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Opinion: Why ‘peak iPhone’ is likely temporary, but Apple may have to think the unthinkable on price

peak-iphone

After literally years of analysts claiming that we’ve reached ‘peak iPhone’ – that Apple’s year-on-year growth had gone as far as it could go – that day has finally arrived. iPhone sales last quarter were essentially flat (up just 0.4% year-on-year), and the company yesterday forecast that this quarter will see its first ever year-on-year decline in revenue since 2003.

If Apple hits the midpoint of its projected revenue for the current quarter, it will suffer a year-on-year fall in income of 11%. For the first time in 13 years, the ‘Apple is doomed’ merchants can cite real-life numbers as support for their position.

The reality, of course, is far more nuanced. There are some very specific reasons why the current quarter will be such a tough one, and why ‘peak iPhone’ is likely to be temporary, and I’ll get to those in a moment. But there’s also a bigger picture that suggests that Apple may have to be willing to think the unthinkable when it comes to the huge margins it has been able to enjoy to date …

Let’s begin with the reasons Apple expects this quarter to be so tough. To avoid confusion, I’m going to refer to calendar quarters rather than Apple’s fiscal quarters, which begin in October.

First, Apple had supply issues when it launched the iPhone 6/Plus, meaning that it wasn’t able to satisfy all of the demand that existed in the holiday quarter. A chunk of the sales that would normally have accrued in calendar Q4 2014 instead rolled over into calendar Q1 2015. It didn’t have the same issues this time, so there’s an artificially high target to beat this year.

Second, the global economic environment is challenging, notably in China, Apple’s second largest market after the USA. As Cook put it in yesterday’s earnings call:

We’re seeing extreme conditions, unlike anything we’ve experienced before, just about everywhere we look.

Targeting the wealthiest tier of the population, Apple is better placed than most companies to prosper even in a stagnating economy, and did continue to grow its business in China by 14% – but that’s a long way short of the 84% growth it achieved the previous quarter.

Third, Apple generates two-thirds of its income outside the USA, and the strong dollar has hit the export market hard. In some markets, Apple has increased prices to protect its margins, which inevitably hurts demand. In others, it has taken the hit and earned less money from the same number of sales. The total impact of the shift in currency rates was $5B in the previous quarter alone.

To put that figure in perspective, the amount Apple lost in currency exchange was roughly the same as Facebook’s entire quarterly income. Or, as Apple’s CFO Luca Maestri put it yesterday:

If you take $100 of the business that we did outside of the U.S. in September 2014, when we launched the iPhone 6 and 6 Plus, the same level of business today translates to only $85.

2

Apple is also in it for the long haul. As Cook said yesterday, the company does not live or die on a quarter-by-quarter basis. In particular, it is growing its increasingly important services business – launching Apple Music last year, and likely a streaming TV service this year. With a billion active iOS devices, it has a vast potential market for these.

Especially during periods of economic uncertainty, it’s important to appreciate that a significant portion of Apple’s revenue occurs over time.

Apple’s underlying position, then, is not as bad as it appears on the surface. While iPhone sales may have temporarily peaked, it’s likely that growth will resume in one or two quarters’ time as the economy picks up.

But this does not mean the company can afford to be complacent. While factors like the Chinese economy and strong dollar rate are outside of Apple’s control, they represent the real world, and Apple needs to respond.

To date, Apple has been able to shrug off falling iPhone market share by pointing out that while other companies take home the bulk of smartphone revenue, its high margins mean it grabs almost all of the profit. It has been able to happily watch Android manufacturers compete for the bulk of the market while it skims the cream from the top.

But the market is changing. One big change is the ending of ‘subsidized’ pricing. It used to be that carriers sold you an iPhone for $1-200 upfront in return for a 1-2 year contract, hiding the rest of the purchase price in the monthly plan. You and I weren’t fooled by this, but it’s amazing how many people thought they really were paying only $200 for their brand new iPhone rather than the true all-in price of $650 and up.

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The competitive environment is also changing. Once upon a time, if you wanted to opt for Android, you had a choice of only two or three flagship handsets at prices close to those of an iPhone for a device with a horrible manufacturer overlay on top of the stock Android OS. The rest of the Android market was cheap-and-nasty. These days, the Nexus 6P is a very solid piece of aluminum hardware with good specs and pure Android 6.0, free from bloatware. Performance-wise, it’s comparable with an iPhone, and comes in at $499 – not spectacularly cheaper than an iPhone, but enough to catch the attention of some.

Perhaps more worryingly for Apple is the fact that we’ve seen the emergence of really strong mid-market smartphones. For example, the Moto X Pure/Style, which allows you to choose your materials (including metal, wood and leather) and delivers a solid spec for $400. Add a few bucks to throw in a 128GB MicroSD card and you can match the storage capacity of an iPhone 6s costing twice as much.

You can even pick up an attractive and solid Android smartphone for just $250 in the form of the OnePlus X. You’re making one or two sacrifices for the price, but surprisingly few. Many mass-market consumers will be perfectly happy with this.

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I’m not, of course, suggesting for a moment that Apple would ever need to compete with a $250 price point. I’ve also made the point before that the ‘Apple tax’ is lower than it appears due to high resale values, something echoed only yesterday in a WSJ piece suggesting this was a significant factor in Apple’s success in China.

Apple’s innovations like 3D Touch and Live Photos give it an edge, but never for long.

There is also the famed Apple ecosystem. To be honest, when friends ask me what to buy, this is probably my primary reason for pointing them toward Apple rather than Android: you’re buying into a tightly-integrated system in which you can work pretty seamlessly between devices. That ecosystem is a large part of Apple’s success; if you have an iPhone and are in the market for a tablet, laptop or smartwatch, it makes a lot more sense to buy another Apple product than to mix-and-match systems.

