How should Apple approach the decline in iPhone sales?
iPhone sales represented 63% of Apple’s net revenue in 2018. While the iPhone is the primary business for Apple, global sales of iPhones have significantly declined over the last year. According to IDC, the worldwide shipment of iPhones has dropped by 30.2% over the first quarters of 2018 and 2019. Overall, there are two explanations for the decline: the global market of smartphones has been declining and mid-tier smartphones have increasingly challenged high-tier smartphones.
The first step in analyzing the decline is to realize that the primary reason for the global decline is the decreasing frequency of smartphone upgrades. According to Anthony Scarsella, a Research Manager at IDC, “Consumers continue to hold on to their phones longer than before as newer higher priced models offer little incentive to shell out top dollar to upgrade. Moreover, the pending arrival of 5G handsets could have consumers waiting until both the networks and devices are ready for prime time in 2020.” While Apple is affected by the overall market decline, its revenue drop can further be explained by the increasing availability of improved mid-tier devices that provide premium designs and features at much lower prices. According to Roberta Cozza, senior research director at Gartner, “In mature markets, the high-end smartphone market is particularly oversupplied and commoditized, with higher average selling prices and no compelling new utility or experiences for users to upgrade to”. Thus, the release of Google Pixel 3a in May 2019 represented a direct challenge to iPhone X.
Considering the significant decline in iPhone sales, Apple has four options to compensate for losing profits: to raise iPhone prices, increase iPhone unit sales, decrease costs, or focus more heavily on other products/services.
Option 1: Increasing the price of iPhones is something that Apple has been doing since the introduction of its very first iPhone. One possible explanation for the customers’ willingness to pay ever-increasing prices is a relatively low price sensitivity of Apple’s customers due to the premium nature of the brand. However, most of the research data indicate that smartphone users are becoming more price-sensitive than before. A recent survey of 1,303 smartphone users in the US conducted by USA Today (2019) has shown that only 3% of all the smartphone users in the US today are willing to pay a price of over $1,000 per device. Almost an identical result was found by Counterpoint Research (2019), which points out to the price ceiling of $1,000. In addition, based on multiple reports by IDC, including the report on the Chinese market for smartphones, it seems that the issue with the increasing price sensitivity is not only the US-specific but global. Considering the consumer price ceiling and the intense competition between mid-tier and high-tier smartphones, it is not clear how flexible Apple is in charging higher prices for its new iPhones.
Option 2: Increasing the number of units sold may require either increasing the frequency of upgrades or attracting new customers. Increasing the frequency of upgrades is something that Apple is already doing through its iPhone Upgrade Program. Increasing the number of new iPhone users essentially means making more Android customers switch to iOS. According to the research conducted by Consumer Intelligence Research Partners, the share of Android users who switched to iOS has gone up over 2017–18. “It appears that iPhone XR did serve to attract current Android users”, said Mike Levin, CIRP Partner and Co-Founder. “Of course, Apple doesn’t just state plainly its launch strategy. But, based on the pricing and features, we can infer that Apple positioned the iPhone XR to appeal to potential operating systems switchers from Android.” As a result, it looks like Apple is already doing everything it can to increase the number of iPhone units sold.
Option 3: Decreasing the costs could be achieved by decreasing variable costs, fixed costs, or both. Although cutting costs sounds attractive, multiple sources, including the iPhone costs analysis by Tech Insights, indicate that Apple’s variable costs (materials & assembly) are already at a pretty low level. Talking about fixed costs, Apple could consider reducing its R&D expenses or decreasing salaries. However, it is not clear how the reduction in these parameters would affect Apple’s productivity and future profitability. It is also worth mentioning that as of today, Apple is experiencing potential threats from the US-China trade war, which may lead to the significant growth of production costs for Apple. According to the estimates by J.P. Morgan, the effect may be so notable that Apple, for example, may need to raise the price of the iPhone by 14% to offset the impact of a 25% tariff. Altogether, decreasing costs doesn’t seem to be the best option, at least in the short term.
Option 4: Apple may also consider increasing profits from non-iPhone products, which can be achieved by rising prices, growing units sold, reducing costs, or introducing new products/services. Considering the sales tendencies of Apple’s major revenue sources, it would especially make sense for Apple to focus on ‘Services’ and ‘Wearables, Home, and Accessories’ categories that have the highest margins and an actively growing share of the overall business. Apple’s services include Digital Content and Services, Apple Pay, iCloud, and Apple Care.
Conclusion: iPhone sales are declining, and Apple cannot do much about it in the short term. However, in the current situation, Apple may greatly benefit by expanding its ‘Services’ and ‘Wearables, Home, and Accessories’ categories.Not only those two categories will help to partially compensate for the declining sales of iPhones, but they will also create an additional layer of loyalty by making customers interact with Apple’s core products more frequently. It is also worth mentioning that profit margins from services are much larger than from anything else that Apple offers. Overall, the expansion of those two categories will help Apple to gain additional loyalty from its customers, which will consequently help the company to compete better with both mid-tier and high-tier smartphones as well as to charge higher prices in the long term.
