iPhone sales in the last quarter were slightly down (50.8 million vs. 51.2 million a year ago). That is the fourth quarter out of the last five in which iPhone sales have declined.
Apple CEO Tim Cook had an explanation for that on his earnings call last night: “We’re seeing what we believe to be a pause in purchases on iPhone, which we believe are due to the earlier and much more frequent reports about future iPhones.”
For Cook, that was an extraordinary statement.
Since back in the days when founder Steve Jobs would launch new Macs at Macworld the media has leaked details and reported rumours of the expected updates to new Apple devices. It’s part of the fun, the mystery and — for Apple — a key part of the marketing (even if the company would never admit that).
The hype helps Apple sales.
Or at least, it did.
Now, Cook says, it is hurting them.
Leaks and previews are an embedded part of the iPhone sales system. iPhones are released on a two-year, tick-tock cycle, with a “new” model denoted by a new number (iPhone 7, for instance) and a more incremental update denoted by an “s” suffix (i.e. iPhone 7s), the year after. Consumers tend to end up as either repeat “new number” buyers or repeat “s” buyers. This time every year, consumers who might need a new phone hold off on buying one until they get a good idea of what Apple is going to deliver in September.
But this year is different.
It is the 10th anniversary of the iPhone, and the media and analysts were — until recently — expecting Apple to break the tick-tock cycle and deliver “iPhone 8,” even though the schedule calls for a mere “iPhone 7s.”
In fact, analysts had, ahead of the call, said publicly they believed iPhone buyers were waiting for iPhone 8 instead of buying new phones. “We believe iOS subs are deferring purchases ahead of the iPhone 8,” analysts at Nomura told their clients.
At UBS, analyst Steve Milunovich wrote, “Overall smartphone buying intent for the next 90 days fell to a nine-year low as did Apple’s share of these planned buyers. It appears Apple users are holding off upgrading but not necessarily leaving the ecosystem. … Most of the pullback in smartphone demand appears to be Apple users deferring upgrades.”
This “pullback” sets Apple up for a huge wave of new sales when iPhone 8 is released.
“Less demand now could mean more later as long as the retention rate remains high. Apple’s retention rate at 80% has been trending down the last two years,” Milunovich wrote
But Cook’s comments last night complicate the situation if you believe — as some now do — that iPhone 8 is not coming this year. We reported yesterday that some analysts, including those at Deutsche Bank, are paying more attention to reports that Apple may wait to launch iPhone 8 in 2018, not in September 2017 as currently expected.
A delayed iPhone 8 would cause a huge headache for Apple.
The useful life of an iPhone is getting longer. People used to replace them every two years in part because the screen would break, the battery would no longer hold a charge, and so on. But the iPhone got better, and iPhone customers can now extend the life of their devices to three years or more. The average cycle is 32 months. The difference between an iPhone 6 and iPhone 7 is largely incremental. The software is the same. An iPhone 6s owner won’t miss much by skipping iPhone 7s and waiting until 2018 for iPhone 8, especially if the high price of the device is a factor in the purchase. As the recent four quarters of declining iPhone sales show, consumers are willing to
not buy an iPhone if they think something better is coming along in the next year.
In other words, consumers are off the tick-tock cycle, and are able to hold out longer for what they want.
The good news for Apple in that scenario would be that the pent up demand for iPhone 8 would generate an almighty super-cycle of sales.
The bad news is that it might seriously dent iPhone 7s sales, if iPhone 7s is the only phone we’re getting this year.
That’s why it’s so interesting that Cook said he is seeing a “pause” in iPhone demand. It could be his early excuse for poor results if all we get is an incremental iPhone 7s. Or he could be under-promising in hopes of over-delivering a stunning new iPhone 8.
Either way, there’s a lot riding on his words.
Here’s the full exchange between Cook and UBS analyst Steve Milunovich from the call last night:
Steven M. Milunovich – UBS Securities: “You mentioned the 451 Research survey. They did have a couple findings that were interesting. One is a nine-year low in iPhone purchase intent, and that might just be where you are in the cycle. And the other was a declining retention rate in the U.S. toward 80%. Any comment on either of those and whether you’re concerned?”
Cook: “In general, what we are seeing, we’re seeing what we believe to be a pause in purchases on iPhone, which we believe are due to the earlier and much more frequent reports about future iPhones. And so that part is clearly going on, and it could be what’s behind the data. I don’t know, but we are seeing that in full transparency.”
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