'Apple faces a critical strategic decision' over the future of the iPhone, Goldman Sachs says

Hollis JohnsoniPhone X.
  • Apple, and other smartphone firms, are becoming victims of their own success.
  • Happy customers are hanging on their smartphones for longer, which analysts think is having a damaging impact on iPhone sales.
  • If people hang on to their iPhone for just a tenth of a year longer, it represents 8 million fewer iPhones shipped.
  • Goldman Sachs said the shrinking market could prompt Apple into “a critical strategic decision”: Take the iPhone downmarket in a bid to grow sales, or keep it high-end and take the hit on volume.

Wall Street is reportedly in “full panic mode” ahead of Apple releasing its second-quarter earnings on Tuesday.

That was the view of GBH Insights analyst Daniel Ives in a note to clients. He forecast that the perfect storm of slower demand reported by Asian smartphone suppliers and the $US1,000 price tag of the iPhone X will bite Apple this week.

History has shown that you would be a fool to bet against Apple, but there was a prevailing theme in analyst notes ahead of the company’s financial results: Apple, and other smartphone firms, are becoming victims of their own success.

BMO Capital Markets captured this best in the graph below, which shows how happy consumers are hanging on to their smartphones for longer.

BMOBMO

“Longer smartphone lifetimes are having a negative impact on shipments,” it said. The lifespan of Android models is now comfortably over 2.5 years, BMO said, and it expects iPhones to head in the same direction.

“Although we estimate iPhones get replaced more frequently than competitors’ phones, we believe replacement rates will continue to worsen,” it added in a note to clients.

BMO wasn’t alone. Oppenheimer said there is a “lengthening of the replacement cycle” to which “Apple is not immune,” while Goldman Sachs asked if Apple can overcome people becoming “more fatigued with smartphone upgrades.”

If people hang on to their iPhone for just a tenth of a year longer, it represents 8 million fewer iPhones shipped, BMO estimated. In other words, it’s easy to see how having satisfied customers could quickly stack up to significantly fewer phones sold for Apple.

Apple is expected to announce iPhone sales of between 50 and 53 million in the three months to the end of March 2018. At best, this would only represent modest year-on-year growth on the 50.76 million units Apple shifted over the same period last year. And that’s with iPhone X sales kicking into full throttle.

The most expensive iPhone ever, it is expected to deliver disappointing unit sales, but potentially higher revenue – which Goldman Sachs said provokes an existential question for Apple CEO Tim Cook.

“Apple faces a critical strategic decision,” the investment bank said. “Move down market with the iPhone more aggressively and take lower margins or remain at the high end of the market with higher margins and lower unit volume.” Apple does sell cheaper iPhones – the SE and its range of older models can be bought for hundreds less than iPhone X. But it is the exciting new models that drive new unit sales, forcing the question about the X’s price tag.

As noted by the Financial Times, the iPhone X could represent a “terrible misreading” of the shrinking smartphone market, or a “genius move to buoy up revenues.”

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