Chillax! Apple Is NOT Crashing. iPhone has best loyalty of any phone with massive sales and highest prices

Once again I have to do my Dr Jekyll, Mr Hyde transformation from ‘hating Apple’ to ‘Apple fan-boy’. Come on, relax. Take a chill-pill. Apple is not in any type of trouble.

The smartphone is the most popular consumer gadget in human history, sold 1.5 Billion units last year alone. The smartphone business is not ending, its not shrinking in market size - its still growing! The worries are of ‘growth rate slowing’ not of ‘declining sales’. The smartphone industry is largest consumer gadget business the planet has ever seen, so yes, bigger than cars or TVs or PCs or cameras or gaming consoles or DVD players or radios or wristwatches. Biggest consumer tech ever - and its STILL GROWING. Only as the penetration rate and unit sales are at the very limits of human affluence, that growth is now slowing down. The GROWTH is slowing down, but smartphone unit sales will still grow EVERY YEAR at least up to year 2019. Why? Because its predecessor gadget, the mobile phone (aka ‘dumbphone’) is in the process of migrating to smartphones so there are still about 500 million of that business to shift to smartphones. The industry consensus view is that around year 2019 (some pessimists say 2020) all new phones sold will be smartphones. Currently 1.5 Billion of 2.0 Billion mobile phones are smart, the remaining one quarter are dumb. By 2019 all will be smart. Even if the total global handset market never grew one unit anymore (and trust me, that will also grow), just that TRANSITION of the handsets from dumb to smart, gives us growth of 500 million more units in annual sales - yes, one third more industry growth at least to come. Don’t panic. Relax. Chill. Chillax!

So what is the world’s bestselling smartphone? Its Samsung. They sell about one in five smartphones. What is the world’s second bestselling smartphone? Its Apple. The iPhone. But compare the two. Samsung sells most of its smartphones in the mid-price and low-price range, its ‘Galaxy’ class flagship phones only sell a fraction of Samsung’s total unit sales worldwide. And they aren’t priced as high as the iPhone. Meanwhile Apple’s iPhone only sells premium price smartphones. The average sales price for Apple is literally the highest in the industry. The most expensive smartphones. Its like the Rolls Royce of phones. Or Ferrari or Aston Martin, however you might enjoy you car brands. (Can’t say Bugatti Veyron, that would be the Vertu, phones so rare nobody sees them in the wild haha)

Of phones sold in normal phone stores, the iPhone is the most expensive on the market. And how does it sell? Within its price range, its the best-seller. Its like what Mercedes-Benz is in cars rather than say Lamborghini or Jaguar or Porsche or Maserati or Bentley. So Apple ‘missed estimates’ this past quarter. Well a big whoop-te-doo to that. Who the heck, cares. Apple has - get this - the largest market share in the premium phone category (where else would you want to have your lead if you could select a category? Would you really prefer to have the market lead in the cut-throat, razor-thin margin bottom-price cheapo smartphone market?) and it has highest prices and it has best profits (several of the phone makers at these price ranges generate a loss, like say Sony Xperia) and best of all... the iPhone has the best consumer loyalty of any phone brand! Yes. Best loyalty. Essentially so addicted that we geeks sometimes refer to Apple buyers as ‘iSheep’ but any brand in any tech would want to have the passionate loyalty of Apple, where whatever generation new iPhone it is, people will stand in line OVERNIGHT to be able to buy the first of the newest model. Nobody else has this loyalty in the smartphone business. Its not even close!

The iPhone unit sales growth has now stalled. Deal with it. The market that Apple was able to generate is enormous. With its loyalty, it is safe to sell something well above 200 million iPhones any year and could go well above 250 million in a good year. In 2014 they sold 192.7 million and now in 2015 Apple sold 231.4 million iPhones. Every single one sold at a profit, Apple actually generates the largest profits in absolute terms - and as percentage of the sales price of each of its phones (among any Top 30 largest handset makers, lets ignore the Laborghini smartphones and Vertus and Caterpillars for now).

The iPhone market share visited briefly 20%, then declined and was the past 3 years at 16%, 15% and now (preliminary estimate for 2015) 15%. That is yes more than one in seven smartphones sold worldwide. This in literally the most competitive global industry humankind has ever seen. Look how much Samsung is struggling to hold onto modest profits. Then look at Apple. Apple RAISED its prices last year and found growth of 20% more in iPhone sales. Increased prices and yet increased sales? In the most competitive industry where most rivals reported losses? How is that possible? Its because Apple has perfected that proposition to its customers. Apple knows what its users want, and Apple delivers that satisfaction better than anyone else! Did I mention that they have the best customer loyalty? Duh. So Apple won’t grow to have 30% of this market, who cares. They are large enough that nobody can ignore them. At 15% new sales market share, iPhones can sustain a whole ‘ecosystem’ just around their own customers, even as most smartphone users are on Android (and Windows Phone is essentially dead).

