Thursday, 02 May 2019 11:27

Why lower iPhone sales in Q1/Q2 2019 aren't relevant to Apple's continuing success Featured

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It has been all over the news for the last six months – Apple's lower than expected iPhone sales are reported as being a big problem for the company. But is it really true?

With this week's latest Q2 2019 financial results for Apple showing iPad sales up (the strongest sales in six years), Wearables, Home and Accessories sales up, and Services revenue up, as well as total quarterly revenue of US$58 billion, with all those figures beating Wall Street expectations, Apple continues its well deserved run as one of the most successful companies in all of human history.

This is because it produces products that people want to buy, and are happy to hand over their hard-earned money for – even when those products are priced at a premium.

Now, it is definitely true that Apple's prices over the past couple of years have been higher than ever before, and this may well be one of the main reasons why iPhone sales have fallen.

However in a world where national debt levels in many countries are out of control, and labour costs in China (where most of our products are manufactured) have been steadily rising, too, it's no surprise to see that product costs have risen as well.

Sure, Apple has around 37% gross margin levels which compares with razor-thin profit margins of many competitors, but this margin ensures Apple is the company that others follow, copy and try to beat with "firsts", as Apple works hard to deliver quality, consistency, longevity and the widest hardware and software developer support that competitors can only dream of attaining.

Android device makers have razor-thin margins because they simply can't sell their products at higher prices, as people won't pay those prices. As always, the market speaks volumes. 

Now, in the earnings report linked to above, we see that Apple sold US$31.051 billion worth of iPhones compared to US$37.559 billion in the corresponding quarter last year. Pundits and analysts will paint this as a drop of US$6.5 billion, or 17% lower. But this ignores a massive market that keeps Apple's user base growing.

This market is the second-hand and refurbished market. Yes, thanks to Apple's quality, massive app library, years-long iOS update support, excellent customer service support and more, iOS devices retain resale values higher than just about any other type of product.

Compare this with the drop in value that Samsung and other brand devices see, and you know that the market has spoken on Apple. There's no way that Apple's products would retain such high second-hand prices if they were no good, yet you can easily check Gumtree, eBay or other services yourself to see how well Apple products retain their value, and how other brands simply don't.

I've helped a lot of people who wanted a better iPhone than they have now to find a refurbished model at Dick Smith or Kogan websites (the same company), where refurbished models are guaranteed to be working, guaranteed not to be stolen and come with a warranty, while I also know plenty of people who have purchased second-hand iPhones privately without issue.

These second-hand sales are not recorded in Apple's sales, and yet they are a hugely important part of the iOS user base, able to drive sales of Apple Watch, AirPods, iPads, new iPhones, Macs, Apple TV, Apple Music, iCloud storage and other Apple products and services.

It has long been said that Apple's biggest competitor isn't Android, but itself via the second-hand market, and this is truer than ever before, especially in an era of higher priced iPhones.

Those with an older iPhone 6s undoubtedly benefit from an iPhone 7 or 8, or Plus model, or X, XS, XR or XS Max.

An iPhone 7 or 8 is better than a 6 or 6s, is much cheaper than any X model, keeps a user in the iOS ecosystem of apps, messaging and more, and stops that buyer from purchasing an Android.

Yes, there are ever greater numbers of low-end, mid-range and high-end Androids to tempt iOS and iPhone buyers into switching.

Huawei, in particular, has been incredible in developing cameras that outclass Android and iPhone competitors, price challengers such as Xiaomi have finally entered the Australian market, Nokia's keenly-priced Android models have proven very popular amongst Android buyers, Samsung still sells hundreds of millions of smartphones per year, Motorola continues offering excellent value for money too, as does OPPO, and Android mid-range and very affordable models are everywhere.

However, as Apple has long stated, if it isn't an iPhone, it isn't an iPhone – and even an older, once-flagship iPhone that is newer than the one previously owned can be better than a brand-new mid-range Android! If this weren't true, prices for second-hand iPhones would be very low, but that's simply not the case as earlier explored.  

Apple sustaining a 37% gross margin with tens of billions in revenue per quarter doesn't happen by accident, either – as noted before, it comes from people voluntarily paying Apple's prices, even though those prices have risen in the last couple of years. 

Yes, even at Apple's higher prices, people are still buying iPhones in droves (as well as getting them on telco contracts of one, two or three years), while Google complains poor Pixel 3 sales are due to "headwinds" (and its services revenue falls), something that has forced the company to build cheaper Pixel 3a devices that will soon hit the market, meaning direct competition with the very Android licensees that keeps Android in business!

Apple's official iPhone sales may have fallen, and the ever more impressive Android competitors at all price points and feature sets have never been more active and competitive, but Apple's incredible results speak for themselves.

iOS user numbers continue to grow, Apple's second-hand and refurbished market is stronger than ever, Apple's services are growing at breakneck speed, Apple's AirPods remain wildly popular, and the Apple Watch is the undisputed most popular smartwatch in the world, despite some truly woeful and now utterly disproven analysis from those who desperately — desperately! — wanted Apple to fail.

The will of those pundits wishing Apple to fail has ironically failed, and deservedly so. 

Yes, Apple's official iPhone sales may have fallen, even as the second-hand and refurbished market remains vibrant and strong, and so the company itself has never been stronger.

Beta test versions of iOS 13 will arrive at the 2019 Worldwide Developers Conference (WWDC) in just a few weeks, with mouse support reportedly arriving at long last for the iPad – and plenty of unannounced surprises to come. 

New versions of macOS, tvOS and watchOS are coming too, and with Apple controlling both the hardware and software, there is no schism where Android licensees have to worry what direction Google is going to go next, or what problems the next version of Windows 10 will deliver to Windows PC makers – let alone long suffering users, some of whom still pine for the simplicity of Windows XP!

The future has never been brighter for Apple and its users, and unless the world faces a catastrophic and irreversible nuclear, environmental, political or financial crisis first, the best is still (and always) yet to come.

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Alex Zaharov-Reutt

One of Australia’s best-known technology journalists and consumer tech experts, Alex has appeared in his capacity as technology expert on all of Australia’s free-to-air and pay TV networks on all the major news and current affairs programs, on commercial and public radio, and technology, lifestyle and reality TV shows. Visit Alex at Twitter here.

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