One of the most surprising things Apple CEO Tim Cook said last night on the company’s earnings call was about prices.
He basically admitted that one of the reasons iPhone sales are in decline is Apple’s policy of trying to charge the highest prices it can in order to protect its record-breaking profits.
This is the heart of the problem for Apple this year: Cook is trying to raise prices while admitting that consumers — indeed entire countries — are suffering from “extreme conditions” in their economies. He called out China, Brazil, Russia, Japan, Canada, Southeast Asia, Australia, Turkey and the eurozone as having been hurt by slowing economic growth that suppressed sales.
Apple announced the greatest profits ever — ever! — earned by a single company last night: $18.4 billion.
That profit was created by increasing the average selling price of iPhones to $691 from $687. So Apple is raising prices on its phones while at the same time saying its customers can’t afford its phones.
It did so while the US dollar got stronger, in a global economy where other currencies are trying to stay as cheap as possible. The result, according to Apple’s “currency index” chart, is that $100 spent with Apple in 2014 is now the equivalent of only $85 today:
Apple CFO Luca Maestri said earlier on the call that higher prices — which are “protecting our margins” — may have dampened demand for Apple products:
One of the things that we’ve done to respond to the foreign exchange situation has been to increase the price of some of our products in certain international markets. That has had the effect of protecting our margins, which you’ve seen have been very strong, both in the December quarter and in the guidance that we provide for the March quarter. But inevitably over time, higher prices affect demand and so we’re capturing that in our guidance. So, I would say these are the major reasons and the drivers for the guidance on revenue.
The guidance Maestri was referring to was Apple’s expected 11% decline in revenues for next quarter. Cook then elaborated:
I think you can tell from the numbers that Luca is talking about just on the currency side and that’s before thinking through the effect that price increases can sometimes have on the business over a period of time, it’s clear that the economic piece is large.
“The effect” is that Android — generally cheaper than iPhone — is winning some of its contests against the iPhone. Kantar Worldwide published some new data on iOS vs Android today. Android gained share everywhere except China in the last quarter. According to Carolina Milanesi, chief of research at Kantar Worldpanel ComTech, new consumers are becoming less likely to buy an iPhone: “Customer acquisition from Android has gone from 13% in 4Q14 to 11% in 4Q15, and the contribution that first-time smartphone buyers make to Apple overall sales numbers went from 20% to 11% over that same period.”
For the longest time, the mantra was that Apple did not compete on price, because its products were superior, its iOS platform was “special” to Apple, and because Android products — which are cheaper — are not equivalent to an iPhone.
And yet when the currency headwinds blow against Apple, and consumers get poorer, here we have the CEO talking about price competition. This is the most extraordinary issue to come out of last night’s call: Apple’s two most important financial executives admitting that as long as Apple keeps its prices high, to protect its profits, consumers may not be able to buy them, and that Apple is vulnerable to price competition.
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