But Apple is BETTER than that. Do you know what is the market share of smartphone operating systems not by new sales, but by ‘installed base’? So the average replacement cycle of smartphones is about 18-20 months globally. And the past 3 years Apple’s market share was 16%, 15% and 15%. You don’t have to be a mathematician to figure out, iPhone has to have about 15% market share in installed base, maybe a fraction above it. And your math professor would be proud, but Tomi here at CDB blog would not. Because thats not the reality on the ground in the smartphone OS wars. The latest smartphone OS installed base that we have measured was for October 2015, and Apple held 20% of the installed base of smartphone! Not 15%. 20% !!! Why is that? Look at your kids. Look at your parents. See all the older iPhones that refuse to die. If someone has bought a sad HTC smartphone, they can’t wait to get rid of it and get some other phone. If someone was suckered into buying a lame-o Microsoft Lumia, one third of those ‘smart’phones were not even activated (so said Microsoft itself). But Apple’s iPhones? They get handed down to kids, to loved ones, parents, friends, or are sold in the second-hand market. Apple’s iPhone has the longest life-span of any smartphones in use. Thats why its share in the installed base is higher than the sales number, and currently yes, one in five smartphones used globally is an iPhone. Installed base market share is 20%.

Thats before we consider the other devices running iOS, the iPads and Apple Watches and iPod Touch devices etc. This is true of all major OS platforms, Android is more than on smartphones, its on notebooks and tablets. Windows is on PCs and tablets (did I mention, Windows Phone is totally dead). Even Tizen is on watches and TVs. But yes, iOS reaches all those other Apple gadgets too, tablets, watches, portable media players. So if you’re a developer interested in reach of smartphones - the largest platform is obviously Android but Apple’s iOS is second biggest. Its installed base is larger than its unit sales level and iOS adds a good probably 33% to 50% to its reach on the other tech Apple devices also in the wild. So the market potential is massive.

Which then brings me to affluence. The RICHEST digital customers are disproportionately .. iPhone owners. It doesn’t mean that rich people don’t have Galaxies or Xperias or even Blackberries but the median income of iPhone owners is the highest of any (major ie Top 30) smartphone brand. And again, this is by a large margin. You want to address the richest slice of the smartphone owners of the planet - target iPhone users. What about influence? What is the smartphone beloved by the artists, the media, advertising and Hollywood? Its the iPhone. (Musicisans might prefer the Marshall London smartphone but who cares about doped-out rockstars, its a tiny slice of entertainment anyway)

So there was an end to the ‘unending growth’ trajectory. Come on, only a fool thought there is no end to that growth for the iPhone. Come on, you KNEW this, didn’t you. It could not last forever. Nothing lasts forever. But gosh, the iPhone had an incredible run of growth after growth. Now, it settles into its mature years, milking the loyalty and satisfying customers and selling in the 200 to 250 million unit level annual sales for maybe the next decade. And while some phone makers may go (Motorola, Palm, Nokia) or come (Xiaomi, Huawei, Nokia) the Apple iPhone is an icon that I promise you, will be selling in significant levels still in 2025, similar to how the Mac keeps selling its PC year in and year out, decade in, decade out, as a profitable loyalty-building cash cow for Apple.

The growth in the smartphone market is at the low end of the price pyramid. That is not where Apple will find its business nor is it one where durable profitable market segments can be found (consider the consistent massive profits of Porsche in cars). Apple knows where its future lies. At the top, most valuable, most beloved, highest loyalty smartphones. This means, now that the growth period is over, the market share will settle into gradual market share decline - while unit sales remain roughly flat. So around 2020 expect iPhones to sell about 10% of all smartphones sold worldwide but still be the highest price, most valuable, most profitable smartphones with the best loyalty. This is what Apple created. Any other manufacturing company, truly any other, would love to have Apple’s core customers and their loyalty. The sky is not falling.

So take a chill-pill, relax, chillax. Apple is not in any sort of trouble whatsoever. Some idiots thought iPhone growth could continue forever. Well, they learned a bit of reality today. They had to grow up at some point. For the rest of us, this is one of the pillars of the industry and it will continue to play an oversized role. Every year, we will enjoy the games ‘what will the next iPhone have’. As I predict, iPhone 7 will read our mind, iPhone 8 will include the cloaking device, iPhone 9 will come with teleportation and finally iPhone 10 will have time-travel, so I can move forward in time, to an enlightened era in tech writing when morons finally have quit posting silly comments.

