Apple Q2: iPhone decline should be competitors' concern

Every quarter, even during Apple's highest of high marks, analysts talked about the time that the company would begin its inevitable decline. But every three months, Tim Cook would get on the phone and defy expectations, announcing that Apple sold even more iPhones than the previous year. Now, that incredible streak has ended, and with it Apple's 13-year sequential revenue growth.

In the second quarter, Apple sold 51.2 million iPhones, down nearly 20% from the same period a year ago. Revenue, at $50.6 billion, was down 11% year over year.

Macroeconomics and iPhone SE

iPhone SE

iPhone SE

When a single product line comprises nearly two-thirds of a company's revenues, there is cause for concern. When that product is affected so strongly by what Cook calls macroeconomic headwinds — global economy weakness paralleling the strength of the U.S. Dollar — any auxiliary knock on demand can have a terrible impact.

In this quarter, that knock came from a number of areas. From a top level, the smartphone market is slowing, especially at the premium end, where Apple has heretofore defied expectations. While its major competitor, Samsung, saw high-end smartphone sales decline over two years ago, Apple sold a record number of iPhones in both Q1 2015, and then again a year later, with average sales price (ASP) that broached $700. And because Apple hasn't typically played in the mid-range space, it has defied calls to introduce lower-cost handsets to take on Android's growing pie of the sub-$400 market.

The iPhone SE, the early sales numbers of which were not reflected in the three months ending March 26, will, according to Cook, "attract even more customers into the platform with a[n] incredible product." It will contribute to the iPhone's dropping average sales price, which declined $15 this quarter to $642.

That ASP decline reflects a trend in the smartphone industry itself, not just Apple's part of it. Apple claims that more people switched to iPhone from other platforms in the first half of the fiscal year "than any other six month period ever." Though iPhone sales dropped year over year, it is still stealing considerable numbers from Android. And there is plenty to steal from: Android, in terms of market share, already has a huge head start.

First Cupertino, then the world

Cook also noted that worldwide smartphone penetration is only 42%, and that there are billions of people for whom the next five years will represent their first smartphone purchases. Apple does not recognize the sales of used iPhones in its quarterly earnings, but in developing nations like India that gray market has represented a considerable amount of existing off-book revenue for the Cupertino giant. It is desperate to turn off-book into black book in markets, like India and China, that were like North America and Europe six years ago — with room to play. In those aforementioned developed markets, upgrade cycles are lengthening, and many current iPhone owners waited until the debut of the larger iPhone 6 and 6 Plus back in 2014 to replacement their aging iPhones. Many millions of those handsets, approaching two years old, are still in use today.

But even butting up against prevailing macroeconomic headwinds, Apple was able to sell over 50 million iPhones at an average sales price of $642 USD. Other companies, including many in the Android space, are not faring so well. While Samsung has hinted that its profit will grow on better-than-expected sales of its Galaxy S7 and S7 edge handsets, its arc has been inversely proportionate to Apple's in recent years: sales of its Galaxy S5 and S6 flagships were relatively soft, and it is now only staging a comeback. Moreover, the company's latest numbers from back in January showed year-over-year declines in its mobile business.

In other words, everyone is struggling. Apple is just the latest victim of a slowing mobile industry, with nothing — not even the venerable iPad, nor the nascent Apple Watch — to make up the difference. During a question and answer session this afternoon, Tim Cook said that he doesn't believe this iPhone sales rut will be indefinite, and once China's economy turns around, and the U.S. Dollar steps down from its proverbial throne, mobile growth is once again foreseeable.

Room to grow

"I think there's still really, really good business in the developed market, so I wouldn't want to write those off, and it's our jobs to come up with great products that people desire, and also to continue to attract over Android switchers," Cook noted. "With our worldwide share, there's still quite a bit of room in the developed markets as well."

Apple's iPhone business may never reach the heights it saw in the first quarter of 2015, when the iPhone 6 and 6 Plus represented wish fulfilment for millions of people, but a slowing iPhone business should not be taken in isolation. While a 20% drop in iPhone sales still results in sell through of 50 million units, other OEMs will not be so lucky.

