Hey guys it’s Greg with Apple explained, and I don’t know if you realize it or not,
but Apple is currently facing one of their worst nightmares: declining iPhone sales.
And that has led to the company issuing their first profit warning in 16 years.
Which means the amount of revenue Apple told investors they’d earn in the fourth quarter
of 2018 actually turned out to be inaccurate.
So the company had to issue a warning, letting shareholders know that they actually made
nine billion less than they original forecasted.
And in this video I’m going to talk about how Apple ended up in this nightmare, and
what they might do in the future to recover.
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Now I want to start off the video by walking you guys through the series of unfortunate
events that led to Apple being in the tough position they’re in today.
And I think the first domino fell back in 2014 with the realization that the smart phone
market was becoming saturated.
Since that’s when growth started to decline dramatically across all smartphone manufacturers.
And the biggest reason for this is that by 2014, most people who wanted a smartphone
already bought one.
So the number of customers shopping for a smartphone began to dwindle.
Apple recognized this trend and knew they needed a strategy to counteract the slowdown.
So they came up with a few different plans, first, Apple began to focus aggressively on
the Chinese market.
Mainly because China was Apples fastest-growing source of revenue and the company saw an opportunity
to capture even more market share.
Not to mention China has the most mobile phone users on the planet, with India coming in
second.
The Verge even said China was the key to sustaining the iPhones remarkable growth.
And now that the Chinese smartphone market and overall economy is slowing, the effect
its having on Apple is undeniable.
But China wasn’t Apples only strategy.
The company also began implementing price hikes in 2015 in order to make more money
from less sales.
It started with some of their accessories like the Magic Mouse which not only became
about 15% more expensive, but carried a $20 premium for the space gray color.
And in 2016 Apple introduced new MacBook Pros along with a $200 price increase for no apparent
reason.
But 2017 was when Apple really began pushing the boundary of what their customers were
willing to pay with the iPhone X.
You see, ever since the iPhone 4, Apple had always offered their flagship model iPhone
for the unsubsidized price of $650.
But this changed in 2017 when Apple decided to release two new models of iPhone at the
same time.
The iPhone 8, and the iPhone X.
The 8 was priced at $700, which is already more expensive than the previous iPhone 7,
and the X was priced $300 more at $1,000.
Marking the first time customers had to drop a grand to get the best iPhone Apple had to
offer.
But if you thought that was bad, 2018 was even worse.
With Apple raising the prices of almost every product they upgraded.
And remember, these responses were all due to slowing sales of the iPhone.
Which Apple knew was dangerous since the iPhone accounts for 60% of the company’s revenue.
So by growing their appeal in China and making other products in addition to the iPhone more
profitable, Apple thought they’d still be able to post record-breaking quarters despite
slowing sales but now we know that isn’t the case.
Since Tim Cook had to issue a statement correcting their revenue numbers for the fourth quarter
of 2018, from 93 billion to 84 billion, which marked a year-over-year decline that frightened
investors.
But before we go any further, I should mention that 84 billion is still a huge amount of
revenue, and Apples definitely not in any financial trouble just because of a weaker
than expected fourth quarter.
But this is a sign that something more serious may be in store for Apple.
And when you consider all of the different factors at play, you begin to understand why
many people are worried for the company, especially considering that the majority of Apples revenue
comes from one product line, the iPhone.
So how exactly did Apple end up with a disappointing fourth quarter?
Well, lets take a look at the reasons Tim Cook provided.
He put the majority of the blame onto China, saying, “we did not foresee the magnitude
of the economic deceleration, particularly in Greater China.
In fact, most of our revenue shortfall to our guidance, and over 100 percent of our
year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac
and iPad," Now its true that Chinas economy is slowing, but I wonder if there’s another
layer to this story that Apple isn’t mentioning.
Because the fourth quarter is also when the new iPhone XS and XR went on sale, and maybe
Apple expected better sales performance of those devices but was disappointed to find
out many customers in China didn’t want to pay the iPhones premium price.
Especially considering they have so many other affordable options.
And market saturation in China is likely another culprit.