But Android and Chrome are catching up fast. A Chromebook, pure Android smartphone, Android Gear smartwatch and Google Apps get you about 75% of the way toward Apple-style integration. Apple definitely still leads the way, but Google has significantly closed the gap.

future

So what do I think Apple needs to do to protect its position, and ensure that ‘peak iPhone’ is a temporary state of affairs rather than a permanent one?

The first and most important thing, it’s already doing: continuing to invest in growth markets. It hasn’t let the difficult Chinese economy slow its rapid rollout of retail stores in the country, and it is investing in future growth markets like India. China will soon be a bigger market than the U.S., and while India represents a tiny percentage of sales today, it will one day be huge, and Apple will by that time be extremely well-established in the country. The four-inch iPhone will also likely help, especially if it sticks around long enough to get $100 sliced off the initial price next year.

But Apple cannot afford to have anything resembling a sense of entitlement when it comes to customers at the premium end of the market. Leaving aside those geeks who have their own technical or philosophical reasons for favoring Android, it’s largely been the case to date that anyone who can afford to buy an iPhone does so almost automatically. That fact is testament to Apple’s extraordinary marketing prowess.

But players like Google, Huawei, Xiaomi, Lenovo and OnePlus are learning fast. (Xiaomi has learned rather too literally, with blatant ripoffs of both Apple products and Apple marketing, but it will mature beyond that stage at some point.) So while Apple’s current dominance of the premium end of the market gives it a massive head-start, it can’t count on forever remaining the automatic choice. It will need to learn to compete on a slightly more level playing field as its competitors continue to up their game.

I’ve argued before that when Apple is selling premium products, it needs to deliver on that promise. It needs to be less stingy when it comes to things like RAM and flash storage.

But I think it will also need to learn to be a little more flexible when it comes to its profit margins, especially in growth markets. That ~40% markup has served it well for a great many years, but I don’t think it can necessarily expect to maintain it indefinitely. When a non-techy customer (which is most of them) is exposed to decent marketing for attractive and well-specced smartphones in the $250-400 range, each of them backed by a competitive ecosystem, Apple may need to be a little less ambitious in its margins.

Again, I stress that I’m in no way arguing that Apple needs to compete at the $250 level, or even the $400 one, but I am suggesting that there will come a time when it will no longer be able to reach quite as high as $950 at the upper end. That even a company pitched firmly at the premium end of the market will have to be willing to accept a slight redefinition of what that term translates to in dollar and margin terms once the U.S. becomes a minority market and growth economies come even further to the fore.

Do you agree? Or do you see Apple maintaining its 40% margins forever, even at the cost of seeing its market shrink? Please take our poll, and share your thoughts in the comments.

Cam Bunton kindly assisted with Android smartphone recommendations.

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Comments

  1. mtjs (@mtjs) - 8 years ago

    It is not the amount of units that counts, but the amount of money they make per unit. If a lower priced iPhone still gets ca 35% – 40% margin for Apple, fine by me… else… (so I don’t agree ;))

  2. chrisl84 - 8 years ago

    I’ve said that Apple needs to shift to a 16-18 month refresh cycle on iPhones. People are holding them longer as the value in upgrade reduces each year as critical features are already available. At a 1.5 year refresh people will be more inclined to upgrade on each version to avoid having to wait 3 years for a new phone. Dump the S model and release a top of the line flagship phone ever 1.5 years.

    • Blair Rohlfing - 8 years ago

      This may be fine from a technical perspective, but it would be disastrous from a business perspective. Right now, Apple’s shareholders can expect a tidy return every year from about a third of the market upgrading their phone. Assuming all else remains equal, you’re asking them to make that same amount of money half as often. That would introduce totally unnecessary volatility into its stock price.

      • chrisl84 - 8 years ago

        No the return would increase on each model as more customers will upgrade on each refresh. Everyone flips out when you talk about extending iPhone upgrades to 1.5 years over 1 but look at Macs, look at iPads people ARENT upgrading annually but the risk of knowing skip a model and you will have to keep that phone for 36 months will drive upgrade on each model. Tell customers it’s now or another year and a half from now and see what they do, they’ll buy now.

      • Blair Rohlfing - 8 years ago

        There is a HUGE difference between the iPhone market and the Mac market.

        For one thing, Macs are designed to last much longer.

        For another thing, they’re several times the price, so your average consumer simply cannot afford to upgrade them yearly.

        And if you needed yet another reason, there are no killer features baked into the new laptops — though Apple would likely say otherwise, laptops are generally treated as a mature product category; you buy one when you need it, not because the new ones are much better than the one you’ve had for two years.

        iPads are a middle category. People refresh them more frequently than laptops but less frequently than their iPhones (likely because of the subsidies/installment plans carriers offer that reduce sticker shock). And this points to why what you’re suggesting would be so strange: you’d be asking Apple to get people to upgrade one of their cheaper devices like they do their most expensive ones. It doesn’t make any business sense, though I do concede that, from a technical perspective, it makes a lot of sense to have your users upgrade devices to the latest and greatest in larger chunks.

      • Blair Rohlfing - 8 years ago

        And regarding the return for shareholders, I think you missed the point. Yes, the return during an iPhone upgrade quarter will be higher than it is now if you wait longer, but you’re not capturing any new people. You’re just getting your customers’ money in fewer chunks over the years. That means the stock will be worth less during the >1 year period when there is no new iPhone coming out, because those looking for shorter gains won’t consider buying Apple. That’s called stock volatility, and it is really dangerous for a company of Apple’s size.

      • srgmac - 8 years ago

        This is probably why Apple still keeps the 16GB model around…makes sense — still sucks for their users.

    • just-a-random-dude - 8 years ago

      Apple already confirmed that at least 60% of their customers prior to iPhone 6 have not upgraded. In order words, more than half of iPhone 5S or older owners are not being tempted to upgrade at all.

