What it is: The iPhone is Apple’s flagship product. While sales have consistently increased each quarter, this may be the first time that sales actually drop.
When Apple first introduced the iPhone, it was an entirely new type of smartphone. Sales were decent initially, but Apple soon dropped the price to spur more sales. While the original iPhone did nothing more than make phone calls through a unique touch screen interface, it defined the future of smartphones from that point on. Even Google quickly modified Android from a Blackberry clone to an iPhone clone.
Initially, iPhone sales climbed because the previous year there was no iPhone. When Apple allowed third-party apps, sales of the iPhone began rising. When Apple made the iPhone available on more networks, sales continued rising. When Apple started selling iPhones to China and other parts of Asia, sales kept rising. When Apple made larger screen iPhones, sales rose even higher. Eventually sales can’t keep climbing quarter after quarter, year after year, so it’s no surprise that this quarter, Apple may report that they sold fewer iPhones than the previous year in that same quarter.
Critics point to such a potential drop in sales as potential problems with Apple. Yet increasing sales each quarter was simply impossible. Even though many people replace their iPhones on a two-year cycle and more people are switching from Android to the iPhone than the other way around, there’s no possible way sales of iPhones can continue their massive growth quarter after quarter. The problem isn’t that the iPhone is in trouble but that there are fewer new markets that the iPhone can tap to increase sales.
Although PC sales have steadily dropped over the past few years, few people are claiming that Microsoft and Intel are in trouble. Microsoft actually made less money than before because of declining PC sales, but their future looks promising with their shift to subscription services for Microsoft Office 365 and other cloud-based services. Intel is in more trouble as they’re laying off workers because their business depends too heavily on the PC market. Despite Intel’s troubles, fewer people seem to predict Intel’s demise. Instead, they point to Apple’s potential demise.
The main difference between Intel and Apple is that Intel is trying to sell improved processors to an indifferent market. In the old days, each new processor encouraged a new wave of PC buying because new processors made PCs more powerful. Today, a new Intel processor doesn’t dramatically improve features over last year’s PCs, so there’s little reason to buy a new PC based on a new processor. Add to this problem the declining PC market in general as people shift to mobile computing (smartphones, tablets, and wearables) and Intel’s business is like a buggy whip manufacturer, linked to a slowly sinking industry.
On the other hand, Apple can survive a slowdown in iPhone sales because the slowdown is occurring not because fewer people want smartphones, but because fewer people want a new iPhone. Most likely iPhone sales will stabilize at a certain level, far below today’s current sales levels, and Apple will earn steady profits in much the same way that Ford and General Motors earn steady profits from car sales that rarely increase dramatically over each quarter. Car sales don’t keep dramatically increasing each quarter, yet no one claims Ford, Toyota, and Honda are in trouble.
Apple’s advantage is that they don’t just make money selling hardware, but they also make money selling services, much like Microsoft is trying to do with their Microsoft Office 365 subscription service. An iPhone user can buy music, ebooks, or apps, subscribe to music streaming services, or use Apple Pay. A typical iPhone user will also likely buy additional Apple products like a Macintosh, iPad, or Apple Watch. Even if Apple never sees an increase in iPhone sales ever again, their large installed customer base will keep using Apple’s services to keep sending money to Apple.
Selling apps, music, or ebooks might not look as exciting as selling new iPhones, but it’s just another revenue stream for Apple. In comparison, once Intel sells a processor, they never make money off that processor again. Apple sells an iPhone and will likely earn additional money from that iPhone user over time. Appel doesn’t make money just from selling hardware but from selling additional services afterwards.
In an ideal world, Apple would love to keep selling more iPhones every quarter. In a realistic world, massive iPhone growth year after year is simply impossible. For Wall Street to get alarmed at the inevitable while ignoring the same lack of growth in other industries is just myopic. Declining sales is never good for any company, but it’s not a cause for alarm. If sales keep dropping year after year for several years, that’s a cause for alarm, and that’s exactly what the PC market is going through.
Given a choice, would you rather sell PCs or iPhones?