Apple's Worst Nightmare: Declining iPhone Sales and Profit Warning
It's no secret that Apple is currently facing one of its worst nightmares, with declining iPhone sales causing the company to issue its first profit warning in 16 years. The amount of revenue Apple told investors they would earn in the fourth quarter of 2018 turned out to be inaccurate, resulting in a disappointing forecast that has left shareholders worried.
The First Domino: Saturated Smart Phone Market
The series of unfortunate events that led Apple to this difficult position began back in 2014 when it became clear that the smartphone market was becoming saturated. This realization prompted growth to decline dramatically across all smartphone manufacturers. The biggest reason for this slowdown was that by 2014, most people who wanted a smartphone had already bought one, leading to a dwindling number of customers shopping for a new phone.
Apple's Response
To counteract the slowdown, Apple came up with several strategies. First, they began to focus aggressively on the Chinese market, which was their fastest-growing source of revenue. China was seen as an opportunity to capture even more market share, given its large and growing mobile phone user base. The Verge noted that China was key to sustaining the iPhone's remarkable growth. However, with the Chinese smartphone market and overall economy slowing down, the effects on Apple are undeniable.
Second Strategy: Price Hikes
In addition to focusing on the Chinese market, Apple also began implementing price hikes in 2015. They started by increasing prices of some accessories, such as the Magic Mouse, which became about 15% more expensive and carried a $20 premium for the space gray color. In 2016, Apple introduced new MacBook Pros with a $200 price increase for no apparent reason.
Pushing Boundaries: The iPhone X
The final blow came in 2017 when Apple released two new models of iPhone at the same time: the iPhone 8 and the iPhone X. The iPhone 8 was priced at $700, more expensive than the previous iPhone 7, while the X was priced $300 more at $1,000, marking the first time customers had to drop a grand to get the best iPhone Apple had to offer. This was a bold move that further pushed the boundaries of what their customers were willing to pay for.
Worse Than Expected: 2018
The situation worsened in 2018 with Apple raising prices on almost every product they upgraded, again due to slowing sales of the iPhone. Remember, these price increases were all a response to the slowdown, and they were made because the company knew that the iPhone accounted for 60% of their revenue.
A Year-Over-Year Decline
The results are clear: Apple's fourth quarter revenue forecast was not met. Tim Cook had to issue a statement correcting their revenue numbers from $93 billion to $84 billion in the fourth quarter of 2018, marking a year-over-year decline that frightened investors. While $84 billion is still a huge amount of revenue, this indicates that something more serious may be brewing for Apple.
A Sign of Troubles Ahead
The majority of Apple's revenue comes from one product line: the iPhone. This means that when the sales of the iPhone slow down, it has a ripple effect on the entire company. When you consider all the factors at play, it becomes clear why many people are worried about Apple, especially given their reliance on this single product line.
The Blame Falls on China
When asked about the disappointing fourth quarter, Tim Cook placed the majority of the blame onto China, stating that they did not foresee the magnitude of the economic deceleration in Greater China. He noted that most of their revenue shortfall and over 100% of their year-over-year worldwide revenue decline occurred in Greater China across iPhone, Mac, and iPad sales.
