Apple caused a stir last week with the warning that it was going to miss smartphone sales expectations for the past quarter. While much of the focus was placed on the Chinese market, there’s far more to digest here. Fundamentally, consumers are not upgrading their iPhones as frequently as Apple had expected, but this should hardly be a surprise. Consumers are holding onto their devices for longer and longer, with the average duration now close to three years between upgrades.
There are two key factors influencing this consumer hesitation. Firstly, the price of flagship phones continue to increase and when these devices (not just Apple) pushed past the $1,000 price point, many consumers began to pause before making a knee-jerk upgrade. The counter argument to this has always been that consumers do not perceive the price that way, rather looking at the monthly payments they make and while that argument has some validity, a $1,000 sticker price is clearly inducing more than a little shock factor. Further, the monthly installment fee (on a 24-month financing program) has also clearly increased as the overall price of the phone rises: the top-of-the-line iPhone has increased by 50 percent over the past two years, from $40 in December 2016 to $60 in December 2018, which will also cause some consumers to think more before an upgrade.
This is particularly the case when we consider the second key factor: the lack of innovation in smartphones. How much has the average smartphone truly changed over the past few years? Yes, the camera continues to improve, but there’s a limit to how many marketing iterations can focus on an even better camera before consumers decide that last year’s model is still good enough. 5G could be the next big “innovation” for smartphone manufacturers, but we suspect that will be a 2020 success, meaning that there is still a 12 to 18 month hump for OEMs to get through. And that is assuming that the carriers and app developers discover a truly justifiable reason for consumers to embrace 5G, as well as the expected plan premiums, and additional hardware premiums that will come with it.
Apple’s silver lining is the increased revenue for everything other than the iPhone, with Tim Cook citing a revenue growth of 19 percent for the rest of the business. That includes services, Macs, wearables and more. But there is a longer-term concern with most of these categories, if the iPhone loses market share. Most of these devices are inextricably linked to the success of the iPhone (far less so the Mac, of course). Any drop in iPhone interest means a smaller base for watches and services.
Indeed, the service space - still highlighted as a strong growth area today - is a potential area of concern in the longer-term. As the technology ecosystem becomes more focused on voice assistants (specifically speakers), we see Amazon’s Alexa range driving most of the growth, not the HomePod. That pulls consumers out of the core Apple services world, driving interest in Amazon (and Google) content and services, such as video and music. Apple appears to realize this and just a few short weeks ago announced that Apple Music will be available via Alexa speakers. In other words, Apple’s hardware-focused ecosystem is losing its walled garden approach slightly, but the move may not be enough: there are many other music services that will play on these voice-based speakers (including Amazon) and Apple will be competing on, at best, a level playing field with its services in the new speaker-based world. That is not a great position to be in as it is far more of a pricing-focused playing field rather than a premium service.
That all being said, we need to remember one core metric that was not touched upon: retention rates. Over 90 percent of Apple iPhone owners replace their old device with a new iPhone. Sure, they may not be upgrading quickly enough to maintain the hoped for revenue targets, but they are still in the Apple world for now. This is the metric that needs to be watched most closely, and only if this metric starts to show signs of weakness will Apple truly have a problem. And clearly, Apple is working hard to ensure that doesn’t happen: hence improving the replacement experience and trade-in rates via Apple stores.
Apple’s greatest challenge moving forward is the smart speaker and related voice capabilities. Siri was an early entrant to the voice functionality, but failed to keep up with Google and Amazon’s solutions. But it’s also a hardware game, which Apple should excel at: a failure to migrate to the new voice-centric ecosystem world has the potential to challenge Apple’s services revenue in the long-term as consumers migrate to Amazon and Google-based hardware and services instead.