The big Apple news this week was the company’s surprising profit warning, the first time Apple has had to do this in 15 years. Apple is expecting revenue of about $88 billion this quarter, rather than its initial guidance of up to $93 billion. In other words, they’ve sold about $5 – $9 billion less in iPhones. (Yes, this is mostly the iPhone, because other products seem to be stable, and services have apparently increased.)
Funny, though; this is a record quarter for Apple, yet they had to issue a profit warning, and the stock fell nearly 10% the following day. But the stock market fall was not about this single quarter; it was about Apple’s future. The company’s revenue is mostly – and dangerously – focused on this single product. It represents about 59% of Apple’s income, so any drop in sales could have very serious effects.
It was interesting that Tim Cook spent 1,500 words blaming all sorts of reasons for this drop, whereas he can’t come out and say the real reasons. First, the iPhone has gotten too expensive. As Apple has seen demand flatten, they have raised the price of the iPhone (as well as other products, such as the high-end iPad, and the Apple Watch):
The second reason is that the iPhone simply isn’t magical any more. And hearing Tim Cook use that term in the presentation of the latest iPhones sounded falser than it had in the past. Steve Jobs could say that in the early years of the device, because, for a while, it was magical, at least to many users. But now, the iPhone is an appliance, it’s one of many smartphones that all look more or less alike, and that all do more or less the same things. I stick with the iPhone because of the ecosystem – in part, because I write about Apple products, but also because I’m somewhat locked in through the apps I use – and because it is more reliable and more secure. But it’s not magical.
It’s time for Apple to grow up and stop selling their devices using this sort of language. Sure, the company is transitioning to services, and, as this article suggests, we might see iPaaS, or iPhone as a service, in the near future. Apple has already started that transition, with their upgrade program, but given the high price of new iPhones, the monthly payment for that is still somewhat steep. With the company’s dependency on the iPhone as its main revenue source, this transition will need to happen very quickly to maintain the level of income the company has seen, and that keeps its share price high.
But Apple’s biggest problem is that their services have never been stellar. Sure, the iTunes Store was and still is profitable, but their other services are not leaders in their sectors. We’ll see how Apple negotiates this turnaround as their star product becomes mature and no longer seems magical.
I have read a plethora of articles in the past 36 hours commenting on the profit warning statement by Mr. Cook of Apple. This was the most concise factual article to date. Sometimes the simple answers are the closest ones to the actual truth.
I must confess I was becoming put off with the over use of the word “amazing” and “magical” by Mr. Cook during Apple events. And here I thought I was the only one….
I can’t say that I agree with the assessment above. Things are not as simple as “iPhones are no longer magical.” And the idea that the iPhone is too expensive doesn’t stand up to scrutiny either.
Here’s an interesting counterpoint by D. E. Dilger:
https://roughlydraftedbeta.com/home/2019/1/5/apple-note-sends-media-pundits-into-a-fit-of-histrionic-gibberish
I don’t know Kirk, every time I ask Siri on my Apple Watch to tell my iPhone to play any music in the world on my HomePod and Living Room AppleTV it feels pretty magical.
Every time I start an email or browsing the web or a doc in Pages on my iPhone then pick up my iPad or Mac and the same doc or page or email is sitting there waiting for me to continue thanks to Continuity it feels pretty magical.
Every time I pick up my iPhone XS Max and FaceID authenticates to show me the content of all my notifications without swiping in or an app seamlessly authenticates me with FaceID it feels pretty magical.
Or every time I pay for items with a tap of my wrist up to 3 thousand dollars at any store here in Australia without entering a pin code or having to pull out my wallet it feels pretty magical.
Perhaps you need to admit that actually, Apple’s small 5% reduction in their projected revenue for this quarter is actually almost entirely the fault of challenging economic conditions in China after all?
One has to ask – where was all the angst about the largest Android OEM Samsung posting 22% and 12% lower revenue from their Smartphone section over the last two quarters and instead crucifying Apple for a drop a fraction of that percentage?
Oh, of course – Apple doomed since the start of this century. sigh
Interestingly, what you’re describing is the ecosystem, not the iPhone itself. I think the vast majority of iPhone users do not have other Apple devices. To be fair, new technology always seems magical at first, until it’s commonplace. (FWIW, Android does a form of Face ID as well, but it’s not as secure. But Apple’s not the only one with that technology. And with an Android watch and Android Pay, you can do the same thing.)
Re challenging economic conditions in China: yes, but, as I said, the Chinese aren’t locked into the idea of Apple as a brand, and their nationalism makes it much more possible for Chinese brands to outpace Apple.
Re the difference between Apple and Samsung: 59% of Apple’s revenue is from the iPhone; for Samsung, it’s only 21%. They have a much more diversified portfolio than Apple. (https://www.statista.com/statistics/630434/samsung-quarterly-revenue-by-segment/)
Yes, it is Apple’s vertical integration and ecosystem that make much of this possible and highlight how the iPhone is part of a greater whole. With Apple making the whole widget, everything becomes more magical.
Various Android implementations of FaceID are not just a bit less secure, but significantly so in that they can be easily fooled with a photo – Android OEMs haven’t implemented anything like Apple’s FaceID Infrared camera, Flood Illuminator and Dot projector for industry-leading AR technology support and 3D biometric authentication.
In terms of diversification, yes the iPhone generates a large percentage of Apple’s revenue, but Apple’s other segments are also huge – they just can’t yet compare with the iPhone juggernaut.
The Apple Watch is now bigger than the iPod ever was and is also bigger than the entire Swiss Watch industry.
Apple’s App Store is now not only bigger than Hollywood in terms of revenue, but bigger than the worldwide box office.
Apple’s Services division is big enough to be a Fortune 100 company by itself and is growing at 23% per year.
Apple Pay now generates an absolutely gob-smacking 90% of the mobile payments revenue in the world and growing at a rapid pace.
Apple’s Music Business is the largest in the world.
Apple’s iPads are the number 1 tablet vendor and Apple sells more ids than any PC manufacturer sells laptops and/or tablets.
Apple has captured an amazing 72-83% of the global Business Mobile and Tablet markets.
Apple’s AirPods have captured an enormous 85% share of the global wireless headphone market.
And lastly, it is a big mistake to forget Apple’s ace in the hole – an installed base of 1.4 billion active devices owned by the most lucrative demographic in the world who are extraordinarily loyal to the ecosystem Apple has built. They may keep their old Apple kit a bit longer than the past, but they’re not going to switch to a competing phone nearly as easily as any Android customer churns to another Android OEM.