Apple iPhone Q2 Sales fall to 26M, market share falls to 16%, but this is normal sales pattern

So then we have Apple's turn in Q2 results of Smartphone Bloodbath, year three: Digital Jamboree. We expected the iPhone sales to fall from the level it had in Q1 (and remember, these are calendar quarters, not fiscal quarters, so Q2 is obviously the April-June calendar quarter). I expected iPhone sales to come in somewhere in the 30s, but the iPhone only sold 26 million units in Q2. Somewhat disappointing yes, but in terms of pattern, while the sales declines at RIM, HTC and Nokia are all severe causes for distress, over at Apple the 26% decline from Q1 sales is not a cause for alarm. This is normal for Apple, as it only makes one annual product release and after that new product sales peaks, we get flat and even declining sales into the last quarter(s) before the next iPhone. I have been writing for a long while now, that Apple could avoid this see-saw sales pattern, if it released more iPhone models per year to balance out the sales (and also gain significantly more sales, market share and profits). 

26 million iPhones in Q1 gives a preliminary market share for the iPhone of 16% (down from 24% in Q1). But when we take the rolling 12 month period to cancel out the launch peak seasonal sales pattern, we still find Apple increasing its market share, although at very slow pace. The 12 month moving average market share for Apple is now 20% of global smartphone sales.

I would make a mild note of caution. The decline was far bigger in this Q2 than we've seen before. There are a few easy reasons why this is happening, but they suggest Apple may face tougher times ahead. First, obviously and very visibl, Samsung is on fire. The Galaxy S3 alone sold 10 million units in just two months from launch. Samsung is expected to sell about 50 million smartphones in Q2 and might even sell 52 million by which it would be twice the size of the iPhone. The Samsung surge is powered by a wide portfolio across very wide and strong distribution, with superphones like the Galaxy Beam (the one with the pico projector) to glamorous smartphones like the massive-screen Galaxy Note, to low-cost bada based smartphones that sell well in many markets in the Emerging World. Remember that two years ago, Samsung smartphones were one third the size of the iPhone, now they may be twice as big.

Samsung is the clearly visible reason why the iPhone is under pressure. The other reason is more subtle, but many carriers/operators with handset subsidies have been working to extend the time span of their contracts. AT&T in the USA for example has pushed its average contract length up by 2 months. We learned also from Britain that the median contract lengths are increasing, as reported in the annual telecoms report by the regulator, Ofcom. Apple has exceptional loyalty, and can rely on not bleeding much market share to rival brands. But as those contracts now become longer, it means that Apple's replacement sales suffer. We may well be seeing the early signs of a pattern here. I do expect for Q3 the iPhone sales to dip again from the current levels, until we get the new iPhone model launched. But that launch will then rocket the iPhone sales level to a whole new level once again. Apple is incredibly profitable, the iOS ecosystem with robust iPad sales only grows stronger, and there is the inevitable waiting for what will the next iPhone have. There are no major stumbles here, and the loyalty of the Apple users continues unmatched. This sales decline in Q2 is no cause for alarm. Only lets monitor these little signs, they may take some of the peak sales performance away from the iPhone going forward.

Comments

[Bob]

I for one am hanging out for the iPhone 5 before replacing what will probably be the last in the long line of Nokias I ever own, an N8. May have stayed with Nokia if Meego had been a go (should have called it Meegone) but no way I want to buy into this M$ rubbish. Have had an iPad for a 18 months, which prompted me to buy a Mac and it just makes sense to go with the iPhone now. I'd say there are many people in a similar position to myself that are just biding time for the iPhone 5, I'm sure there will be a huge surge in sales when it's released.

Perhaps uncommonly I do not buy phones on contracts and just buy outright. Any figures for the proportion of customers like myself?

[Bob,Boulder, Colorado]

any news on the China angle ? Iphone surge was led by China, has that stagnated or something ?

[Vinicius]

Apple doesn't innovate. That is the problem.

The same thing with Android, I don't see ANY reason to purchase an improved version of Android, other then the artificially created "it is not going to be updated".

