Apple has a plan B as iPhone demand wanes

Apple has a plan B as iPhone demand peaks, but many of its suppliers do not.

Jeran Wittenstein and Mark Gurman, writing for Bloomberg:

In a world where iPhone demand is on the wane, Apple Inc. has a Plan B. As customers wait longer between upgrades and the smartphone market saturates, Apple can fall back on charging higher prices for each handset and raking in more money from services such as streaming music, digital videos and data storage.

Faced with a maturing smartphone market, Apple’s strategy has been to entice customers to pay more for phones with new features such as facial recognition and more vibrant screens.

If this massive Reddit thread is an indication, lots of regular customers believe Apple is nickel-and-diming them even though there’s nothing new about paying more for high-end Apple gear.

On the flip side, longer-lasting iPhones and other Apple products could result in a boost to Tim Cook’s favorite data point—customer satisfaction. And higher customer satisfaction might in turn permit Apple to get away with charging even higher prices for its devices.

Extending the lifespan of its devices is another part of the strategy:

More recently, Apple launched a new version of its operating system, iOS 12, that supports an unprecedented 28 of the company’s devices, including models that went on sale in 2013. Previous iOS upgrades supported gadgets dating back several years, but this is the first time Apple has prioritized enhancing the speed of older iPhones.

Listen, it’s been no secret that iPhone has peaked.

Units have been growing at a slow clip: in the September quarter, Apple moved nearly 47 million iPhones and while revenue grew 29 percent annually, unit sales were flat year over year. And now that the company has said it will stop reporting iPhone, iPad and Mac sales, analysts are convinced that unit sales may go negative even though revenue is increasing.

Here’s how finance chief Luca Maestri explained to investors on the call why Apple is fleeing from transparency by stopping to report unit sales of iPhones, iPads and Macs:

First, given the increased importance of our services business, and in order to provide additional transparency to our financial results, we will start reporting revenue as well as cost of sales for both total products and total services beginning this December quarter.

As demonstrated by our financial performance in recent years, the number of units sold in any 90-day period is not necessarily representative of the underlying strength of our business. Furthermore, a unit of sale is less relevant for us today than it was in the past, given the breadth of our portfolio and the wider sales price dispersion within any given product line.

Oh I get it, reporting on the number of units sold in the quarter is OK when sales are on the rise, but not so much when units are flat.

As I know you’re aware, by the way, our top competitors in smartphones, in tablets, in computers, do not provide quarterly unit sales information either.  We’ll provide qualitative commentary when it is important and relevant.

That still doesn’t change the fact that Apple is trying to be more transparent by telling us less.

But at the end of the day, we make our decisions from a financial standpoint to try and optimize our revenue and our gross margin dollars, and that we think is the focus that is in the best interest of our investors.

But I digress, back to Bloomberg:

The 3-D sensing components from companies like Lumentum are found in iPhones that often cost more than $1,000. Fewer people can afford to pay that much for a new device. But when a sale does happen, suppliers get a one-time payment for their component, while Apple can generate hundreds of extra dollars per gadget. In its most-recent quarter, Apple reported almost no increase in the number of iPhones sold, but revenue from that business jumped 29 percent from a year earlier.

If demand for newer, pricier iPhones wanes, Apple can cut component orders, or delay shipments, leaving suppliers with more inventory. That makes them more likely to cut prices when Apple comes back to the negotiating table.

It’s time Apple reinvents itself as a services business that happens to sell hardware, too.

The process has already started: Apple’s been increasingly focusing on selling things like apps, music, subscriptions, cloud storage and more. Now, some folks have proposed that Apple come up with an Amazon Prime-like subscription that might include some cloud storage, Apple Music, its upcoming original programming, priority shipping and more.

Loop Ventuers analyst Gene Munster told Bloomberg:

Apple is no longer a traditional hardware business. The Apple investment paradigm is moving away from a focus on device sales toward a more predictable services-driven business.

By the way, doesn’t it seem like ever since Gene left Piper Jaffray and quit chasing that elusive Apple television set he’s become a far more reliable analyst?

Apple’s ultimate goal, in my opinion, could be selling its iconic smartphone as a service where you’d pay a monthly fee in exchange for a brand new iPhone model every single year.