Comments

[Steven epstein]

The only threat to apple long term is mobile cloud app business models 3 to 5 to 7 years from now on 5g. Then the smarter network will impact the upgrade path for billions of users to go out to 3 years plus. Rather than 2 yrs. Now apple becomes the new hated company like MS. Business the same. Mood and trolling becomes different.

[Catriona]

On today's call, Apple spent a lot of time talking up their service revenue. While it won't provide iPhone-like growth (those types of products don't come around very often), it is a valid point. Apple has 1 billion active devices out there. They can build ancillary revenue around services, accessories (yes, this is why I think the Watch is here to stay), and repeat business.

[Aviezer]

Good morning,

A very enlightening article - thank you, Tomi.

A small remark: please change "its" to
it's
or to
it is
in the relevant places.

Have a nice day,
A.

[Asko]

I must say I'm positively surprised to see that you Tomi have finally gotten around to understanding the "where else would you want to have your lead if you could select a category" argument that had been flying around for few years.

[RickO]

Love it. A great read. Never had an iPhone, never will. Yes, a good product but price bordering on extortion. Spec for spec iPhone is still a year or two behind most other brands. Alain DeButton ~ his 2004 book ~ Status Anxiety ~ should rewrite / amend it just for iPhone users.

[E.Casais]

Could those who keep predicting "peak iPhone" for the next quarter tone it down, now?

Anyway, I hope that Tomi will appraise the figures for the complete 2015 review by focusing on the changes, where signals of evolving market conditions are to be found. Glancing at Apple figures there are two interesting ones:

a) Apple total sales are down in America and Japan.

b) iPad and Mac sales are distinctly down, both in units and in revenue (and I suspect the same is taking place for the iPod, given clear historical trends).

On the one hand (b) confirms that everything is moving to mobile phones. PC sales overall are down anyway, as we know; tablets however may be barely growing overall.

On the other hand, (a) and (b) together potentially highlight an emerging difficulty, as iPhones are both in units and revenue considerably more important than iPads and Macs. So what is happening in Japan and the Americas?

[Per "wertigon" Ekström]

All you do say is true Tomi. However, I'd just like to point back to the mid eighties, when Windows 1.0 was released.

Everybody laughed at it and ridiculed it, the user experience was abysmal especially compared to the Mac. And yet, windows improved for every subsequent release, and by Windows 95 it was a good enough OS to completely roll over and crush any and all competition. And it STILL sucked compared to the Mac!

Similar things have happened to many other platform makers over the years, and thus Apple would be the anomaly. So while the iOS platform will continue to thrive, I do not think it will survive, especially not now that Jobs is gone. I think Apple will end up like Nintendo - once the ruler of the roost, now severely struggling to keep up as the console market is slowly drying up.

But that transformation will take time and will not happen overnight. Apple is safe for the next decade and longer still. It all depends how much Apple can keep up with new advancements in this field, and how fast competitors can ditch/improve their abysmal UIs (like the TouchWiz). :)

[Ahmet Giz]

Hello,

Yeah record quarter,

Iphone DOWN 0.3% Ipad DOWN 25% Mac DOWN 4%

Cheers

Ahmet

[E.Casais]

@Ahmet Giz

What I have seen is iPhone up +0.42% in units, +0.90% in money.

[Tester]

All I have to say here:

Remember Nokia in 2010. They were doing record sales, their profits were growing and all looked well on the surface - only to see it all implode a few months later.

Corporate rot has the unpleasant property of only showing itself clearly when it's too late.
And there's definitely some rot going on in Apple - it's only a matter of time if it eats the company alive if they do not change strategy. I have been hearing some very harsh criticism about newer Apple hardware from more levelheaded users - listening to the fanbois won't provide an enlightening picture, but that's what we mostly get here.

Furthermore, Apple's current market shows all the signs of an overinflated bubble - and they tend to burst eventually.

The only question is 'when?'. It will most likely take a few years - so for the near future Apple may continue as usual, reeking in more profits, but at the same time do some damage to their long-term prospects.

And last, but not least:

Up until last year the bi-annual improvements to the phones were so large that any thought of this ending would have been pointless.

But if we now look at the competition which reached the sweet-spot in features two years before Apple, who was fashionably late with larger screens, it's quite evident that most of what newer premium phones have to offer, doesn't interest the potential buyers so much, so one has to wonder how Apple will fare next year.

They'd have to do something truly radical to break this pattern - as of now the only thing that's left is higher resolution displays, but the need of full-HD on a smartphone is already very questionable to many users.

So, whatever they do, another iPhone 6 moment seems unlikely.

[NO ONE WANTS WINDOWS]

Apple might be doing well ...but microsofts's consumer products are really BIG TIME CRAP! Even the NFL is getting screwed by microsoft! ...too funny!