"WEBVTTKind: captionsLanguage: enHey guys it’s Greg with Apple explained,and I don’t know if you realize it or not,but Apple is currently facing one of theirworst nightmares: declining iPhone sales.And that has led to the company issuing theirfirst profit warning in 16 years.Which means the amount of revenue Apple toldinvestors they’d earn in the fourth quarterof 2018 actually turned out to be inaccurate.So the company had to issue a warning, lettingshareholders know that they actually madenine billion less than they original forecasted.And in this video I’m going to talk abouthow Apple ended up in this nightmare, andwhat they might do in the future to recover.Now this video was the first place winnerof this weeks voting poll and if you didn’tget to vote make sure you’re subscribed,that way the voting polls will show up rightin your mobile activity feed and you can letme know which video you would like to seeyou next.Now I want to start off the video by walkingyou guys through the series of unfortunateevents that led to Apple being in the toughposition they’re in today.And I think the first domino fell back in2014 with the realization that the smart phonemarket was becoming saturated.Since that’s when growth started to declinedramatically across all smartphone manufacturers.And the biggest reason for this is that by2014, most people who wanted a smartphonealready bought one.So the number of customers shopping for asmartphone began to dwindle.Apple recognized this trend and knew theyneeded a strategy to counteract the slowdown.So they came up with a few different plans,first, Apple began to focus aggressively onthe Chinese market.Mainly because China was Apples fastest-growingsource of revenue and the company saw an opportunityto capture even more market share.Not to mention China has the most mobile phoneusers on the planet, with India coming insecond.The Verge even said China was the key to sustainingthe iPhones remarkable growth.And now that the Chinese smartphone marketand overall economy is slowing, the effectits having on Apple is undeniable.But China wasn’t Apples only strategy.The company also began implementing pricehikes in 2015 in order to make more moneyfrom less sales.It started with some of their accessorieslike the Magic Mouse which not only becameabout 15% more expensive, but carried a $20premium for the space gray color.And in 2016 Apple introduced new MacBook Prosalong with a $200 price increase for no apparentreason.But 2017 was when Apple really began pushingthe boundary of what their customers werewilling to pay with the iPhone X.You see, ever since the iPhone 4, Apple hadalways offered their flagship model iPhonefor the unsubsidized price of $650.But this changed in 2017 when Apple decidedto release two new models of iPhone at thesame time.The iPhone 8, and the iPhone X.The 8 was priced at $700, which is alreadymore expensive than the previous iPhone 7,and the X was priced $300 more at $1,000.Marking the first time customers had to dropa grand to get the best iPhone Apple had tooffer.But if you thought that was bad, 2018 waseven worse.With Apple raising the prices of almost everyproduct they upgraded.And remember, these responses were all dueto slowing sales of the iPhone.Which Apple knew was dangerous since the iPhoneaccounts for 60% of the company’s revenue.So by growing their appeal in China and makingother products in addition to the iPhone moreprofitable, Apple thought they’d still beable to post record-breaking quarters despiteslowing sales but now we know that isn’tthe case.Since Tim Cook had to issue a statement correctingtheir revenue numbers for the fourth quarterof 2018, from 93 billion to 84 billion, whichmarked a year-over-year decline that frightenedinvestors.But before we go any further, I should mentionthat 84 billion is still a huge amount ofrevenue, and Apples definitely not in anyfinancial trouble just because of a weakerthan expected fourth quarter.But this is a sign that something more seriousmay be in store for Apple.And when you consider all of the differentfactors at play, you begin to understand whymany people are worried for the company, especiallyconsidering that the majority of Apples revenuecomes from one product line, the iPhone.So how exactly did Apple end up with a disappointingfourth quarter?Well, lets take a look at the reasons TimCook provided.He put the majority of the blame onto China,saying, “we did not foresee the magnitudeof the economic deceleration, particularlyin Greater China.In fact, most of our revenue shortfall toour guidance, and over 100 percent of ouryear-over-year worldwide revenue decline,occurred in Greater China across iPhone, Macand iPad,\" Now its true that Chinas economyis slowing, but I wonder if there’s anotherlayer to this story that Apple isn’t mentioning.Because the fourth quarter is also when thenew iPhone XS and XR went on sale, and maybeApple expected better sales performance ofthose devices but was disappointed to findout many customers in China didn’t wantto pay the iPhones premium price.Especially considering they have so many otheraffordable options.And market saturation in China is likely anotherculprit.The Chinese market did grow quickly duringthe early days of the iPhone.But that growth has come to a halt just likein the US, since many people who wanted asmartphone already own one.The problem is the majority