The State of iPhone (Premium)

This has inadvertently turned into a big week of iPhone news and commentary. But I think this is an important topic, so what the heck.

Apple’s recent warning about lower-than-expected iPhone sales was met by histrionics on both sides of the fence. Apple haters—and yes, they exist—rejoiced in the firm’s declining fortunes, while conveniently ignoring the fact that Apple is a huge, huge business and will be for the foreseeable future. Apple’s biggest fans, meanwhile, circled the proverbial wagons, first denying that all of the evidence we had seen about an iPhone shortfall was true and then falling back on nonsense defenses related to Apple’s services business (which is much, much smaller than iPhone) or its cash balance, which says more about the past than the future.

As is so often the case, there is a more measured reality to be found. And as is always the case, that truth can only be found by looking at what’s happening rationally rather than emotionally.

Contrary to what many think—on both sides—I have no particular stake in this controversy. And my take on Apple remains unchanged, mostly because Apple itself has remained unchanged over many years. This is a company that makes great hardware products, decent apps, and terrible to middling services. It is not an innovator but in one major way, which I do respect: After moving slowly to embrace particular technologies, it usually gets it right when it finally does jump in; this results in safe, predictable experiences that its users value and appreciate. The way it markets itself and its products is almost always reprehensible, and Apple executives exude a faux humility and hubris that I find troubling. Its products are generally too expensive, but those who use them for several years can usually justify—or at least rationalize—the cost. There are a lot of them, folks. Maybe they’re on to something.

That’s most of it. But with regards to the iPhone specifically, Apple had been on a nearly decade-long tear before reality set in. This reminds me very obviously of Microsoft and Windows, which enjoyed a similar dominant decade that ran from roughly 1992, with the release of Windows 3.1, until 2001-2003, the dates that coincide with its antitrust losses in the United States and the European Union, respectively.

The Windows comparison is apt: Dominant businesses don’t just drop off the face of the earth. And while Microsoft—and Windows—suffered through a subsequent uncertain and wobbly decade, giving competitors like Apple and Google a chance to first catch up and then race ahead, especially in mobile, Windows is still a thing. Here we are, 15 years after the EU verdict, and PC makers still sell 260 million units a year. The Windows PC user base is still 1.5 billion strong.

It’s not possible to state that Apple’s iPhone business will be alive and thriving in 15 years, of course: I’ve already explained my theories about how each subsequent personal technology wave happens faster than that of its direct predecessor. And those timelines include the speed at which the market occurs and grows as well as the speed at which it passes into obsolescence.

But we don’t need to look out 15 years to see that the iPhone remains a force to be reckoned with. And that, despite increasing pressures from competitors with regards to pricing, margins, capabilities, and quality, that Apple’s iPhone business will benefit from the forward momentum of its user base size, which is considerable, and the many other products and services that feed into that ecosystem, giving its users less and less reason to look elsewhere.

How big is Apple’s user base? The firm said on Tuesday that there are now over 900 million active iPhone users in the world. And that it now has over 1.4 billion active users overall between iPhone, iPad, Mac, and Apple Watch. We know that there are about 100 million Mac users, so most of the remaining 400 million in that last number are iOS users. So I’ll guess that the iOS user base overall—iPhone and iPad combined—is about 1.35 billion.

I have written in the past that it’s only a matter of time before iOS usage surpasses that of Windows, displacing the once-dominant Microsoft platform to third place. But we know now that the iPhone user base grew by 75 million active devices in 2018. And the PC user base fell or was flat. So where there is still upside to be had for Apple going forward, I don’t believe that the Windows user base grows over time.

There are many reasons for both assertions. But it’s worth pointing out that both of those platforms are dwarfed by Android, which counts over 2 billion active users. And that Android and iOS have very engaged users, and Windows doesn’t, which matters quite a bit as well.

In any event, Apple is no longer providing iPhone unit sales, presumably because they are falling when compared to the year-ago quarter. I’ve seen various back of the napkin estimates about how many iPhones that Apple sold in the most recent quarter. But they all seem to fall very neatly into a simple math trap: Apple’s revenues from iPhone were 15 percent less than they were a year ago, so Apple must have sold 15 percent fewer iPhones.

I don’t feel that’s accurate.

As you may recall, Apple jacked prices last year by about 20 percent in order to make up the difference from falling unit sales and margins, a strategy I (cough) imaginatively called Apple Jacks. Apple CEO Tim Cook yesterday admitted that this strategy had failed, and that Apple had raised prices too much, at least in emerging markets and China. But whatever: The average selling price of the iPhone did go up in 2018. And that means that a 15 percent drop in revenues does not evenly reflect on unit sales. Put another way, I estimate that iPhone unit sales fell in the most recent quarter by 15 percent plus 20 percent of 15 percent. (Assuming my 20 percent figure is correct.) In other words, iPhone unit sales fell by 18 percent. Since Apple sold in the year-ago quarter, Apple sold 77.3 million iPhones. So it sold about 63 million in the most recent quarter.

Yeah.

Apple just sold 63 million iPhones in a quarter that most analysts have described as a sales apocalypse. That’s an incredible number even before you factor in all the headwind that Apple finally hit. Losing China and emerging markets to low-cost Chinese Android phone makers. The strength of the U.S. dollar. The loss of phone subsidy income. And so on.

Yes, Apple will make—and it needs to make—adjustments. We’re going to see lower iPhone prices in emerging markets in the short term, I bet. But more important will be lower-cost iPhones specifically designed and customized for those markets in the longer term, a more diverse, affordable, and competitive line of iPhones. And yes, Apple will continue to expand its services business and try to turn that into another growth engine. There is certainly a virtuous cycle—of which Steve Jobs once boasted of iPhone and Mac—that could come from services too.

I’m interested to see if Apple continues to provide real-world data related to the size of the iPhone, iOS, and overall Apple user bases. These numbers will provide an even more useful look at the health of the Apple ecosystem. After all, Apple could sell fewer iPhones in all of 2019 than it did in 2018, but if some percentage of those sales went to new users, the user base would still grow. And that would feed into the overall engine of hardware, software, and services. Again, virtuous cycle.

Put simply, the iPhone isn’t going anywhere. We may have reached “peak iPhone” in terms of unit sales—OK, we almost certainly have—but that doesn’t mean that the iPhone era is over by any means, despite claims to the contrary. Instead, we are very much living in the iPhone era right now.

This would continue for years to come if Apple simply kept going on the current trajectory. But I think this most recent quarter was a wake-up call. And as was the case with Microsoft before it, Apple’s response to this mortality check will determine how much it succeeds moving forward. I’m not counting it out.