The Chinese market did grow quickly during the early days of the iPhone.
But that growth has come to a halt just like in the US, since many people who wanted a
smartphone already own one.
The problem is the majority didn’t choose iPhone.
And that’s probably because people in China use an app called WeChat to do almost everything
they need.
From paying for groceries to chatting with friends, rather than using iOS-based services
like Apple Pay or iMessage.
So most Chinese customers simply buy an affordable Huawei phone to use WeChat since the experience
inside the app is essentially the same.
Now Cook also put the blame on carriers for offering less subsidizes on the iPhone.
Which I think reinforces the fact that iPhones are too expensive to begin with.
Since he’s essentially saying that if prices were cheaper through subsidies, Apple would’ve
sold more iPhones.
And the company actually tried imitating a subsidy by advertising the iPhones trade in
price.
But apparently that hasn’t worked too well, considering the majority of customers don’t
have the more recent iPhone 7 Plus that would qualify them for the $450 trade in.
And the final place Cook put the blame was on their $30 battery replacement program.
Which allowed users to receive a battery replacement from Apple if their select iPhone’s battery
was at least 80% degraded.
Apparently users who swapped out their iPhones battery had a detrimental effect on sales
of the XS and XR.
And I find this rationale to be a bit strange.
Because I imagine someone who planned on upgrading to the iPhone XS would simply see the battery
replacement program as a bonus.
Not a reason to keep their old phone for another year.
And it also implies two things about Apple.
First, that they didn’t make the new iPhones appealing enough for users to upgrade.
And two, degrading batteries did in fact serve as a form of planned obsolescence.
But I don’t think those reasons, as true as they may be, would cause such an unexpected
drop in iPhone sales.
So let me share what I believe are the more consequential factors.
First we have to recognize that the iPhone XS is perhaps the most unremarkable iPhone
release since the 3GS.
It doesn’t have any major new features and the addition of a larger, even more expensive
model means nothing to the average consumer.
And at a starting price of $1,000, the XS needs at least one amazing headlining feature
to add value.
And this isn’t even considering the fact that many customers already dropped a grand
on the iPhone X in 2017, so they’re hoping that device lasts them a lot longer than one
year.
So while China’s economy may be slowing, I think it’s more likely that Apple priced
themselves out of the Chinese market, and now they’re suffering the consequences.
Now that we’ve discussed how Apple ended up in this situation, I want to talk about
what Apple might do to recover in the future.
And I think there’s a short term solution and a long term solution.
For the short term, Apple should focus on markets that have not reached the same levels
of saturation as the US and China.
Places like the Middle East, India, Latin America, and Africa all remain areas of untapped
potential for Apple.
But there are barriers of entry that they’d have to overcome in order to compete.
For example, in India, the import taxes, or tariffs, on foreign smartphones has been on
the rise.
And Apple tried to negotiate for lower tariffs back in 2017 when the rate was set at 15%,
but India actually did the exact opposite and increased their smartphone tariff to 20%.
Which means today, the starting price of an iPhone XS in India is over $1,400.
So it’s obvious that Apple has a lot of work to do in these markets.
And I think introducing a modern budget iPhone like the SE would really help boost Apples
sales in these locations.
But even if Apple is successful in India or the Middle East, it’s only a matter of time
before market saturation becomes an issue again, since it is an unavoidable problem
with virtually any product.
And that brings me to the long term solution.
Apple either has to introduce a product that cannibalizes the iPhone, similar to how the
iPhone cannibalized the iPod, or revolutionize the iPhone in such a dramatic way that it
essentially appears to be a new product.
Because even though the original iPhone cost almost twice as much as its competition upon
release, customers were still lining up outside Apple stores for days to buy it.
So Apple has to do the same thing again in order to generate the excitement necessary
to sell a high volume of expensive devices.
And I think Apple already knows this.
They’re just stuck waiting on that next big technological breakthrough that’ll set
their product apart from anything we’ve ever seen before.
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Alright you guys, so that is Apples worst nightmare, and if you want to vote for the
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Thanks for watching, and I’ll see you next time.