Daniel Bader

Daniel Bader is a Senior Editor at iMore, offering his Canadian analysis on Apple and its awesome products. In addition to writing and producing, Daniel regularly appears on Canadian networks CBC and CTV as a technology analyst.

  • Rip patent trolls pos.
  • I had a plan with AT&T (2 lines), and renewed each phone every other year. I've purchased every iPhone model since the original. Like most carriers AT&T stopped doing 2 year contracts...iPhone 6 was the last iPhone I have purchased. Losing the subsidy discount is the only reason I am still on the iPhone 6. It is also the reason I left AT&T.
  • All carrier got rid of contracts. I love the next program. My plan is cheaper because of it Sent from the iMore App
  • Sprint still has contracts as an option.
  • Were you on at&t's mobile share plan? Because your plan would've been within a couple dollars of your subsidized pricing had you stayed. The benefit of financing is that now you get a lowered bill when your contract is up
  • I like the positive spin. Heaven forbid we read anything positive on the Internet.
    Most regular folks (non tech obsessed people) I meet are still rocking iPhone 4s or 5, 5s. I work in a tech department, so I often engage in questions as to why they still have an older model phone. For most people, their phone "just works", and "Why would I buy a new phone if this one isn't broken?" are the most common responses.
    We see the same with iPad.
  • That means the products are good Sent from the iMore App
  • Or the next model doesn't really offer anything new in their eyes...
    (except raw computing power, judging from my 6+ (iOS 9) compared to my wifes 5 (iOS 7)) And no, not trolling, just MHO
  • You'd have a point if they were on a 6, but the most obvious difference between the 4's and 5's is the increase in size which makes for easier reading and typing.
  • Also see the same with PCs / Macs
  • Exactly! Apple products are usually built to last much longer than Apple would actually like :) But if they skimped on quality to make sure your iPhone only lasted 3 years, then they would have an inferior product and a worse reputation.
  • On the flip side, Apple products typically have lines of code that I and many others have removed that prevent them running newer operating systems even though the hardware can do so without issue, (
    For example. if you have a Mac look at, “/System/Library/CoreServices/PlatformSupport.plist”. That’s them making your hardware obsolete.
  • It's not to make sure that people aren't upgrading on systems that can't handle the update? And it's not like if your computer can't get an update it will stop working.. Technicians at the Genius Bar will still recommend Mavericks if it means a better experience for a user. Mavericks will run the latest version of iTunes and such also..
  • IPhone sales are usually weak after the Christmas quarter and this is also an 'S' year. They won't be all that good next quarter either as folks will be saving their pesos for the iPhone 7.
  • I don't think Apple is in trouble. Since the pent up demand for the larger screen phone was So high, they broke every record in the books with the 6 and 6+. the S model just couldn't keep up with that volume.
    People bought the 6, even though it was ugly, because they wanted a larger iPhone no matter what it looked like. I do wish Apple would reinvent iOS, again. It's stale at this point.
    Go back to the Leica-Like build quality. (like iPhone 4).
    I hope the 7 is awesome, but we have to wait to see that. Maybe being down in sales will spur Apple to make the 7 more awesome than originally planned.
    In the meantime, I use a Galaxy S7 (Leica-like build quality) and, have an iPhone SE as a side kick. (SE is still far more beautiful than the 6 line) I also wish Apple would advertise the Mac more. It's such a big part of an Excellent ecosystem.
    Macs are so amazing. More people should use them.
  • Iphone 4/4S remains my favorite for sure in terms of iphone build. And I absolutely agree about the Macs statement. I think Apple could leverage the iphone much better in selling Macs.
  • I love the 6 and 6s design and the 5s design being my second favourite, the 4 and 4s designs while groundbreaking at their release I find extremely dated now and is my least favourite design of the iPhone and the bezels are so thick on an iPhone 4s if you look at one now. Sent from the iMore App
  • I totally agree that the 4/4S design in todays world wouldn't be so great. You are right, back then, they were groundbreaking. The 4 series felt awesome in the hand. the Glass and metal married together to make something special.
