Apple’s in trouble.
The company depends on iPhone revenue for growth. But the iPhone isn’t growing.
The competition is. Growth by Chinese smartphone upstarts is in the double digits.
Meanwhile, Google is suddenly more serious about smartphone hardware. And Samsung is about to announce a new line of amazing phones.
Enterprises and businesses gravitate toward Apple in large part because of its market leadership, which translates into industrywide buy-in by developers and third-party service providers.
Is it time to panic about Apple?
The short answer is: no.
The longer answer is: It’s complicated.
Let’s understand all this.
The software troubles
Apple has a great reputation for quality control. But that reputation has taken a hit lately. Apple recently began investigating widespread problems that occur during calls on its flagship iPhone X.
Some users say the touchscreen won’t turn on for up to 10 seconds when a call comes in, making it impossible to answer.
In some cases, the display won’t “wake up” after users move the phone from their ear, so users can’t hang up calls. They’re also finding that users are accidentally “butt dialing” emergency services, then can’t hang up.
Others have reported that they can’t quit apps during calls.
The list of issues is significant. Text messages are showing up in the wrong order. Apps are crashing.
In short, the iPhone X has been plagued by a long list of unfortunate problems.
The good news is that they’re the good kind of problems — they’re software-based and therefore fixable with updates.
The real “bug” is in Apple itself. The company realized that its own complexity of process and product is leading to an unanticipated lowering of software quality. That’s why Apple software chief Craig Federighi has reportedly instructed his team to slow down on some new features and focus instead on improving quality, and also on the ability to ship on time.
This dent in Apple’s reputation isn’t the end of the world, but it won’t help iPhone sales.
The sales troubles
A year ago, analysts assumed that iPhone 8 and iPhone 8 Plus sales would be close to normal, and that additional iPhone X sales would drive overall iPhone sales into the stratosphere — an expected event they called the “super cycle.”
Turns out there was no “super cycle.” It wasn’t even a regular cycle.
iPhone X sales actually fell, prompting Apple to adjust future sales expectations, according to some reports. Apple sold 1% fewer iPhones in the last quarter of 2017 compared with the same quarter in 2016.
KGI Securities analyst Ming-Chi Kuo says the iPhone X will be canceled, with “production ceasing in the summer.”
Kuo said the reason for iPhone X’s woes is: China. Chinese consumers, he believes, like bigger screens and hate the iPhone X’s “notch.”
It’s likely that iPhone sales in the current quarter will also turn out to be lower than last year.
Apple admitted Dec. 20 that as iPhone batteries age, performance is throttled by design. Apple then offered everybody a battery replacement at a steep discount: $29 (instead of $79).
By extending the lives of older iPhones with new batteries (and also un-throttling performance), Apple is actually hurting its own sales.
Apple’s core competency is making money. Even with the iPhone decline, revenue increased by 13% because of higher prices — the average price of an iPhone increased by a whopping $100. While that price increase boosted revenue, it also contributed to the drop in sales.
Meanwhile, while Apple sales declined, the Chinese upstarts were on fire (not in the Samsung Galaxy Note 7 sense, but in terms of sales growth). Xiaomi’s sales increased by an incredible 70%. Huawei and Oppo each grew by more than 10%.
What is Apple going to do about it?
Weird is the new normal
The smartphone industry is changing fast. And the iPhone is, too.
Kuo says Apple this year will release a new version of the 5.8-inch iPhone X, plus a 6.5-inch “Plus” version. He says a third “budget” iPhone, which could be called the iPhone SE2, will look more or less like the other two, but will be made with an LCD screen instead of OLED, as well as offer inferior camera tech, RAM, battery and frame. By “budget,” he means it could cost $699.
Even if these phones are amazing and popular with consumers, it’s unlikely that Apple will return to the growth we’ve all come to expect.
It seems to me that the smartphone “fever” arguably peaked in 2015. That’s when buyers were extremely brand loyal, felt compelled to upgrade faster and when China and many other markets were rapidly switching from feature phones to smartphones.
TrendForce predicts smartphone market growth momentum will stay flaccid, with lower demand and fewer upgrades than previous years? The industry should build about 1.5 billion smartphones, which is a 2.8% increase.
An increase sounds positive, but the actual number of smartphone users will grow more than that. What’s happening is that the rate of upgrades is slowing.
I believe smartphones in 2018 are becoming like tablets: The old device is still working fine, so why upgrade?
While technology continues to advance, customer satisfaction with new devices is merely matching satisfaction with older devices. In other words, while people love new phones, they increasingly still love their old phones.
Is it time to panic about the iPhone?
Why iPhones will endure
The doom-and-gloom around iPhones is overblown.
When we look at sales of iPhones vs. the Chinese upstarts, it’s important to understand that the Chinese market is where these changes are most dynamic.
The iPhone X sales disappoint because of China. Xiaomi, Huawei and Oppo sales impress because of China.
If your company isn’t in China, these mega-changes don’t really affect you.
Apple will continue to decline in China because of the growing appeal of Chinese brands in that market.
But those same companies won’t challenge Apple in the United States any time soon.
In fact, U.S. intelligence agencies, including the FBI, CIA and NSA, this week warned Americans against buying products from Huawei and ZTE, citing security risks from the Chinese government.
These brands still have low recognition in the US, and in any event are being largely excluded here by the carriers, which still have enormous control over sales.
OK, but what about Google and Samsung?
Early last year, it appeared that Google’s Pixel line and startup Essential would transform the smartphone market.
IDC says Google shipped just 3.9 million phones last year. That’s how many iPhones Apple sells in a week. (If that sounds bad, know that Essential sold only 88,000 units shipped in their first six months.)
But it appears that Google is getting super serious about phones. The company acquihired HTC’s mobile division for $1.1 billion. HTC is the company that made the Pixel and Pixel XL phones.
Meanwhile, Samsung’s answer to the iPhone X and Pixel 2 is: Samsung Galaxy S9 and S9 Plus, which are expected to be announced Feb. 25.
The S9 is expected to have a great camera, which can focus fast and record super slow-mo video. It also should take pictures in very low light.
The phone should boost security by adding iris scanning to the face recognition.
Despite these market threats, Google and Samsung are unlikely to unseat Apple’s dominance in the US market any time soon, especially in the enterprise arena.
Apple’s real crisis
Apple is arguably the most successful company in history.
The Silicon Valley giant has gifted shareholders with very strong growth, year after year. If you had invested $990 (less than the cost of an iPhone X) when Apple went public in December of 1980, your Apple stock would be worth $394,758 today. Not bad.
Growth like that becomes an expectation. So what is Apple going to do in the next 38 years to maintain that clip?
It’s safe to say that smartphones ain’t gonna do it.
In the short term, Apple will probably return to smartphone unit sales growth, and maintain revenue growth.
In the medium term, I expect Apple to push harder and more explicitly into the enterprise with offerings around integration, security, cloud services and A.I.
In the long term, Apple will be forced to enter a gigantic new business to replace the iPhone as the driver of Apple’s crazy growth and conspicuous dominance.
So what’s Apple’s next move?
Smart glasses? Self-driving cars? Content?
That transition is the real Apple crisis. When you’re the most successful company in history because of your smartphones — and smartphones are losing steam — what’s the next big pivot?
Without its visionary founder Steve Jobs, it’s not clear that Apple has the vision to dominate the industry with one more thing.