      In addition, the 12 month cycle has more to do with leasing contracts, they’re often 2 years. A lot of people are using the leasing model at their carriers to pay 20-30$ a month for their iPhones and they’ll only upgrade once they pay off the whole amount. If Apple extends beyond 2 year, they will lose more customers to newer Android devices that is being marketed as newer and higher performance than slower and old iPhones.

      I’m happy with my iPhone 5S and I have no desire to upgrade for the next 2-3 years, I’ll stick with it until it dies. My mom is happy with her iPhone 4S and many family members are still on 4/5 with no plans to upgrade until the phones die. The 16-18 month refresh cycle will not do anything to help. I will wait longer and if anything, I’ll look at Android devices that are updated more often with cheaper prices. I also have a Blu Life X that I got for 100$ and it’s on par with iPhone 5S, I rather buy this every year than iPhones and still save more money in the long run.

      Also, I would only upgrade to S because they have less issues than the new versions, they are refinements to the previous version for a reason.

      Also, this is why they’re doing the monthly subscription for the iPhone Upgrade plan in US right now to see if it would generate more revenue from these users.

      • ロハン増進 - 8 years ago

        Absolutly agreed. On top of that iphone 5S is the last real nice and Apple like iphone. After that not any version feels like to die for it. I used to upgrade my iphone every year till 5s. I really felt no appeal to go for 6. I upgraded to 6s just because I am finishing 2 years cycle. They started giving very slow upgrades in iphone every year, to keep users tempted for the next version

      • chrisl84 - 8 years ago

        Dude, the S line only exists to force upgrades, which guess what, no longer is working. IT IS NOT A REFINEMENT. Apple withholds features on the original line to “wow” on the S line. Apple should DROP the S and release a fully spec’d out product EACH AND EVERY TIME

    • Jon C (@JonCBK) - 8 years ago

      Terrible idea to hold off on innovation which is ready after one year of development just to artificially attempt to juice an upgrade cycle. iPhone release should be driven by technical innovation, not marketing and confusion. Frankly the one year release cycle seems too long to me. I’m hopeful the 4″ rumors are true and Apple does two releases a year: larger flagship in Fall and upgraded budget version in Spring. Apple should sell the best phone it can make for the price. That will make it harder to compete with Apple. You are suggesting Apple give other companies a six month lead while Apple sells older phones.

      • chrisl84 - 8 years ago

        Holding off innovation is called the S model. wake up and look at the stock price, you are a zombie to status quo.

      • chrisl84 - 8 years ago

        Wait, you just said a 12 month refresh is long to you…..why’d I even reply youre batcrap crazy. Yes Apple spend R&D on 3 month phone life cycles PLEASE

      • Brett O'Donnell - 8 years ago

        I don’t understand why some people are so down on the S cycle. Are people really that enamoured with having a shiny new design? iPhone 6 was basically a 5s with a bigger screen, curves and some extra LTE bands… It really didn’t bring much else to the table. The S cycle always brings much bigger real upgrades as the focus shifts from how to make it look new and shiny to significant under the hood improvements. Personally, I always skip the new design year and upgrade on the S cycle.

    • Jon C (@JonCBK) - 8 years ago

      Chris,

      So you think Apple should have created the A9 CPU and had it ready in September 2015, but not shipped a phone with it until March 2016? That seems crazy to me. And is your view Apple should still be selling the inferior cameras in the 6 as their flagship device? 3D Touch should still be off the market? That is your position? That would lead to more profit and happier customers? Why do you think it is better for Apple to freeze its production for longer periods of time? Yes, I think Apple should accelerate its iPhone output if it is technically capable of doing so. But I doubt it is, so as long a one year predictable releases is in the ballpark of how the overall tech develops they should stick with it. And their tick tock strategy of Case change one year / Internal changes next year, is very understandable and easy to follow. I’d just add another product line in the 4″ form factor and put it in the Spring.

      • chrisl84 - 8 years ago

        Dude Apple STILL uses the A8 for crying out loud in BRAND NEW Devices!

    • o0smoothies0o - 8 years ago

      No, this is what the iPhone upgrade program is for. It basically lets people indefinitely lease iPhone and get a new one without thinking about the features. It’s not wise for users really, but it’s wise for Apple.

  3. emulajavi - 8 years ago

    We’ve come to a point where the question is… If you sell 60 million iPhones each Quarter and hundreds of millions every year… Have you reached the point where the are less people who needs or wants and iPhone than the quarter before? It’s simply that there’s not enough people available to keep buying 60 million iPhones each quarter. Many people that didn’t have a smartphone, once they’ve bought their first one, they don’t keep buying a new one each two years. If the one they have works, they keep it until it doesn’t or it breaks.

    • ^^^ Exactly ^^^ I still have an iPhone 5 that I bought 4 years ago. Not because I like the size but because I can’t justify spending $600+ for a new iPhone when this one is still working. If the new phones were a little cheaper I would have upgraded already.

      • Jon C (@JonCBK) - 8 years ago

        Why can’t you justify buying a new phone? My phone is my most used item, period. I get value out of it daily, if not almost on an hourly basis. Assuming you have basics like food and shelter covered, keeping the device you use multiple times per day upgraded seems like a great use of money. I’d skimp on pretty much all other luxury items before squeezing out an extra couple of years on a smartphone. And frankly I wonder why I’ve in the past denied myself yearly upgrades. That seems silly in retrospect. But then I say this while I haven’t upgraded my home computer in years and I use that daily as well.

      • Brett O'Donnell - 8 years ago

        I don’t think it’s reasonable to expect that iPhone (and smartphone in general) sales could continue to grow indefinitely. At some point you reach market saturation and after that your really just selling to people who are in the market for an upgrade or replacement. Capitalism is stupid sometimes… Last year when Apple sold 75 million iPhones in Q1 2015 it was record breaking… This year they manage to match their previous record breaking performance in Q1 2016 and investors are acting like Apple is going under. I don’t think Apple will go bankrupt if they only sells 200 million iPhones this year, It still has a hugely profitable business.

