For years we’ve been trained by slick marketing campaigns that a smartphone should be replaced every year, and for more than a decade it worked. Apple successfully convinced millions of people around the world that the iPhone is a product with a limited lifespan, designed to be replaced on an annual or bi-annual cycle—an effort that’s helped along by the iPhone Upgrade Program.
Everything was looking great, and the numbers were up every year the company released a new phone—until it suddenly started to stall. Wednesday, Apple CEO Tim Cook released a letter to shareholders ahead of earnings to detail a rare quarter that was worse than expected:
“While Greater China and other emerging markets accounted for the vast majority of the year-over-year iPhone revenue decline, in some developed markets, iPhone upgrades also were not as strong as we thought they would be. While macroeconomic challenges in some markets were a key contributor to this trend, we believe there are other factors broadly impacting our iPhone performance, including consumers adapting to a world with fewer carrier subsidies, US dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements.” (my emphasis)
Not only was the quarter bad, but it was worse than Apple’s own estimates, on a year that the company delivered what appeared to be its strongest lineup of iPhones yet with options across both price points, models, and color for the first time. Like in the PC world before it, we have reached a peak where sales begin to decelerate, making the act of releasing a refreshed device with enough features to stimulate sales incredibly difficult.
Across the industry, peak smartphone is arriving with a bang. But, only Apple is so closely exposed to its effects as the market dries up: the iPhone is its one-trick horse, responsible for the majority of its yearly revenue.
In his letter, Cook cited two core reasons for the miss: the Chinese economy and declining iPhone sales. Reading between the lines, however, it appears Apple has finally discovered the upper limit of how far it can raise prices before consumers give up and use their old phones for longer instead of upgrading.
Apple may have actually sped up the clock and created the perfect storm to end the smartphone craze after an epic, decade-long run.
For a few years Apple was able to cover up the effects of a globally slowing smartphone industry by hiding declining sales in ever-increasing prices for its phones. Starting with the iPhone X, the company dramatically hiked the average sale price of its devices by hiding behind the new device’s ‘premium’ category, designed to justify its existence.
When its successor, iPhone Xs, arrived this year, Apple did it again with even fewer reasons to justify the upgrade, then padded out the bottom end with the iPhone Xr, for customers that might have been holding out on buying.
It had the opposite effect: the iPhone Xs was a perplexing sell for anyone who ran out to get the X. It largely had features that should have been there at launch, which gave people little reason to switch.
Making the situation even more problematic: the revelation that Apple intentionally slowed down older phones that needed a simple battery replacement. That made it look like Apple’s choice to ramp down hardware performance as batteries age was a means of deception, designed to push users to upgrade, even if it had innocent origins.
After the scandal broke, Apple was forced to offer $30 battery replacements for anyone affected, and Tim Cook specifically names this as a problem in the company’s letter as well: too many people are fixing their phones, so they aren’t buying new ones. That’s a testament to Apple’s prowess at building devices, but not good news for a company that relies on annual hardware sales and not much else.
The slowing Chinese economy is easy for Apple to point a finger at, and it is a legitimate problem, but it hides something else that’s been lurking underneath: Apple was only able to succeed for so long by rapidly pushing into new markets as its most successful markets began to saturate.
In the US, the iPhone has become a fact of life over the course of a decade, and it’s become a tool rather than an exciting device we’re willing to shell out thousands for. More people than ever are using their phones for three or four years rather than upgrading, which is better for your wallet and the environment.
In many markets there’s just very few people left to ‘win’ for the iPhone anymore, at least not at the rate we’ve seen in the past, and Apple must now face a new reality: what does it look like when the world’s richest company, which relied on the majority of its revenue from a single product line has that disappear? So far, that’s largely looked like rising prices across all of its products and moving into subscription revenue instead.
Unlike in the past, when the iPod’s success faded and Apple was able to summon the iPhone out of thin air to replace it, there’s nothing on the horizon that could clearly replace its success. Apple Watch is a popular device and people love their AirPods, but neither product is comparable revenue-wise (and HomePod, the latest product, is notably absent from Cook’s letter). Augmented Reality or self-driving cars could be the next big thing, however those technologies seem far away, too, leaving Apple to bide its time.
Luckily for Apple, a ‘bad’ quarter is $84 billion in revenue, and it has over $130 billion in cash on hand so it’s got plenty of time to figure that out. But, what’s increasingly unclear is whether or not the Apple of today is still able to navigate its way to the next big thing, or if it’s become a skilled marketing giant, squeezing profits out of ideas rather than generating new ones on its own.
Peak PC was brutal for every company involved, from HP to Toshiba, and even the biggest companies at the time weren’t immune to brutal investor pressure, acquisitions and competition for declining sales as we used our laptops for years on end. With smartphones the "peak" might look different, but it’ll be a bloodbath as hardware companies fight for new business models.
Apple has plenty of other products, from AirPods to Apple Music, but it’s not clear there will ever be another iPhone-sized product from the company, and the company’s letter to investors is a first warning sign of wider turmoil to come. What happens from here is anyone’s guess, but it’s going to ripple across the industry, from the App Store to Samsung’s LED business, as it unfolds.