You saw it coming, of course. But don’t get too cocky; we all did.
Apple Inc.’s admission that sales of its iPhones would fall $5 billion short of expectations was a stunner, all right. But it wasn’t exactly a surprise. For the past couple of years, the company has propped up its revenue by charging lavish prices for the iPhone — $1,000 or more for a gadget that’s only slightly better than the one users already had.
It was only a matter of time before people said “no more.” And when they did, they said it in Chinese.
We should have seen that part of it coming, too. China is Apple’s third-biggest market, after the United States and Europe. But it is facing a sluggish economy, aggravated by a simmering trade war with the United States. At the same time, the country’s own smartphone makers, like Huawei, Oppo, Vivo, and Xiaomi, make excellent phones and charge half the price of an iPhone. So when millions of patriotic Chinese facing a thrifty new reality are due for a new smartphone, why bother with Apple?
But the Chinese downshift isn’t the whole story. In his letter to Apple shareholders, chief executive Tim Cook admitted that even in “developed markets, iPhone upgrades also were not as strong as we thought they would be.” Presumably he is referring to the United States, Europe, and Japan.
To Tim Bajarin, president of industry research firm Creative Strategies, the message is clear: Apple’s nosebleed pricing strategy has reached its limit.
“I think Apple’s actually dealing with the threshold of how much they can charge for a product,” Bajarin said. “I think everything over $1,000 isn’t going to fly anymore.”
And that means Apple’s in for a challenging year or two, as it recalibrates its business strategy. (The stock took a major drubbing on Wall Street Thursday, igniting a big selloff in US markets; it ended the day down nearly 10 percent.)
Let’s not exaggerate the damage, though. Apple is still vastly successful and astoundingly rich. It expects to have about $130 billion in cash at the end of this quarter. And despite the falloff in China sales, Cook said first-quarter earnings per share would set a record, thanks to a 19 percent revenue increase in the company’s other businesses — Apple Watch, cloud-based services such as Apple Music and the App Store, and the venerable Mac line of personal computers, which got a major overhaul last year.
Still, the iPhone is about two-thirds of Apple’s revenue, so the company must change its ways. So what’s the plan? In his letter, Cook tells us what to expect.
First, Apple will offer new incentives to trade in old phones. It sounds like a continuation of last year’s unusually aggressive trade-in program, the desperation move that alerted Apple-watchers that there really was trouble in paradise.
Still, it’s a smart play. Apple can avoid a humiliating and costly price cut on its premium products, while still making them more affordable. Meanwhile, the used phones get refurbished and resold, often to people who’ve never owned an iPhone before. Now Apple can sell these people on subscribing to the company’s cloud-based services, like music streaming, apps, and online data storage. It’s an excellent way to keep making money in a smartphone market that’s not growing anymore.
Yet this strategy amounts to a holding action. Cook alerts us to expect more. “Apple innovates like no other company on earth,” he said, “and we are not taking our foot off the gas.”
What’s next? The next big thing in smartphones will probably be 5G, the superfast wireless technology that’s just starting to be deployed in a few cities in the United States and abroad. Apple has said it doesn’t expect to sell a 5G iPhone until 2020, which makes sense, because it will probably take at least that long before 5G is widely available.
But other phone makers, including Samsung and Huawei, plan to offer 5G phones this year. So 5G alone won’t give Apple much of an edge, unless they can combine it with something more.
Like augmented reality, perhaps. That’s the technology that lets you see digital images overlaid on the real world, and without a lot of fuss, Apple has been making major investments in it.
For one thing, Apple has added augmented reality features to its iPhone software. But it has also spent millions of dollars buying up companies that make the components needed for a new kind of augmented reality device. One of them makes sensors for tracking eye movements, another makes head-mounted displays, and another builds see-through video screens for AR glasses.
Existing AR glasses are far too heavy and bulky because of all the computing horsepower needed to make them work. Enter 5G. It moves data so fast that remote computers in the cloud could do the hard work. Then the network could relay augmented reality images to a sleek and comfortable pair of glasses with the Apple logo etched into the frame.
Tim Bajarin is convinced AR is Apple’s next big bet. “If they get that right,” he said, “it’ll be another big, innovative hit for them.” Indeed, it would be Apple’s first new product category since the iPad was released nine years ago.
Can Apple make it work? It’s no sure thing, but the company needs a new hit. After the Chinese meltdown, Apple’s smartphone business will never be the same.