The big Apple news this week was the company’s surprising profit warning, the first time Apple has had to do this in 15 years. Apple is expecting revenue of about $88 billion this quarter, rather than its initial guidance of up to $93 billion. In other words, they’ve sold about $5 – $9 billion less in iPhones. (Yes, this is mostly the iPhone, because other products seem to be stable, and services have apparently increased.)
Funny, though; this is a record quarter for Apple, yet they had to issue a profit warning, and the stock fell nearly 10% the following day. But the stock market fall was not about this single quarter; it was about Apple’s future. The company’s revenue is mostly – and dangerously – focused on this single product. It represents about 59% of Apple’s income, so any drop in sales could have very serious effects.
It was interesting that Tim Cook spent 1,500 words blaming all sorts of reasons for this drop, whereas he can’t come out and say the real reasons. First, the iPhone has gotten too expensive. As Apple has seen demand flatten, they have raised the price of the iPhone (as well as other products, such as the high-end iPad, and the Apple Watch):
The second reason is that the iPhone simply isn’t magical any more. And hearing Tim Cook use that term in the presentation of the latest iPhones sounded falser than it had in the past. Steve Jobs could say that in the early years of the device, because, for a while, it was magical, at least to many users. But now, the iPhone is an appliance, it’s one of many smartphones that all look more or less alike, and that all do more or less the same things. I stick with the iPhone because of the ecosystem – in part, because I write about Apple products, but also because I’m somewhat locked in through the apps I use – and because it is more reliable and more secure. But it’s not magical.
It’s time for Apple to grow up and stop selling their devices using this sort of language. Sure, the company is transitioning to services, and, as this article suggests, we might see iPaaS, or iPhone as a service, in the near future. Apple has already started that transition, with their upgrade program, but given the high price of new iPhones, the monthly payment for that is still somewhat steep. With the company’s dependency on the iPhone as its main revenue source, this transition will need to happen very quickly to maintain the level of income the company has seen, and that keeps its share price high.
But Apple’s biggest problem is that their services have never been stellar. Sure, the iTunes Store was and still is profitable, but their other services are not leaders in their sectors. We’ll see how Apple negotiates this turnaround as their star product becomes mature and no longer seems magical.