There ar lots of posts like this on YouTube here is just one sample :-)

https://www.youtube.com/watch?v=_zq7mEVgi5M

It's easier and easier to see why NO ONE WANTS WINDOWS ON A PHONE ...or soon, even a SURFACE PHONE (same CRAP just a different label) :-)

[NO ONE WANTS WINDOWS]

Just ridicule for microsoft...

https://www.youtube.com/watch?v=-NqEQIYkRnk

https://www.youtube.com/watch?v=YDD5MT9cKOk

https://www.youtube.com/watch?v=xcUzKzxFqC8

...fun stuff. No wonder NO ONE WANTS WINDOWS ON A PHONE! too funny...

[abdul muis]

According to valuewalk, in the fine print.... Apple were stuffing the channel inventory. so, in reality, sales were down!!!

http://www.valuewalk.com/2016/01/iphone-sell-in-vs-sell-through-1q15-vs-1q16/
quote:
"Apple’s stock has been battered over the past year due to fears about iPhone unit sales growth. Yesterday’s fiscal Q1 2016 results finally give us some data to understand how realistic these fears are. Apple reported iPhone shipments of 74.8 million units in the quarter, growing marginally over fiscal Q1 2015. However, Apple also increased iPhone channel inventory by 3.3 million over the quarter compared to a decline of 0.2 million in the same quarter last year. Keeping in mind that Apple reports sell-in (shipments), not sales to end users, this implies that iPhone sell-through actually declined by 4.3% YoY, from 74.7 million to 71.5 million units. This is the first such decline in the history of the product."

(image: http://www.valuewalk.com/wp-content/uploads/2016/01/iPhone-Sell-In-vs.-Sell-Through.png)

[Catriona]

@abdul, Luca Maestri said that on the call. 3.3 million units is hardly channel stuffing given the volumes involved (and also Apple's normal levels of inventory), and they were transparent about it. Either way, given that the 6 pulled upgrades forward, the 6S is selling well.

I'm a bit surprised they didn't get more questions about the iPad. That seems to be a line that Apple doesn't know what to do with. Introducing the Pro doesn't seem to have helped revenue or ASP all that much. Apple instead focused a lot on services. They seem aware that they are moving from growth to a cash cow with iOS.

[Tester]

@Wayne Brady:

"Apple was supply constrained last year."

Sure. The same lame excuse was brought forward every single time Apple was showing some problems.
You guys apparently cannot accept the fact that the magic has come to an end.
True sheep, indeed.

[Earendil Star]

Interesting analysis on valuewalk.
What is implied is that for 1q 2015 pent up demand was such that inventories were practically nil lady year. This year instead the large screen effect has waned and actual iPhones sold to consumers fell for the first time ever vs same quarter in 1q 2016.
Again, nothing dramatic, but a vindication that the same market laws also apply to... Apple.
Reference to normal inventory levels just misses the point... not that this is perchance, of course, but still...

[CorrectionsForYou]

What really must annoy the anti-Apple folks here (people commenting, not Tomi) is the timing. They were screaming for "peak iPhone to happen on Q4 and the pro-Apple folks tried to explain that Apple guidance is up, even though slightly, hence unit sales are not down.
This was of course unacceptable. Q4 2014 was supposed to be "pent-up demand spike" that was completely impossible to replicate. Apple could NOT understand their own business.
So not only did Apple sell more but their guidance now is that they will indeed sell less on next quarter. On the quarter which - by the same folks - was in 2015 the "pent-up demand subsiding" down quarter.
So nit only were they unable to tell where the first YoY decline would be but Apple came out and told it for them before they got to paint the doomsday scenarios.

Must be frustrating that Apple knows their own business.

[crun kykd]

The most interesting part of the call was Tim Cook's comments on VR: "I don't think it's a niche," he said. "It's really cool. It has some interesting applications." As I've been saying, VR is the real driver for all future hardware technology upgrades. Existing cpu, graphics chips, displays, etc are simply not up to snuff. And the desirability of high-end VR is off-the-charts. Watch this space.

[coldspring21]

People tend to forget that Apple being able to dependably sell 230-250 million iphones year in and year out at super premium price for all of next decade depends on lot of things going right for Apple, and nothing going seriously wrong. Iphone is after all just single product and bulk of Apple's revenue and profit depends on it. Apple has become too dependent on status quo to be a disruptive force any more, but it might find itself being disrupted. Apple's smooth sailing down to 10% global market share by end of 2025 is just one of the possible outcomes, and future could be surprisingly unpredictable and possibly less pleasant for the fruity company.

[ch]

IIRC Samsung, LG and Sony etc. don't get 75% of their income from mobile phones. A market that will grow in units next year but i doubt if the mobile phone market as a whole will grow in revenue. But hat doesn't matter that much for the Android manufacturers (except Samsung) as stealing from their competitors is their way to grow. Something which is much more difficult for Apple