    • Will Van Gelderen - 8 years ago

      Exactly. Another thing to look at is that a lot of these “Premium” phones do infact last longer than say a $100-200 Android counter part. If I buy a $650 phones, I sure expect it last longer than 2 years where as if I buy a $100-200 phone I just hope I can get over a years use out of it.

    • Greg Pryor (@gpo613) - 8 years ago

      I am on my 3rd iphone. I went 3GS, 5, and now 6S Plus. My cycle is 3 years. It works for me. The phones last and work for 3 years. I get a few bucks when I sell them. But I agree with Jon C in that my phone is my most used device especially since I went to the Plus. I have even noticed myself sitting down and not turning on the TV instead using my phone for a bit before moving to the TV. I like the iphones they work and they last. The ecosystem is great. Upgrades to software is good. At this point no reason to jump ship.

      But I do think the smartphone market has hit saturation. It happens with all products. Unless apple starts selling phones to aliens there isn’t another market to sell to that will move the needle. Now we are waiting for the next big thing in technology. Something that will have mass appeal. It will take some time.

  4. Oflife - 8 years ago

    Out of the 20 or so core colleagues I associated with, those who are 100% non technical and do not know ‘what is good for them’, own an iPhone. And, despite what I am about to say, happy with it. The technical ones, all own Android phones with similar specs to iPhones, but that cost (in particular with Motorola G and X models), almost a 1/3 for the same spec and a more robust body. You even get NFC an Stereo speakers on many Androids, and wireless charging, such as on the still awesome Nexus 5 Mk1, of which the 32GB model can be had used for about £200.

    I have the Samsung Galaxy Note 4, probably still the best mobile phone in the world, and certainly better than any iPhone model, even if the experience is not always as slick as iOS. Let’s see: 1. Superb Wacom stylus that makes operation a delight and inspires creative thinking. 2. Tough plastic rear that does not scratch when dropped. 3. Excellent sound quality during calls and speaker. 4. Long lasting battery, two days typical use. 5. £5 ($7) for a wireless back from China (I have one and it works superbly.) 6. 32GB RAM + miniSD card slot. 7. Removable battery which makes resets easy and you can carry a spare. 8. Very fast, no slowdown at all with Android 5.0.1. 9. Amazing camera, shoots 4K with STEREO audio, unlike any iPhone – so your audio sounds real. 10. £200 approx less than a mid level iPhone.

    And here’s the clincher, the Note 5, although without memory expansion, is even better. And wins all the ‘best of’ awards on GSM Arena, along with the Note 4.

    The current iPhone has those ugly antenna lines on the rear, and is fragile, so you have to spend more on a case. (Note 4 doesn’t need one.)

    People are getting wise to the fact that as per Windows and OS X, once you’re running apps, it doesn’t matter what OS you’re using, so that is why the iPhone is projected to suffer a sales slowdown. And it’s not innovative! Where’s the stereo speakers? Stylus? non Apple garden walled NFC?

    Typed on a Surface Pro 4, the machine that made me dump my MacBook Pro 13″ Retina.

    But I bought a latest gen iPod Touch and it’s lovely, way better value than an iPhone (1/3 price!) and technically more impressive being it does ALL an iPhone does in a body 1/2 as thin and light. And I can communicate using it via hotspots or tethering it to my Note 4 as a nice secondary device or for playing iOS games.

    Oh and one more thing, Apple are messing with global standards, why no USB-C in the iPhone or latest iPads, yet in the new MacBook?

    All my devices, except the iPod Touch use global standards, so charging and so on is never an inconvenience.

    • PMZanetti - 8 years ago

      Android is imitation cheap garbage joke nonsense. Pretending otherwise is beyond pathetic.

      • Daniel Reyes - 8 years ago

        No. it’s a completely functional OS aside from Apple’s domain and saying what you just said without even a miserable argument is beyond pathetic.

  5. patstar5 - 8 years ago

    I still can’t believe people are paying $650+ for iPhones and android flagships. I guess carriers are trying to hide price through financing. I’ll rather buy my phone outright. There are a slew of android phones coming out with pretty great specs and performance for way less than an iPhone or big brand android flagships.
    Look at the honor 5, 5.5 inch 1080p screen, fingerprint scanner, aluminum, and it’s all for $199. Though they really do try to mimic ios with their ugly EMUI.
    As long as apple has people tied into their ecosystem, I don’t think alot will be switching.
    Then again, saving $300+ on a phone allows you to re buy most of your apps… I wonder how modular phones will shake up the market.

  6. applegetridofsimandjack - 8 years ago

    iPhone prices have risen every 2 years in Europe. From 575€ for the 16gb iPhone 3GS to 600€ for iPhone 4, to 650€ for iPhone 4s to 700€ for iPhone 5 to 759€ for iPhone 6S.

    All prices are for the 16GB models

    Absolutely ridiculous. Apple just keeps rising the prices because they want every penny they can get. I bet iPhone 7 will start at 800€ for the 16gb model.

    • just-a-random-dude - 8 years ago

      You do realize the price is increasing because the value of dollars is getting stronger and stronger compared to euros, right?

      • Grayson Mixon - 8 years ago

        Exactly. The cost of the phone is staying the same. The units you use to buy it keep getting smaller, so it takes more and more units to add up to the same value.

