Yesterday, Apple’s iPhone sales fell short of Wall Street’s expectations, sending the company’s stock into a minor tailspin. Let’s set the wailing and gnashing aside for a minute though. The iPhone’s dominance continues unabated, and shows no signs of slowing. If anything, it’s gaining steam.
Let’s talk about what actually happened with those iPhone sales last quarter: Apple sold more than 47 million smartphones over the last three months, roughly one for every single person in Spain, and 35 percent more than the same period the previous year, which is very good. Though, not as good as analyst expectations, that fabricated jumble of numbers that serves as a benchmark for a company’s stock performance. They had expected something closer to 50 million, and the disappointment in that gap ended up shaving $62 billion off of Apple’s market value in three minutes. So fickle!
The iPhone did receive some objectively mediocre news yesterday. While sales were up year over year, they were steeply down sequentially. That’s also not a total surprise, though; the further into the (extraordinarily predictable) iPhone product cycle we go, the fewer people there are left to buy them. At this point, unless you’re truly desperate, you might as well hold off until iPhone 7. Which, again, despite all of that, Apple still moved 47 million plus units.
Mounting a defense for the iPhone feels a little like holding Goliath’s spit bucket, so let’s think of this more as a light dusting of context, a gentle reminder that the iPhone dominates the premium smartphone space as it seldom has before—and will continue to do so barring extraordinary events.
“Whether you’re talking about phones or tablets or PCs, even the digital music players, it’s always been known as the premium, high-end play,” says Gartner analyst Tuong Nguyen. “So the fact that they’re well secured in this end of the market is not so much of a surprise to me.”
Nguyen isn’t just referring to Apple’s most recent quarter, but to a Gartner study published earlier this year that highlighted just how dominant Apple became by the end of 2014. It was the first time since 2012 that the company had beaten out Samsung for worldwide market share. The next-closest competitor to the two top dogs, Lenovo (which includes Motorola), managed only around a third of the volume of either.
That growth, according to Nguyen’s colleague Anshul Gupta, came largely at the expense of Samsung, which lost 10 percentage points of market share in the fourth quarter of last year. “This downward trend shows that Samsung’s share of profitable premium smartphone users has come under significant pressure,” explained Gupta at the time. In other words, it couldn’t keep up with the iPhone.
Apple’s dominance of the top tier might sound obvious, but it wasn’t always this way. The reason Samsung led the smartphone race since 2012 isn’t just that it flooded the market as many models as it could dream up, though that doesn’t hurt. As Nguyen points out, it’s also because Apple—despite public perception to the contrary—hit a rut.
“Apple fell behind,” says Nguyen. “They didn’t have those larger screens that everyone else did, so some of the users who may not be as loyal Apple fans started to drift away.”
If it weren’t clear by now that the iPhone 6 and 6 Plus brought back more than a few non-loyalists into the fold, Apple CEO Tim Cook confirmed as much during last night’s earnings call. “The strong iPhone results were broad-based in both developing and emerging markets,” Cook said in his introductory remarks, “and we experienced the highest switch-over rate from Android that we’ve ever measured.”
The better news for Apple? Not only is the iPhone siphoning disillusioned Galaxy owners away from Samsung, a large swath of Cupertino loyalists haven’t yet upgraded.
“In terms of the percentage of customers that have upgraded to a 6 and 6 Plus versus that have not upgraded, it’s 73 percent,” Cook shared last night, “meaning that 27 percent of the installed base of customers prior to the launch of 6 and 6 Plus have now upgraded.” Roughly speaking, three out of four current iPhone owners are still on the table. And that’s before we even get to China.
Thanks to a handy transcript from Seeking Alpha, we know that the word “China” came up on yesterday’s earnings call 29 times. (For context, “iPad” only merited 23 mentions, while “watch” hit 40). That’s no coincidence; if Apple has room to grow, it’s there.
“I think it’s fair to say that most if not all people who have or want iPhones in mature markets have them,” says Nguyen. Not so overseas. “China is very important because it’s such huge market just in terms of total numbers… Similar to what we saw in the U.S. with pent-up demand, there’s pent-up demand there as well.”
Nguyen notes that Apple may not find as much success there, proportionally, as it has in the United States because of a different socioeconomic environment. Even if so, a smaller slice of a 1.3 billion population should still be enough to satiate the most avaricious appetites.
A bigger threat to the iPhone’s continued ascension—and maybe, at this point, the only thing that could possibly topple it—would be the introduction by a rival of some previously unthinkable feature, a premium offering to which Apple is slow to respond.
Even then, though, the hit might be muted; it already happened, after all, when customers migrated to bigger Android phones between the iPhone 4 and the iPhone 6. It’s also not clear, beyond Samsung and possibly LG, both of which continue to target the premium space, where that challenge would come from. Or whether Apple would stand by and watch its customers stray for as long as it did before.
If anything, the best shot at unseating the iPhone may come from smaller manufacturers like OnePlus, the decent-quality, off-contract imports for those tired of spending more on their phone than they do on a month’s rent. Especially as smartphone plans evolve away from subsidies and toward installment plans, constant reminders of just how much that hunk of anodized aluminum really costs.
In the meantime, the idea that the iPhone dominates its class and all others isn’t especially novel. But in the shadow of such an “off” quarter, it’s probably worth shining some light on just how ubiquitous it’s become, how much further it can go—and how hard it will be for anyone else to stop it.
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