now have been reached. Short of some new transformative technology, all signs suggest iPhone sales will continue to stall.
Then again, some of Apple’s other products had very good quarters – iPads, wearables and home and services are each up more than 25 per cent year on year. While the iPad growth isn’t sustainable, says Gleeson, as it was driven by a price increase on the iPad Pro, “the trend for the future and wearables and home segments is bright”.
The other key point is the continued growth of services. “This will be a big emphasis going forward for Apple,” says Gleeson. Case in point: Apple has put around $1bn into original TV content.
And it’s this part of the business that is growing well, and “certainly the part of the business which will play an important role in the future of the company,” notes Milanesi. “Music has done very well for Apple especially in the US, and while competition in video is much stronger, it is a good indicator of the opportunity Apple has for new services such as video and news.”
Health is another area where analysts see Apple benefitting long-term, and in more than just revenue. Users who will trust Apple with their medical records and use Apple Watch as their health barometer will likely develop a strong loyalty to the brand.
The bottom line: Apple needs to rethink its business model and wean itself off its dependence on iPhone sales.
This article was originally published by WIRED UK