Before we had reasons to upgrade. "Now that's a better camera". "Nice a phone with GPS on it!". "A touchscreen phone? I want that!". "What's that's shiny new interface? Gimme!".

Now what do we have?

"A couple cores more! Why do I need that when my device is perfectly usable?"

"Hey, a few more pixels! Where are they again? I can't see then in this super small screen..."

"NOw they added 0.3" to the screen size! I can browse 5% better for 200% more dollars... NO!"

The evolution now is firmly on the software side of things, and we don't need to buy new phones for it, most 2011 top smartphones can handle the software just fine for a couple more years.

The only ones spending money on smartphones are:
A: Clueless people.
B: New users.
C: People with broken phones.
D: Spec whores.
E: Nokia's Fanboys (true innovation in hardware).

C and D are big groups nowadays. C because most smartphones I now are rather fragile (SG1~3 and iPhones), and D because marketing wins, brains lose.

E is truly minimal at this stage.

B is a growing group, but it will NOT carry companies the size of Apple or Samsung.

A is somewhat limited too.

SO, I predict hardware will somewhat stagnate on the top end of things for a while. Until there is true innovation, that is. Let's see how long until the competition start putting, for example, quality cameras into Android and iOS and THEN we can start seeing smart people rebuying their smartphones. Or an entirely new and unseen revolution.

Given that what Samsung does best is copy, we should see a PureView contestant (that will be A LOT worse) arrive. Due to marketing it will probably sell better than Nokia's tech and be glorified by reviewers.

Or Apple will slap a new name on the iPhone camera, doesn't improve it at all and due to it's marketing make everyone review it better than PureView.

I don't know, but I don't think those companies have ANYTHING to revolutionize hardware in the next couple of years. And I think the consumer is understanding that this spec race in NOT in his best interest.

[KPOM]

I do wonder whether Apple will diversify its product line. I can't see them going as far as Samsung, but considering that half their revenue and profits come from the iPhone, they might add a true second current product. What they have now is the equivalent of selling the 2012 MacBook Air alongside the 2011 and 2010. I could see a second phone easily. I could also see them switching to an October/March cycle, with October being the major upgrade and March being a minor spec bump just to keep the phone current and avoid losing sales to whatever Samsung has coming out. Right now Samsung has the Galaxy S line (their flagship) that is updated annually, along with a few minor releases during the rest of the year (Galaxy Note, Galaxy Nexus) that keep them "current." Apple could do that.

[some random guy]

The only ones spending money on smartphones are:
A: Clueless people.
B: New users.
C: People with broken phones.
D: Spec whores.
E: Nokia's Fanboys (true innovation in hardware).

....

You know D:Spec whores are the most profitable group of customers that spends the most money on phones. I am a proud spec whore who buys phones every six months or so and is accelerating in the rate of purchases. Just to let you know, I do not buy into the marketing and as a self confessed spec whore, I spend enough time with enough phones to know that the specs actually do matter and that a couple of cores really do matter.
And for your information, for ultra heavy mobile users(8+ hours a day staring at mobile), there is simply no compromise and you have to use the best of the best. So that means: larger screen, MOAR pixels, more RAM(so that browser doesn't run out of RAM and start lagging), and MOAR cores, but contrary to what everyone who doesn't actually seriously use a phone seems to think, NOT more battery life. As Tomi said on his blog before, hardcore users simply dont care about battery life, they just carry multiple batteries and switch them out as they run out. Rather, thinness really does count, especially with the beasts like the Galaxy Note(I would know. I use a Galaxy Note).

[darwinphish]

Tomi:
I nominate this for your best blog posting of the year! Short, accurate, informative, to the point and balanced. Better yet, no reference to the problems at Nokia or Elop-madness. Well done and please, more like this!

[KM]

>> Given that what Samsung does best is copy, we should see a PureView contestant (that will be A LOT worse) arrive. Due to marketing it will probably sell better than Nokia's tech and be glorified by reviewers.

Of course it will. Crap doesn't sell, after all, and that's what Nokia has been delivering. The PureView has one - and only one - selling point. The rest of the phone is not worth bothering, so if anybody copies that selling point it will be better by default.

