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Summary:

Apple has found ways to keep the iPhone growing in emerging and also established markets. But it’s coming at the cost of slipping profit margins.

iPhone5iOS7

Between March and June, Apple’s iPad shipments dipped 14 percent. The Mac is dropping along with the rest of the PC industry, and the iPod has declined so much it barely merits a mention from the company anymore. But the iPhone, six years after its debut, continues to find room to grow. This past quarter, Apple says it shipped 31.2 million iPhones, which amounts to growth of 20 percent from the 26 million iPhones shipped the same quarter a year ago.

Despite the increasing saturation of the smartphone market and rapidly advancing competition, Apple has pulled off that feat with little tweaks and adjustments here and there to the company’s pricing and distribution choices. But mostly, Apple has learned how to sell to both the high-end smartphone customer and the first-time buyer overseas who pays a lot of attention to the price tag. It’s a key development that is helping Apple manage its transition from the iPhone to whatever is coming next for the company.
iPhone unit sales, Apple, 2010-present
The iPhone 5, which debuted last October, is still Apple’s most popular model iPhone “by far,” according to CEO Tim Cook, who did not detail the exact breakdown of model sales. But as data gathered by Consumer Intelligence Research Partners showed yesterday, the iPhone 4 and iPhone 4S are still doing surprisingly well despite their age.

Apple says the iPhone 4′s enduring popularity is due to the attractive pricing (it’s free on contract). But what’s interesting is not that Apple is doing well with a cheaper iPhone in developing smartphone markets — sales in India were up more than 400 percent, Turkey and Poland more than 60 percent during the quarter — but that it’s continuing to help the iPhone draw more first-time smartphone buyers in well-established markets.

“The U.S. was up over 50 percent, and U.K. about 50 percent,” Cook said on the earnings call with investors Tuesday afternoon. Even he sounded a bit surprised at how the iPhone was growing: “We had several regions where iPhone growth actually accelerated from the previous quarter, which is an unusual pattern for us. We were very, very happy with this.”

 So how did Apple do it?

  • Promoting the iPhone 4 and 4S in its own stores: CIRP data showed 38 percent of the iPhones sold in Apple Stores last quarter were iPhone 4S devices; the iPhone 5 accounted for 48 percent of all iPhones sold in Apple Stores.
  • Using promotional pricing: the trade-in and cashback incentives were used in India during the quarter are a good example of tactics Apple has learned to deploy.
  • Fine-tuning its retail strategy in countries where its usual sales tactics don’t really work: no Apple Stores in India, no cellphone subsidies in Russia.

Russia is a good example of Apple tailoring sales tactics to particular markets. Fortune noted earlier this week that Apple has been shut out by a lot of the country’s top carriers because they don’t want to offer the subsidies that Apple usually asks, and because of extremely high import duties that get tacked on to an already pricey phone. But as Cook tells it, Apple simply bypassed the carriers — and for the last quarter it clearly worked:

“If you look at Russian market, over 80 percent of smartphones are sold in retail outside of carrier stores. We sell through a number of national chains there. … Our activations in Russia for iPhone set a record last quarter — our highest quarter ever. We’re really happy.”

In a place like Russia, an iPhone 4 price is a much bigger discount relative to a new iPhone 5′s price in terms of unsubsidized pricing. So Apple has in effect found a way to offer a discount on the iPhone to Russians after all.

The margin problem

There are some snags to this plan of pushing lower-priced iPhones though: Apple’s revenues are still predictably high, but its profits are sinking. The $6.9 billion in profits recorded in the most recent quarter were way down from the $8.8 billion recorded a year ago. The profit dip was a repeat of the January through March earnings: revenue was up, but profits were down.

Sanlitun Apple Store, Beijing, China

Sanlitun Apple Store, Beijing, China

The iPhone’s average selling price, in particular, was down $27 or 4 percent from the same quarter a year ago, and down $32 from the previous quarter.

But despite Cook’s professed happiness at the iPhone 4 and 4S’s success, he is by no means resigned to chasing the low end of the market. “I don’t subscribe to the [idea that] the higher end, if you will, smartphone market has peaked,” he told an analyst. “I don’t believe that, but we’ll see and report our results as we go along.”

Apple has made its home at the high end, selling premium products and then bringing price down slightly to capture aspirational purchases. It did this with the iPod and in some ways with the Mac and most recently the iPad. It’s how the company has been able to broaden its customer base and keep competition at bay.

That seems to be what’s happening here. The iPhone is no longer new, it is no longer leaps and bounds ahead of its competition, so Cook is keeping the iPhone afloat by finding ways to discount it and reach new customers. This is a good strategy provided he has something else in mind to follow the iPhone that will bring margins and profits back up.

It’s easy to infer from his and other execs’ comments that it is working on that something. CFO Peter Oppenheimer referenced “a very busy fall” and Cook himself reiterated Apple’s plan for “new products that we will introduce in the fall and across 2014.”

The question is whether any of those products — a wearable computer, a television, or something else — can replicate the iPhone’s mass appeal and return Apple’s profits to their lofty status. Apple still makes an awful lot of money, but the reason its stock has suffered in the past year is because investors saw this profit drop coming.

  1. Prasad Tiruvalluri Tuesday, July 23, 2013

    I think it is because of all the deals it had with the carriers in its heyday. Once they come to a close, it is shutters for iPhone..

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    1. Did you read the article?? In Russia, India and turkey sales grew strongly and none of these markets subsidize the iPhone.

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      1. >> Apple simply bypassed the carriers in Russia — and for the last quarter it clearly worked:

        The Russian carriers stopped carrying iPhone 2 weeks ago. We will know next quarter how that affects Apple. Not the last quarter. In India, no carrier subsidizes the iPhone because the service cost in India is possibly the lowest in the world and there is no revenue for carriers to offset any subsidies. Consequently iPhones sell very poorly in India. A 400% increase doesn’t mean anything without absolute numbers.

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  2. An Apple iWallet on the iPhone could compensate, for lower margins or a cheaper iphone, by a small fee for every transaction. Big money.

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    1. Precisely and more. Apple must transition from dependence on device margins to software and services margins (see Erica’s article on this). Wallet, iCloud, Apps, Tunes and other content, etc. will all contribute. Apple has a long way to go in this arena.

      This is a big story.

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  3. The most profitable company in the US “chugging along”? What are the tens of thousands of other companies doing?

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    1. The headline refers to the iPhone, not Apple as a whole. Also, I encourage you to read the whole post.

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  4. I do not see any mention of Apple’s competitors in “The margin problem”.
    Samsung’s margin?
    Nokia’s?
    Microsoft’s?
    Motorola’s?
    HTC’s?

    When Apple gets over 60% of all profit in the market “6 years later”, I have to assume they are doing something right.

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  5. With any product, even iconic ones like the iPhone, sooner or later, the time comes when it begins to lose it’s claim to superiority and must again establish it’s unique identity. Apple has always been about this, the ability to reinvent itself. I think the continuing challenge for Apple and the iPhone brand is the ability to do this. If the past is any indication, I don’t think investors or customers have much to worry about.

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  6. Yes, Indians are suckers for in-your-face advertising campaigns for two-year-old technology which still costs more than a comparable rival smartphone. Apple, stop dumping old hardware in India. This is a despicable policy.

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  7. It’s a shame Apple has proved unable to innovate anything new, so they string out iOS as long as possible. Investors have noticed this before consumers.

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  8. I currently own an Android Gingerbread phone, only now and then wish for more internal storage or a better camera. My humble proposition: smartphone technology got good enough for most people three years ago – since then it’s been gilding the lily. New users will be driven by cost not incremental googahs.

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