Is Apple’s Cash Cow In Trouble?

Reality distortion field in full swing over iPhone slowdown

Photo by Ali Abdul Rahman on Unsplash

Yesterday, trading of Apple’s stock was briefly paused for CEO Tim Cook to deliver some bad, but not wholly unexpected, news: revenue in Q1 2019 would fall far short of expectations, in large part due to slow iPhone sales. Reports have been coming out for a couple of months suggesting that Apple’s new slate of iPhones — XR, XS, and XS Max — were not selling as much as the company had expected, and now that’s been confirmed.

When Apple reported its Q4 2018 numbers, it provided Q1 2019 guidance of $89 billion to $93 billion in revenue and a gross margin between 38 to 38.5 percent. Cook now says Q1 revenue will be closer to $84 billion — $5 billion below even its low-end target — and gross margin will come in at around 38 percent. But why is revenue, in particular, so much lower than expected?

At least that’s what Tim Cook wants us to believe.

In Cook’s letter to investors, he singles out China as the main “challenge” the company faced in meeting its revenue targets, in particular the lower-than-expected iPhone sales in the region — but problems with the iPhone line go beyond Greater China. Apple has placed far too much attention on its share price in recent years, and now the issues with Apple’s product line are coming back to bite it.

Any slowdown in the iPhone line is a huge problem for Apple because it alone accounted for nearly 63 percent of the company’s revenue in fiscal year 2018. When the iPhone falters, Apple falters — which makes all the stock buybacks and dividend increases Cook has spent the past several years pursuing to please investors useless.

In explaining the lower iPhone revenues, Cook blames lower carrier subsidies, a stronger US dollar, and cheaper battery replacements — the latter of which he positioned as a benevolent move by the company in an interview with CNBC when it was actually a response to a massive scandal over slowing down batteries in older iPhones.

While these things may have contributed to lower sales, they miss the bigger challenge that Apple is facing with the iPhone line, and the way Cook completely ignores it in his letter illustrates how the reality distortion field is still in full swing among Apple executives, and could ultimately be hindering them from addressing the real problem.

In that same interview with CNBC, Cook says that carrier are offering lower subsidies, so for customers who have been out of the market for two to three years and are returning to get a new phone, everything looks more expensive. Except phones don’t just look more expensive, they are more expensive.

Apple has been slowly increasing the price of iPhones for years, to the point where the cheapest of its new models now costs $749, but there are also base models for $999 and $1099 — higher prices are a trend across the whole product line. These prices are in large part a response to the significant decline in iPhone sales growth as the smartphone markets in the United States and China has become saturated. Since sales growth has stalled, average selling price needs to increase to keep overall revenue growing — but even that seems to be becoming a challenge.

Despite the issues cited in China, Cook says all-time revenue records were set in the United States, Canada, Germany, Italy, Spain, the Netherlands and Korea. The company has stopped reporting sales numbers, but it’s safe to assume this is a result of higher revenue from its premium phones — the iPhone XS and XS Max — not due to selling many more phones over last year.

Apple is the iPhone. Sure, its other product lines are doing well, but none comes nearly as close to matching the size and importance to Apple’s bottom line. The company has so far avoided its reckoning with the state of the smartphone market by raising prices, but that strategy is already catching up to it. Even though Cook placed the blame elsewhere, there can be no doubt that higher iPhone prices are a contributing factor to the slowdown; it’s getting harder and harder to justify an upgrade, and raising prices again isn’t going to make it any easier.