      • Fab1Man (@Fab1Man) - 8 years ago

        The biggest problem here is the margin of Apple. The price of an iPhone in the US hasn’t risen significantly, it even got cheaper for the 64GB model. The 16GB model is at a steady $599. In Europe the price has risen and yes this is due to the exchange rate. However, I’ve only seen Apple adjusting their price this harsh. Their MacBooks got 200 euros more expensive over one night, after a new product launch of some sorts. I’ve seen no other manufacturer rising their prices for the exact same model overnight. If it were a spec bump model and “reintroduce” it at a new price, fine, that’s one way to go.

        The pricing strategy of Apple pisses me off, because Europe hasn’t been a big market for Apple ever, mostly because of their own fault. European countries are still being rolled out in several phases, in which you don’t feel important enough as a customer and then when it finally hits the store, in all the world you can pay relatively the most in Europe.

      • applegetridofsimandjack - 8 years ago

        I thought that too but the price hikes are way higher than what Apple is losing due to the decreasing value of the euro.

      • Grayson Mixon - 8 years ago

        The thing about rolling out in phases in Europe is that when negotiating, striking one deal hits many fewer customers than in the US or China.

        For example, Apple Pay is rolling out much slower in Europe than in the US. A major bank in the US has more customers than the entire population of Germany (I believe the largest EU country by population). So, it takes many more individual bank deals to get Apple Pay rolled out. So, it’s slower.

    • Avieshek (@avieshek) - 8 years ago

      It’s the same case in India. So, people will blame ₹ too?

  7. just-a-random-dude - 8 years ago

    Apple is actually trying the monthly price subscription model first before it even thinks about dropping its profit margins. They just need to expand it quickly and to drop the price slowly.

    The upgrade plans they have is actually very tempting to me, free upgrade every year and AppleCare included, that’s very nice. I definitely would not mind paying 15-20$ a month to upgrade the iPhone 4″ model every 1-2 years and Apple would make money on reselling the used models.

  8. Grayson Mixon - 8 years ago

    You make a great point, Ben. The hurdle to jump over next quarter is caused by a larger than expected quarter last year.

    I’ve seen many people in business make the comment that they want to be higher this year, but only slightly higher. If they set the bar too high this year, they won’t be able to be it next year. So, they intentionally lower things for a particular quarter or year in order to maintain a trend. (This advice also goes for buying gifts for your girlfriend. If you buy her a great gift now, any future gifts will be a disappointment by comparison.)

    • Jon C (@JonCBK) - 8 years ago

      But Ben misses a point that if there had been no 2014 supply constraint, then last quarter would have been the quarter where Apple saw year over year iPhone sales drop. The 2Q2015 sales would have gone into 1Q2015 (i.e., December quarter) and Apple would have sold even more at the end of 2014.

      • Ben Lovejoy - 8 years ago

        In that scenario, this piece would have been written three months earlier. :-) The same points apply.

      • Jon C (@JonCBK) - 8 years ago

        Yep Ben. And I agree with the point. We haven’t seen peak iPhone sales until we see real significant numbers switching from iOS to Android and low growth in developing world. We aren’t there yet. And Apple is probably going to break new records or be supply constrained at launch of iPhone 7. Though Apple may have to lower iPhone prices a touch.

  9. I think they’re safe for awhile until the general public picks up on other ecosystems which have surpassed Apple. Most people don’t pay attention though so it could be awhile. IMO, the only “ecosystem” advantage Apple has is iMessage. Google’s Photos, Drive, Music, and Productivity Suite are available w/ more free storage from the get go and are equal or better than the Apple equivalent. Not to mention, this ecosystem is cross platform.

    And while you mention in the article, the Nexus 6P isn’t a drastic price difference to an entry level iPhone but let’s not forget that this is the same size as the 6S+. For $500, though it’s usually marked down to $450, you’re getting a 32GB, OLED Display, w/ Fingerprint reader, etc. etc. Apple’s iPhone 6S+ starts at $750 for 16GB and to actually make it usable, you need to upgrade to 64GB. It’s at least a $300 difference. The user experience is arguably better depending on if you prefer Marshmallow to iOS.

    Put another way, for the price of 64GB 6S+, you can get a 32GB Nexus 6P, Huawei Watch, and Chromecast w/ unlimited free photo backup, free music backup, and 15GB of Drive storage.

    and don’t even get me started on the iPad Pro pricing…

    • viciosodiego - 8 years ago

      Many people don’t trust google with their data.
      When you use free” google services, you lose rites to your data.

  10. ロハン増進 - 8 years ago

    Seriously….. Margins,cost,peak point are not issue. When no one was selling phone for $600-$700 in market back in 2007, they still outperformed everyone. Despite of 5-6x times expensive than Nokia/Blackberry, they just slammed them. So I don’t think price is hurting them. Real issue is, Apple is so un-Apple now. Ridiculous designs(ugly iphone antenna lines, no more impressive square edges and curves on iphones, macbook with one port, magic mouse2, iphone 5c, ugly ugly yuck iphone cases, iphone battery case, apple pencil). No taste in their apps and software designs, horrible and failed os updates every year. As Steve used to say, you should feel sex appeal to the product, There is no appeal in Apple products now. Once because of their designs and rock solid performance, people used to throw their money to get their hands on it. Now who wants to spend money on ugly and tasteless products?

    • That’s a good point. In 2007, you were paying $600 to buy one of the greatest consumer electronic devices EVER. Now, you’re just overpaying for an average phone. That’s the problem w/ most of Apple’s new releases, they’re just average.

  11. Mike Wilcox - 8 years ago

    When we had a phone subsidy with our plan, you were stupid not to upgrade as early as possible (usually every two years), because you were paying for it already in your phone plan. So we did upgrade religiously every two years. We would even wait for retailer deals at Best Buy to get the $200 price down to $0 in most cases. Now At&t has locked us out of those deals too, essentially forced to pay full price upfront or pay full price over a payment plan! So now we’ve been pushed to slightly cheaper plans, but it the “discount” on the monthly bill doesn’t equate to the same amount of subsidy I was receiving. So now we are left with sticker shock pricing on these new phones, with less money per month to pay for them. So we are choosing to hold onto our devices longer. We would be more likely to upgrade if the price was in between the iPad mini (w/ LTE) and iPod Touch (which should have an LTE option). As it stands now, you pay over $100 more. There is little difference in hardware between an iPad mini (w/ LTE) and an iPhone.

