By Jay Greene and Yoko Kubota
Apple Inc. chief Tim Cook blamed China's accelerating economic
slowdown for stumbling iPhone sales that hurt its global revenue in
the past quarter. The company's problems run deeper in China and
extend to markets beyond.
Chinese rivals including Huawei Technologies Co. are selling
feature-competitive smartphones at lower prices, squeezing Apple's
share of the world's largest smartphone market.
Meanwhile, it has faltered in the biggest untapped smartphone
market, India, where Apple accounts for a scant 1% of overall
sales, according to market estimates.
Mr. Cook also acknowledged trouble at home in his letter to
investors on Wednesday. In the U.S., Apple has been stung by
smartphone owners lengthening the amount of time they hold onto
their devices.
The confluence of events poses a formidable challenge for a
company whose revenue has grown 11-fold in the iPhone era. With
global iPhone sales stagnant, Apple isn't able to rely on big
emerging markets for explosive growth. And it hasn't yet found a
transcending product that can offset the lost iPhone revenue.
After Mr. Cook highlighted the problems in China in a revenue
warning Wednesday, Apple's stock fell 10% on Thursday to $142.19,
its biggest single-day percentage drop in nearly six years. The
slide wiped $74.65 billion from the company's market value.
At Apple's California headquarters Thursday morning, executives
held an all-hands meeting to address questions about its
performance, including the company's monthslong stock slide, said
people familiar with the matter. Some employees have a significant
portion of their compensation tied to restricted stock units. and,
among other things, are concerned about when to pay taxes on
them
Apple's stock has fallen nearly 40% since peaking Oct. 3 at
$232.07.
The growth problem is exacerbated by Apple's reluctance to
change its profitable strategy of selling a limited number of
devices at premium prices. Apple didn't fully appreciate that its
pricing power has diminished in price-sensitive markets, analysts
say, the result of cheaper rival products, a lack of compelling new
features and slowing economies, particularly China.
"There's nothing Mr. Cook said to make you believe there are
disruptive opportunities for Apple around the corner," said Tom
Plumb, president of SVA Plumb Financial, a Madison, Wis.,
wealth-management firm. It has $2.6 billion in assets and counts
Apple among its top holdings, though it sold some shares in the
past two months. "They're still a leader in many areas, but as
large as they are, they need something really big," Mr. Plumb
said.
In his Wednesday letter, Mr. Cook said the company is "confident
and excited" about its product pipeline, adding that "Apple
innovates like no other company on earth, and we are not taking our
foot off the gas."
One component of Apple's strategy long considered its greatest
weapon: an ability to charge ever-higher prices for its marquee
device.
The average selling price for the iPhone has increased 12% over
the past four years to $749.63 in fiscal 2018, helping to make up
for slowing unit sales. When Apple said last year it would stop
reporting unit sales for its iPhone and other products, the company
signaled sales volume wasn't as important as pricing, said Wayne
Lam, a mobile analyst at IHS Markit.
That strategy appears in trouble.
"The price elasticity snapped" in the fourth quarter, Mr. Lam
said. Apple misread the market because it has always been able to
sell iPhones at premium prices, he said. "There's going to be a lot
of soul-searching within management now."
Mr. Cook acknowledged that the forecast revision would prompt
review. "We manage Apple for the long term, and Apple has always
used periods of adversity to re-examine our approach, to take
advantage of our culture of flexibility, adaptability and
creativity, and to emerge better as a result," he wrote in his
letter to investors.
Apple often had the ability to forecast iPhone sales "to the
third decimal," said Daniel Ives, a Wedbush Securities analyst.
That is what makes the revision so stunning, he said. "This is the
biggest miscalculation by Apple in the iPhone era."
The macroeconomic issues cited by Mr. Cook probably accounted
for about 20% of the shortfall, Mr. Ives said. "Eighty percent of
it is that Apple just swung and missed," he said. "Fundamentally,
this was an Apple execution issue."
A prime example of Apple's execution woes is the iPhone XR, its
more modestly priced device among three new handsets it released
last fall. For China, Apple had placed big orders for the XR,
anticipating strong demand after it went on sale in October,
according to a person familiar with the matter.
Apple is now grappling with excess XR inventory, this person
said, a tough pill to swallow for a CEO who once described
inventory as "fundamentally evil."
Apple may have underestimated how competitive domestic
smartphone makers have become, analysts say. With a starting price
of 6,499 yuan ($945), the XR is priced well above a competing model
from Huawei that also launched last year, the Mate 20, starting at
3,999 yuan. The Mate features a triple camera system while the XR
features only a single camera.
Apple's iOS operating system also is less of a selling point for
Chinese consumers than in other markets because smartphone users
spend a large chunk of their phone time inside WeChat, a chat,
payments and social-media app from Tencent Holdings Ltd. that is
identical on phones running Google's Android software.
The company has weathered poor performance in China before --
sales there dropped in both fiscal 2016 and 2017. But those moments
usually were negative blips in otherwise stellar quarters of
growth, fueled by the runaway success of the iPhone. Now, Apple is
facing greater challenges at home.
The iPhone's first decade was driven by significant innovative
leaps in everything from battery life to screen quality to camera
performance. Two-year contracts from mobile-phone carriers coupled
with subsidies for devices drove recurring sales.
But the breakthroughs have slowed, said Chetan Sharma, a
mobile-industry consultant. While some changes in recent years,
such as bigger screens with the iPhone 6, goosed iPhone sales,
consumers in developed markets these days aren't jumping to new
models as quickly as before.
Just four years ago, U.S. consumers upgraded phones every 24.4
months, according to BayStreet Research LLC, which tracks device
sales. The upgrade rate hit 36 months in the quarter that just
ended, the firm estimates.
And it expects the length U.S. consumers hold their phone to
average 38.7 months over the course of this year.
Average sales prices of iPhones are nearly five times the
average price of non-Apple smartphone sold globally, according to
Sanford C. Bernstein analyst Toni Sacconaghi. That discourages
upgrades, he said.
Melissa LeRitz used to upgrade her iPhone every two years. But
the 29-year-old quit doing so when her phone provider stopped
covering the majority of the cost. Her iPhone 7, purchased a couple
years ago, still works fine, she said -- even without some fancy
new features.
"I kind of find it ridiculous to spend $1,000 on a phone when
there's not really too much of a difference," said Ms. LeRitz, an
attorney in Medford, Ore. "I feel like they are churning them out
so quickly I can't keep up anyways."
Mr. Cook said in his letter that Apple is trying to counter the
trend in part by making it simpler to trade in a phone in stores
and finance the purchase of a new one over time.
If Apple keeps its premium-pricing strategy, customers might
hold on to their devices even longer and prospective new customers
might opt for cheaper alternatives. Dropping prices to lure more
buyers will pressure its margins and could cannibalize sales of its
premium devices.
"It's a challenging and arguably intractable issue that Apple
faces," Mr. Sacconaghi said. "There's no easy solution."
--Kirsten Grind and Tripp Mickle contributed to this
article.
(END) Dow Jones Newswires
January 03, 2019 20:39 ET (01:39 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.