Apple's '$1,000 iPhone' problem

  • Mary Meeker has a chart that depicts the main problem Apple will have trying to sell iPhone 8 for $US1,000.
  • iPhone sales have declined in four of the last five quarters, so the price tag on iPhone 8 is a huge decision for Apple.
  • Apple is trying to take market share from Android, with a new ad campaign and discount iPhone offerings like the iPhone SE.
  • Apple’s revenues, profits, EPS and the price of AAPL stock all depend on Apple setting the price of iPhone 8 right.

Kleiner Perkins Caufield & Byers analyst Mary Meeker delivered her legendary annual “state of the internet” report last week, and this chart within it describes Apple’s “$US1,000 iPhone” problem perfectly.

The global market for smartphones has topped out. Sales growth is in decline:

Apple has always taken a roughly 15% share of this market (the orange iOS columns), creaming off the customers who are willing to pay the highest prices for a phone. Google’s Android system takes the other 85%.

But now the entire market has stopped growing. So Apple must either take a greater share of the market — which it has never done before — or expand the market as a whole.

Apple’s problem is that it needs iPhone prices to be high. To maintain its profits, revenues, EPS, and the valuation of AAPL stock, iPhone 8 — expected in September — will likely be priced starting at about $US1,000 (£775), according to Goldman Sachs.

Can Apple take a greater share of the market when it wants $US1,000 for a phone?

One thousand dollars is nearly $US200 more than the current average price of an iPhone ($US815 in the US or £696 in the UK, according to Deutsche Bank’s ranking of iPhone global prices). But it is a psychologically testing barrier for most consumers. Most phones do 90% of the things an iPhone can do. Do you really need to spend the equivalent of half a month’s average income on a slightly better phone?

The problem is material to Apple’s financial results.

In four out of the last five quarters, iPhone sales declined. CEO Tim Cook believes buyers put their purchases on “pause” when they know a new iPhone is coming. The problem with iPhone 6s and iPhone 7 is that neither model was sufficiently different from iPhone 6, and many consumers held on to their old phones waiting for the next model. This is Apple’s other high-class revenue problem: Its phones are now so good you don’t have to buy a new one very often.

There are signs that Apple is working on this. Three years ago, I suggested before the launch of iPhone 6 that the new phone had better be “amazing and cheap” in order to fend off precisely the kind of sales declines that Apple saw in the iPhone 6s/iPhone 7 era. Apple did, in fact, do that — but not quite the way I predicted: iPhone 6 was amazing — it set sales records and a lot of consumers held onto it because it was so good. Apple also launched a cheap iPhone, the iPhone SE, which is currently priced at about half what iPhone 7 costs.

More recently, Apple has become more aggressive in its war against Android. As my colleague Rob Price reported, Apple has launched an ad campaign to persuade Android users to drop the world’s favourite operating system. It has a new website dedicated to helping Android users port their stuff over to iPhone as seamlessly as possible. And, as we know, Tim Cook has for years watched the rate of “Android switchers” coming to iPhone very closely. It is one of the key benchmarks he has touted to investors.

So the next few years will be very interesting: Can Apple take market share with an incredibly expensive phone? Can it take more share with the cheap iPhone SE (or whatever lower price iPhone succeeds it)?

Or is Apple doomed to find itself managing 15% of a category that is mature, stable, and — from a sales point of view — stagnant?

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