  12. RP - 8 years ago

    No that’s not the problem. The Verge posted an article which states that only 40% of iPhone owners have upgrade to the 6 series. I think it’s always about the product. I myself have been giddy to upgrade from the 5s, but every time I think I’ll go for it, I hold it in my hand and am very unimpressed by it. If the 5s can do everything the 6 can do (minus the larger screen) but in an ugly form factor, I’ll just wait.
    The 6 had a lot of pent up demand in it’s larger screen, but the execution was post-SJ typical; Awful. Probably the most un-Apple iPhone ever released. It’s un-stylish un-sexiy and ridiculously gargantuan. If other smartphone makers can fit a larger screen in a smaller form factor than the 6, then that says a lot for the company that created the Macbook Air.

    The price didn’t keep me from upgrading, the product did. People have come to expect an insanely great product from Apple, and have shown that they are willing to pay for it. A somewhat good product? I can skip it. The 6 series has never been a sought after must have device and will never become a collectors item of any kind, It;s just Apple, as with a lot of recent products, releasing good enough.

  13. Robert - 8 years ago

    In Apple’s pattern the ‘s’ years are less of a jump in design, at least externally. The 6s was never going to generate the excitement of the 6 with all the hype about the bigger screens and all the people that held off based on the rumors of the upcoming big screens, the 6 was huge. That Apple matched iPhone sales with the ‘s’ is amazing!

    Apple still grew it’s revenue and profits despite not growing iPhone sales. This means that other products and services are growing. This is what investors (who fear Apple is a one trick pony) should be looking to see and responding positively to.

    The 4inch iPhone is going to confuse all this year on year comparison. It may be that it spreads sales more evenly throughout the year.

    • chrisl84 - 8 years ago

      Services didn’t float Apple, its older model sales in other countries like India that did. Services is far to small to make up for the fact that the S model appeal is dead. No one cares about Force Touch to drop 800 bucks on it.

  14. alexandereiden - 8 years ago

    If Apple releases the 4 inch phone, which is $100 less, this may eat some of their profit. Considering many phones are bought by parents for their kids, they likely will get the smaller, cheaper phone for a whole bunch of reasons. Then you have plenty others who don’t need/want the features of the premium phone, so they will go for the other phone. Yes there will be a many that will be like “eh just 100 more for a better phone, I can afford it so I’m going to get it.”

    The issue with this, is that revenue will be reduced, and therefore profit will be reduced, even is the profit margin remains the same. To counter this, Apple needs a phone 150-200 cheaper than their flagship phone, which puts it into the middle of the android market, for those who just cannot afford an iPhone. And this is better as well because there will be a 2-year upgrade cycle on the smaller phone, which makes it even easier for those who cannot afford flagship phones to be able to purchase a new phone every upgrade cycle. It is great that Apple releases this phone a quarter after the release of their flagship phones, so this boosts Q2 revenue for the future.

  15. Greg Kaplan (@kaplag) - 8 years ago

    Apple just needs to make real separate lines of iphones.

    Starting with the 5c apple started shipping multiple tiers of the last-years-phone. Before that they’d keep it at the lowest tier or even drop it down lower (ew 8gb). The other big shift was for the first time Apple put marketing resources behind it. It was a legit new line of iphone. The issue is it fell flat since everyone perceived the plastic as cheap and the 5s was also a really really good phone.

    When the iphone 6s came out the 6 and 6 plus still have multiple tiers – the difference is there is no marketing. And they really can’t market them. There’s nothing to say. “here’s our old phone… you can buy a 64gb version for the same cost as the flagship 16gb one…) Yea that’s a great sell.

    The new 4” is going to be really interesting. I can’t wait to see how they market it. This basically gives them something new to talk about. “check this out: we friggen shrunk the power of a 6 into a 5s size!”. They can ride the success of the 5s’s name maybe but more importantly it’s still aluminum and will still feel “premium” even if it doesn’t have top specks.

    With this camera news for the 7 p I could see Apple breaking out each phone size into a distinct line that covers price ranges like the ipads do. The plus one can continue to push new things and when it makes sense it will make it’s way over to the middle one. Occassionally the small phone will push new things that make their way over to the middle phone. Basically the middle phone is the best compromises of the large and small device – both pushing things harder in their perspective area.

    I still wonder if all this confusion about what’s coming next isn’t that Apple has 3 phones planed for the 7 release. 4″ 4.7″ and 5.5″

    The line would be iphone mini ( “5se” sitting below it); The iphone, (iphone 6s below it); and the iphone pro (iphone 6s plus below it).

    The iphone mini will be the device that drops the headphone jack. It makes the most sense for the smallest device to drop it and this gives people some time to get used to the idea. The Pro introduces the new camera. In a couple years we see both of these things make their way into “the iphone.”

  16. Kira Kinski - 8 years ago

    The margin Apple makes is growing long in the tooth, especially with how it hammers customers for increases in RAM, for example. Regarding the MacBook Pro and Mac Pro, I want to purchase a new one but cannot since Apple refuses to make a model that can be upgraded internally. (I want expansion slots in the Mac Pro, not just RAM and SSD swapping.) So there are two losses alone just from my household.

  17. Alexander Saberdine - 8 years ago

    I do not agree with this. (Even if it is true to an extent) Apple needs to put the innovation efforts into the software first and foremost. iPhone hardware is constantly being improved and refined so no issue there. I never understood this whining about RAM, if things work well then why care what hardware runs it?