didn’t chooseiPhone.And that’s probably because people in Chinause an app called WeChat to do almost everythingthey need.From paying for groceries to chatting withfriends, rather than using iOS-based serviceslike Apple Pay or iMessage.So most Chinese customers simply buy an affordableHuawei phone to use WeChat since the experienceinside the app is essentially the same.Now Cook also put the blame on carriers foroffering less subsidizes on the iPhone.Which I think reinforces the fact that iPhonesare too expensive to begin with.Since he’s essentially saying that if priceswere cheaper through subsidies, Apple would’vesold more iPhones.And the company actually tried imitating asubsidy by advertising the iPhones trade inprice.But apparently that hasn’t worked too well,considering the majority of customers don’thave the more recent iPhone 7 Plus that wouldqualify them for the $450 trade in.And the final place Cook put the blame wason their $30 battery replacement program.Which allowed users to receive a battery replacementfrom Apple if their select iPhone’s batterywas at least 80% degraded.Apparently users who swapped out their iPhonesbattery had a detrimental effect on salesof the XS and XR.And I find this rationale to be a bit strange.Because I imagine someone who planned on upgradingto the iPhone XS would simply see the batteryreplacement program as a bonus.Not a reason to keep their old phone for anotheryear.And it also implies two things about Apple.First, that they didn’t make the new iPhonesappealing enough for users to upgrade.And two, degrading batteries did in fact serveas a form of planned obsolescence.But I don’t think those reasons, as trueas they may be, would cause such an unexpecteddrop in iPhone sales.So let me share what I believe are the moreconsequential factors.First we have to recognize that the iPhoneXS is perhaps the most unremarkable iPhonerelease since the 3GS.It doesn’t have any major new features andthe addition of a larger, even more expensivemodel means nothing to the average consumer.And at a starting price of $1,000, the XSneeds at least one amazing headlining featureto add value.And this isn’t even considering the factthat many customers already dropped a grandon the iPhone X in 2017, so they’re hopingthat device lasts them a lot longer than oneyear.So while China’s economy may be slowing,I think it’s more likely that Apple pricedthemselves out of the Chinese market, andnow they’re suffering the consequences.Now that we’ve discussed how Apple endedup in this situation, I want to talk aboutwhat Apple might do to recover in the future.And I think there’s a short term solutionand a long term solution.For the short term, Apple should focus onmarkets that have not reached the same levelsof saturation as the US and China.Places like the Middle East, India, LatinAmerica, and Africa all remain areas of untappedpotential for Apple.But there are barriers of entry that they’dhave to overcome in order to compete.For example, in India, the import taxes, ortariffs, on foreign smartphones has been onthe rise.And Apple tried to negotiate for lower tariffsback in 2017 when the rate was set at 15%,but India actually did the exact oppositeand increased their smartphone tariff to 20%.Which means today, the starting price of aniPhone XS in India is over $1,400.So it’s obvious that Apple has a lot ofwork to do in these markets.And I think introducing a modern budget iPhonelike the SE would really help boost Applessales in these locations.But even if Apple is successful in India orthe Middle East, it’s only a matter of timebefore market saturation becomes an issueagain, since it is an unavoidable problemwith virtually any product.And that brings me to the long term solution.Apple either has to introduce a product thatcannibalizes the iPhone, similar to how theiPhone cannibalized the iPod, or revolutionizethe iPhone in such a dramatic way that itessentially appears to be a new product.Because even though the original iPhone costalmost twice as much as its competition uponrelease, customers were still lining up outsideApple stores for days to buy it.So Apple has to do the same thing again inorder to generate the excitement necessaryto sell a high volume of expensive devices.And I think Apple already knows this.They’re just stuck waiting on that nextbig technological breakthrough that’ll settheir product apart from anything we’veever seen before.Now before I end the video I have some prettyexciting news…This channel has received it’s first majorsponsor.And that’s Honey, a free browser extensionthat automatically finds promo codes and appliesthem at the checkout on over 37,000 websiteso you know you’re getting the lowest pricepossible.Now I’m so happy they decided to sponsorthis channel because I actually started usingHoney after seeing it on Shane Dawson’svideos and it just saved me almost $100 intotal on furniture for my new apartment.It has over 100,000 five star reviews on theGoogle Chrome store and only took two clicksto install so there’s literally no reasonnot to use Honey for everything you buy online.Again it’s free and you can install it injust two clicks.Get honey for free at joinhoney.com/apple,that’s joinhoney.com/appleAlright you guys, so that is Apples worstnightmare, and if you want to vote for thenext video topic, don’t forget to subscribe.Thanks for watching, and I’ll see you nexttime.\n"