Anybody with a brain larger than a pea would choose an Android phone over Symbian when the rest of the specs are equal.

[B95]

The reasons for the iPhone decline are, in rough order:

1 - The US carriers are fighting a LTE marketing war. Verizon specifically, with AT&T responding, are putting a ton of marketing $$$ on LTE phones, where the iPhone does not participate. It is part of their strategy to rebalanced their portfolio and have more leverage negotiating with Apple for iPhone 5.

2 - China slowed down and "only" grew 48% and didn't compensate for above. In addition, Europe was flat.

3 - Seasonality, with some holding out for next iPhone. Though we are 3 months too early this time from past seasonality dip.

4 - Barrage of larger screen devices 4.5" + that are not bricks and are desirable - G-S3 et al.

5 - iPhone fatigue. Some users are on their 3rd or even 4th iPhone - they want something different.

Add it all together and Apple has a lot of headwind ahead on iPhone. The iPhone 5 needs to be a hit *and* they will need to drop the price on 4S (-$100 from 5) and 4 (-100 from 4S) to recover volumes.

I suspect that the discounted iPhone 4 and 4S with broad distribution would combined sell as much as the iPhone 5. That is the "cheap iPhone" strategy.

[Vinicius]

@KM

I don't think you though this through.

Do you seriously think ANYONE would buy an Android with the following specs:

Arm 11 1.3GHz, 512MB, 1400mAh.

I'm not sure Android can even BOOT with this amount of resources. And a battery of 1400mAH may as well not even exist, it will last from morning till lunch at most.

And the 808, contrary to 100% other phones launched this year has something NEW. Genuinely NEW.

[niilolainen]

Wow. That was short. You feeling OK? :)

Just to echo the China comment above. Wasn't Q1 better than expected due to Chinese New Year? Thus maybe a bigger roll-off in Q2 might've been predicted.

[antonio]

Guys, stop trying to solve the Chinese mystery, it's very easy - iPhone sales were stagnant because... the LUMIAS ARE OUTSELLING APPLE!! But we didn't believed the MS guy, did we?

/sarcasm

[KM]

>> And the 808, contrary to 100% other phones launched this year has something NEW. Genuinely NEW.

So? Yes, it has something new but aside from the camera it's a sub-par device that won't generate any interest.

Give me the same camera in a decent phone with 2012 specs and we may talk again.

[Nooper]

The 808 has a new feature? What?

2110 - phone calls and SMS
iPhone - phone calls and SMS
808 -phone calls and SMS

N95 - apps
iPhone - apps
808 - apps

N73 - takes bad photos
iPhone - takes bad photos
808 - takes bad photos

"Noooo." you say "the 808 takes great photos; look at mine. Well, the iPhone takes good photos too, in the hands of a person who knows a little about photography and composition. The 1% geek and the 0.5% artistic market. For the rest, the 808 will only make a noticable difference to the value of their photos about 5% of the time.

The real new features recently are:

- my phone understands me when I talk to it
- my phone knows when I'm looking at it
- I can watch a video on my phone without crying
- when I go to a shop they have an app for me.
- almost every bit of electronics integrates with my phone

All of these features were achieved without adding any hardware functionality to phones except for better screens. They are either software or "ecosystem" issues.

[Bob,Boulder, Colorado]

Apple's margins are bound to shrink anyway, unless they invent a whole new kind of device. You get fat margins only when you invent new stuff and the competition takes a while to catch up with you. Then you should invent new stuff, else it will be a race to the bottom. In the long run, I see Google winning the ecosystem war, because they subsidize both hardware and software with their profits from ad business. Neither Microsoft nor Apple can match it.

[kevin]

@Bob,Boulder: Microsoft and Apple do have at least one strategy that can possibly outflank Google in building up the ecosystem. Both can and are integrating more deeply with Google's competitors in ad-supported web services - like Facebook, Yelp, even someday a re-energized Yahoo.

Google can win because many of its own web services are still simply better than the competition, but it needs be careful how it competes with its hardware and services partners, or end up having those partners leave (fork Android, ignore Android). Of course, Apple also faces a similar type of tension, but Apple seems to have a better focus and handle on where its boundaries are.

