Nearly six years into its life, the iPhone is still Apple’s most important product, but it is no longer a rocket engine propelling Apple(s AAPL) to spectacular growth. The company sold 37.4 million iPhones between January and March, which is just 6.5 percent more than the same quarter a year ago. It seems pretty clear the days of more than doubling unit sales nearly every quarter are over.
This was bound to happen eventually: Apple is facing stiffer competition than it ever has in smartphones, especially overseas with lower-priced devices that run Android.(s GOOG) The competition is getting better at the high end as well, and is also releasing new smartphones seemingly every few months. And at the same time, Apple’s been selling the iPhone in more established markets for almost six years.
This doesn’t mean the iPhone is doomed or dead. We’ve just entered a new era of the iPhone — one where the company relies more than ever on older, cheaper devices to continue to expand the ranks of iPhone customers. On Tuesday, CEO Tim Cook gave the example of how this is working in the Greater China region, where the nearly three-year-old iPhone 4 is popular:
China has an unusually large number of potential first-time smartphone buyers and that’s not lost on us. We’ve seen a significant interest in iPhone 4 there and have recently made it even more affordable to make it even more attractive to those first-time buyers. We’re hopeful that helps iPhone sales in the future.
And, he added later, that’s not limited to China: “We’re continuing to do that in other markets. We believe the [iPhone 4] for the price point we’re offering is an incredible value for people that allows people to get into the ecosystem with a really, really phenomenal product.”
Cook didn’t reveal exactly how many iPhone 4 devices Apple sold in the China region (or anywhere for that matter), but recent data from Consumer Intelligence Research Partners shows that preference for cheaper iPhones is a broad theme among recent purchasers in the U.S. too. According to its survey data, the iPhone 4 and iPhone 4S accounted for 47 percent of all the iPhones sold between January and March. The latest model iPhone 5, while still the top seller, represented the lowest ratio of late-model iPhone to older model iPhones Apple has seen. By comparison, the iPhone 4S was still accounting for 73 percent of iPhone sales two quarters after its debut.
If interest in the brand-new iPhone is declining that quickly, barely two quarters into its life, then Apple has two choices if it wants to keep the iPhone growing. It can roll out new devices more often or try to drive volumes with cheaper models.
Since Apple is a bit of a perfectionist when it comes to details and doesn’t seem the type to pump out products that could lead to brand dilution, the most practical move seems to be the one Cook is pursuing now: relying on the status and cachet attached to the iPhone name and offer older model devices to people who can for the first time afford an Apple product.
This is not unlike the company’s iPod strategy: the original iPod in 2001 cost $399, and over the years the company expanded the lineup with more models and storage size choices and brought down the price all the way to the current $49 impulse-buy level price of the iPod nano. It famously provided a much-needed halo-effect for Apple, where first-time customers bought into the iTunes ecosystem, and then the Mac, and in later years the iPhone and possibly iPad. Apple wants the same thing from brand-new customers who pick up an iPhone 4 for free on contract or at a very low price: that those new buyers sign up for iTunes, download some apps, music and TV shows, and store their documents in iCloud — as Cook puts it in the quote above, “get into the ecosystem.”
The iPod eventually gave way to the iPhone as the growth driver for Apple. So with the iPhone maturing, the billion-dollar question is what comes next for Apple after the iPhone? That’s what’s not clear yet. Cook telegraphed new products coming “this fall” and “throughout 2014” but of course didn’t explain whether those were mobile computing products or TVs or whatever.
In the meantime, while it may not be a completely parallel replacement for the iPhone, the iPad is just three years old and still growing; not to mention the iPad mini which is also just two quarters old. At this point, the countdown is on for when it replaces the iPhone as Apple’s most important product.