    • iali87 - 8 years ago

      Because it will be better for you and me if we get better specs since we are paying premium prices. I still think it is unethical to force your partners to make almost to nothing while you still make the most out of it.
      I still can’t forget why the iPad one didn’t have a camera! I mean that was rude. Same strategy is played every year by Apple.

  18. Matt Wronkiewicz - 8 years ago

    Buying a Nexus 6P sounds like a fantastic deal until you realize the drawbacks. You really are getting what you pay for. Performance in most benchmarks is 70-80% of the 6S+, and that’s before throttling. After throttling, it’s not much better than a Nexus 5 from 2013.

    Battery life is not in the same league either. Marshmallow promises improvements, but results swing wildly between minor versions because Apple is much better at quality control than Google. As soon as you load your phone up with the essential apps, you’ll be lucky to make it through a day without a recharge.

    And then there’s the screen. OLED brings major saturation and contrast improvements over Apple’s LCDs. But it comes with a terrible price: burn-in. Go look at your friends’ one-year-old Samsung phones. You’ll see it if you know what to look for. Weird shadows all over the screen, blue-green tint, overall dimness. OLED screens are great as long as you are planning to throw them away in a year. I want to keep my phone for a lot longer than that. The Nexus 6P is worse than usual because of the soft buttons, which can cause noticeable burn-in within a week.

    Apple is not overpriced in this market. If Google is able to make the case that the iPhone 6S Plus and the Nexus 6P are in the same league, that’s due to marketing and the overwhelming prevalence of “first look” reviews instead of endurance tests.

  19. Avieshek (@avieshek) - 8 years ago

    Great article.

    What I would like to say, is portray what Steve Jobs said on his return to Apple, Apple got so involved with only profit margins thereby getting selfish that it failed to think about growing into more possibilities, this is the reason Apple got doomed. And this is the same thing happening folks, if u get a decent phone at $200 now, think about by the time it’s the year 2020. Surely, we won’t be getting glass free 3D-display but those budget phones would pretty much be all the requirement

  20. J.latham - 8 years ago

    Personally, they should do an iPhone 5s/5c launch every year. All new flagship and all new budget friendly or smaller model every year. Similar specs with some items scaled (clock speed, battery capacity, screen size) for the mini and plus versions. And start at $399 or $449 for the mini and go up $100 for every screen size. While it may drop profits a little bit, it should still offer a good return in the profit side and grow the user base for their expansion into services and emerging markets.

  21. José F. - 8 years ago

    Fun fact. If you buy an iPhone 6s 16GB on the US it will cost you around $700 (after taxes) right? If you buy that same iPhone here on Mexico, due to the change rate and our taxes we pay around $800 and guess what? Our minimum wage is around $4 dollars the hour… So yeah if Apple wants to stay relevant in growing markets it need to be able to sacrifice a little of the profits. I bought a 64GB iPhone 6s and I love it but it was reeeaaaaally hard to convince myself to buy it.

  22. bdkennedy1 - 8 years ago

    Apple is not going to reduce their margins. That’s desperate. The market is simply too saturated and people aren’t upgrading as often. Especially iPads. If Apple can create an iPhone as beautiful as the 5, and nothing like the awful 6 (Jony checked out on that design), they could have a winner.

    • ロハン増進 - 8 years ago

      Because Apple is not giving them a reason to upgrade. iphone are not worthy as it used to be till iphone 5S. Their new yuck and ugly desings in software and hardware makes people think twice to waste money on it. When they had real class, people were happily ready to throw their money. Why should I pay premium price for a product which in not premium?

  23. I bought a 6 plus, paid it outright, and sold it for like 600 dollars and used that to purchase a 6s plus outright. I like the phone and am perfectly comfortable with the amount I paid. However, there is something odd when an entry level 11in air is only 150 more than the 6s plus 128gb unlocked.

  24. rettun1 - 8 years ago

    Id be more in favor of apple keeping the same prices while increasing the proformance of their devices (more ram, little more battery, more storage), instead of just simply lowering the costs. They definitely want to keep the image of being a premium brand, and maybe that will being back the days of Apple having superior hardware and specs

  25. Zabdiel Titus Scoon - 8 years ago

    For such a large organisation it’s certainly a tough call. Reducing margins requires selling significantly more products/services. I would more likely expect Apple to look at maintaining a similar profit margin, perhaps slightly less, but looking for steady growth in iPhone sales but more importantly investing in future products with similar profit margins and possibly similar refresh cycles or alternate cycles to maintain profits/growth.

    Regarding software and services. After living with an iPad for 12 months I realise it’s potential and it’s drawbacks. iOS needs more functionality for business, outside the creative realms which has already vastly improved. Xcode, a fully featured MS Office/Pages/Number etc for business and better multitasking to name a few features that could boost this product area and draw the ever increasing number of people working outside the office who don’t need to have a laptop. Look at the latest thoughts in The Netherlands employment law that will possibly allowing employees to spend more time at home working.

  26. jorge1170x - 8 years ago

    Everyone keeps speculating about what will happen to Apple, but it’s actually pretty obvious to anyone who has even a small knowledge of History. Assuming Apple continues its current business model of maker of “luxury electronics”, which they pretty much have to, they will slowly but surely become the same sub-10% player that Cadillac and Porsche are in the auto market, and that Apple itself was in the 90’s, when it almost went bankrupt before the Microsoft bail-out (Bad call Bill Gates! :)). The market-share gobbling Apple you see today is nothing more than a consequence of the “pocket computer” still being a new technology to many people, especially globally. When the automobile was a new technology at the turn of the last century, ALL automobile makers were in the “luxury car” business because the only people who could dream of owning a car were going to be very rich and would demand the best materials, etc. Eventually that changed and luxury automobile makers took their place on the fringes, serving just the sub-10% market. Whether it takes 5, 10 or 15 years, the same thing will happen to Apple, because it has to. Anyone that thinks they are immune to this reality doesn’t understand human nature or history.