We are observing a fascinating, multi-dimensional competition where all the platform providers (Apple, Google, Microsoft, Amazon, Facebook, probably Samsung, etc) need to stay focused on the business model they're using, so that they can continue to create profitable space for their ecosystem partners. It's highly unlikely that a winning platform provider can itself provide everything that is needed in its ecosystem.

[Ravi]

@Vinicius:

Meet the HTC Desire C: http://www.gsmarena.com/htc_desire_c-4759.php

And this isn't a cherry-picked budget phone running Gingerbread or something more ancient. This is a budget phone released in June running ICS (the latest version of Android at the time, though not now).

So what are its specs? 600 MHz Snapdragon, 512MB RAM, 1230 mAh battery. To be fair, I suspect it has a beefier GPU because ICS pushes the GPU more, but still... Android most certainly boots at the 808's specs (or even lower).

[Bob,Boulder, Colorado]

I agree that microsoft and Apple partnering with Facebook is possibly a serious threat to Google. But facebook is not(yet) as efficient an ad-machine that Google is and their business model has a lot of overlapping components with both microsoft and Apple. It remains to be seen how long facebook remains a natural partner of both Apple and Microsoft. Itunes competes directly with facebook apps. The rest of them that is Yelp, Wolfram Alpha yada yada don't count in the grand scheme of things. None of them are profitable, none of them scale, none of them have a killer business model, nor do they have wide enough moat and all of them are part of the so called and overhyped socia media darling club. All hype and no profits.

But there is something that makes me think Google will emerge unscathed. Microsoft has poured billions of dollars into search and their bing is possibly decent enough compared to google. But nobody wants to use Bing. And Apple faces two formidable competitors in Amazon and Google. Both Amazon and Google can live with low margins on hardware devices or even zero margins or if push comes to shove even a small loss. What about Apple ? they cannot. It is a battle of business models and Google has the winning edge(as of now, unless they screw up which is unlikely, or they are broken by up the governments)

Of all the companies, I find Google and Amazon to be most focused on their core business.

[vladkr]

If Apple's sales are falling, Stephen Elop should be sent there to save the situation... I think he will be available soon, and will correct Apple's current problems of execution

[CN]

Sprint just introduced one topic that Apple may need to look at:

---------
As for how many iPhones Sprint sold? About a million and a half units, 40% of which going to new postpaid customers. The iPhone, however, takes its toll on the subsidy expenses, which have increased from $1.1 billion in Q2 last year, to $1.5 billion in the last quarter. As Sprint's press release puts it: "The quarterly year-over-year increase in net subsidy is primarily due to the launch of the iPhone, which on average carries a higher subsidy rate per handset as compared to other handsets."
--------

And yes, Sprint made a quarterly loss of 1.4 BUSD.

[B95]

@Bob and Kevin - that is exactly the discussion to be had. Already on the iPhone 40% of searches are bypassing Google. On iOS 6 with Apple Maps and Facebook deep OS integration and improved Siri, it is a near certainty that less than half of iPhone searches will be seen by Google.

Microsoft is going down the same, path, but of course they are not big enough at the moment to matter.

Google, correctly and immediately recognized the threat of the iPhone to its business. Apple immediately (Jobs famous vow to destroy Android) recognized the threat of Android to its business (comoditizing a premium touch device experience).

Add on top of that when Apple and Google really launch their OTT TV services. It will be an epic platform battle.

That is what the battles will lie. Not on SD cards, camera megapixel counts, etc - those are side shows. The same way that iMessage took 15% of worldwide SMS traffic.

The viable platforms seem to be Google's, Apple's, and on a second tier Amazon's and Microsoft's. These are the only platforms that have scale, content, developers, credit cards on file, etc needed to succeed.

Apple and Google just have such a huge head start. If the iOS Facebook integration really resonates with consumers, and they go do the same with say eBay, flikr, etc, it will be a surround and squeeze strategy on Google. Fascinating to watch and profit from. If only there were ways to short things like Bada and Meego, that would be awesome. At least we can continue to short RIM :)