    • Grayson Mixon - 8 years ago

      Apple has consistently used the Mercedes/Ford analogy. They are aiming to be Mercedes, not Ford. Luxury auto makers are still in business, and make a lot of money. And they make aspirational products. Most people in the developed world don’t dream of one day owning a Toyota. They do dream of one day owning a Ferrari. That’s the position that a lot of people around the world put the iPhone in. They have a cheap Android, but want to one day be able to buy an iPhone. It works for Apple now, and has worked in other industries for a long time.

      • jorge1170x - 8 years ago

        There’s no question it works for Apple, and will work for a long time, it just won’t generate any new growth, that growth period is over, the decline into luxury territory has begun. They will continue cater to the certain percentage of any population (<10%) that are willing to pay double or triple to own the status item. Rolls-Royce is still around and profits handsomely I'm sure, but is anyone clamoring to buy RR stock? It is foolish to think that everything that applies to the Ford/Mercedes relationship can also apply to the fickle consumer electronics field. Mercedes can put the finest materials in their cars at their respective price point, while Ford simply cannot. But going forward, how much "luxury" can Apple build into an electronic device that Xiaomi, Huawei or even Foxconn cannot replicate even before it leaves the Chinese factories? Already, Apple is behind others in terms of camera optics and screen resolution. Many reviewers even say there are fingerprint readers better than Apple's, and Siri pales next to Google Now by all accounts. At least with Mercedes, EVERY single piece of the car is superior to EVERY single piece in the Ford.

      • 7nut - 8 years ago

        Yeah, agree with the aspirational analogy’s but even Mercedes are creating more mid market, affordable models.

  27. ericisking - 8 years ago

    I have to admit, with my contract up later this year, I’m seriously looking at the OnePlus X and thinking what I could do what that extra $500, like put it towards a new MacBook. I still prefer IOS, I’m heavily invested in the ecosystem, my experience of Windows Phone and Android in the past convinced me that iOS is by far the best platform – but is it $500 better? I’m only 50% convinced at this point. The price gap is getting bigger, differences are getting less each year. The iPhone is clearly the best phone, in my opinion, but how much better is it? Can they really ignore pricing trends completely? Can they find enough innovation to maintain a big gap in quality? Time will tell, and the iPhone 7 will be interesting.

    • jorge1170x - 8 years ago

      So many people formed a bad opinion about Android between 2009-2013 (or so) that I’ve suggested on Google’s blogs they should really abandon the name altogether, since Today’s Android is quite refined and yesterday’s was’t and consequently left a bad taste in everyone’s mouth, no thanks to Samsung’s awful skinning of it.

    • Heather Lopez - 8 years ago

      Exactly, in the past I owned several Apple devices, iPhone(s) and iPad(s). Currently, I have an iPhone 5S and two iPad Air. Is not that I can’t afford the devices, but given the economic climate in the U.S. and in the world, I’m saving my pennies. There are more pressing and important issues than a “phone”. I’m very pleased with my Moto G 3rd generation, which I picked up during the holidays, and guess what, is water resistant. If Apple wants me to spend $600 for a phone, they have better change that ugly design, add more ram, and get away from the anemic 16Gb storage. With the Moto G I can pop a micro card and be on my way. Also, the Chinese OEM are starting to make their way to the US.. Anyway, very nice, informative article.

  28. jorge1170x - 8 years ago

    “Peak iPhone” is not a temporary thing, it’s the reality moving forward. Apple won’t compete in the low-end, so they will eventually have to settle for the 10% or less of the world for whom money is no object, and that will be a fine way to make money. So they can be the Rolls-Royce of electronics if they want, but if you really think about it, that sounds like a really absurd and potentially unrealistic/unsustainable long-term business model. Most people who now view electronics as they do cars, simply won’t do that once the features become too similar, which is already happening.

  29. After my HTC One X’s battery life deteriorated to less than 10 hours after 3 1/2 years service in November, it was time for a change. My wife has been an Apple disciple for years and so was familiar with her 5s so I considered a 6 along with a Nexus 6 and 6P and was severely tempted with the Sony Xperia Z5.
    Thing is, as an engineer by trade, looking at it from a pure “what can it do for me” perspective, the few additional features offered by the Apple and the high end Android phones didn’t stack up to justify the premium. In the end, someone not unfamiliar to us all on this article suggested the Motorola Moto X Play. Without going into details, it’s great! Sure there’s no fingerprint scan or anything but will I REALLY use those sorts of features? At £220 over the Cyber weekend compared to £459 for the base model 6, it was a no brainer. Especially as the hardware does not feel second rate in comparison when handled in the shop.
    In summary, IMHO, I think Apple need to match the price of the top end Android devices AND, come up with a mid price iPhone around the £250 with the main features of the high end models but without the costly, nice to have snazzy features. There must be millions of consumers like myself who want the latest tech but aren’t “Techies” as such, want and could afford an iphone to join the Apple ‘collective’, but can’t justify it due family and other financial commitments,
    If there’d been a mid market iphone ‘6B’ (B for Base model) around the £250 mark, I would have probably plumbed for it over the Moto X Play.
    Am I right or wrong?

  30. I for one am getting sick of hearing about how much money Apple does or doesn’t make. I’d like to learn more about how much they hide from taxation as well. The margin on Apple products is also beginning to annoy the $57t out of me. Im nowhere near the fan I once was.

Author

Avatar for Ben Lovejoy Ben Lovejoy

Ben Lovejoy is a British technology writer and EU Editor for 9to5Mac. He’s known for his op-eds and diary pieces, exploring his experience of Apple products over time, for a more rounded review. He also writes fiction, with two technothriller novels, a couple of SF shorts and a rom-com!


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