    Even if you hate samsung and android, if you pick up a Galaxy S7, you can "Feel" the quality and that's what I want apple to do. To me, the plain jane metal back with massive antenna lines is pure ugly. But, it also ok that You like the design. Each of us have our likes and dislikes. I find the 6 series very uncomfortable and they feel cheap in the hand (to ME). I don't expect everyone to agree with that statement, some think its the best design ever.
    I just want Apple to move forward. Sometimes I feel like they are just being lazy with this 2 year design.
    I know the S7 isn't a lot different that the S6, but it was refined, and made better. (more comfortable and higher quality) I think apple is also being lazy on iOS and Siri both. Cortana (on a WP) is better than Siri.
    I feel like Apple has gone from innovating, to "me too". They just need to take some risks instead of playing it safe All the time.
  • The 4/s spoke quality. The iPhone's these days are ugly with the protruding cameras and ugly lines #TeamSpaceGray 6sPlus
  • Yes, the competition, or those who make phones, are suffering as well. But Apple is primarily a cellphone company these days. The competition is a bit more diverse. Isn't that really just samsung? Them and apple have the majority of smartphone profit. I go back to just saying Apple has to focus on its foundation. Cloud. Services. Software. The cracks are many. Same with Macs, Apple tv, apple watch. Or allow better integration of 3rd party stuff. I'd love to have google maps as default again for example. Cook hinted they could be making a larger acquisition to help growth in some area. Regardless, I'm deeper in apple's ecosystem than ever this year with a recent imac purchase. I'm happy with it for now. What I do as a consumer and as an investor are for different reasons. Apple isn't exactly going away (I'm sure i'll be buying Apple stock again later at some point). And I don't really see switching to anyone else right now. Who would that be? Who else has an ecosystem worthwhile? MS? MS is about dead in phones right now. Samsung? They don't make software or services so it'd be a further step back. Google? Would be fine for mobile but I'm a computer guy and just prefer Apple with its mac integration. That said, I'd consider MS if they had any sort of decent mobile option. They seem so lost there though and the app situation there seems rather hopeless. Would i still recommend an iphone and a mac to someone whose income isn't exactly that great and has average needs? Yes. But the reasons they'll hear from me Apple still hasn't quite nailed in marketing. Would I recommend they upgrade frequently? Nope. And the iphone 7 I'd probably pass on. It's starting to sound a bit more like a 6S refreshed based on rumors with something also about removing a headset port. I can be a sucker for screen quality so still have to wait and see. Also, personally I'm happy with the ipad pro. It's a device made better IMO. It's an easy sell to others when talking pencil with the caveat they wait for a good sale. If the apple watch gets cellular, i'll be getting that too. Love the watch. It's paid for itself over and over. That's been a harder sale. IMO, it depends on much your time is worth. Not missing notifications for me is perhaps more valuable than the average person. You get older, you get more things to manage.
  • Excellent analysis! If Apple is hurting then the rest of the market must be reeling as well. Samsung, Apple's closest competitor, has been in trouble on its mobile front for the past couple years as the author noted. Cook also said that he expects declines next quarter too. Apple needs to release 3 new products over the course of this year in order to right the ship. 1. Redesigned MacBook Pro expected at WWDC. Hopefully inspired by the MacBook but with more ports. (A refreshed iOS watchOS would be welcome surprise at WWDC too.) 2. iPhone 7/Plus. Expected in Sept. It needs a killer feature in order to be successful. Dual camera with DSLR picture quality would be that killer feature. 3. Updated Apple Watch before Christmas. Same form factor, faster more responsive S2 chipset, better battery, standalone GPS.
  • I think the whole is needs a refresh . It stale ! Year after year ! The look of cars change , clothes, even home remodeling is needed at times but iOS looks the same and eating the same pizza every day for the last few years gets kinda old ! The old " it just works " is not enough any more these days . iOS fans and those looking into joining iOS may feel like it's still the same iOS as always nothing " new and cool". Sent from the iMore App
  • I think Apple has hit a bit of a plateau at this point. iOS needs a major refresh to be sure. And, some really significant functionality changes that make 3D touch meaningful... instead of just a quirky, somewhat useless, feature. It sounds like the Macbook Pro is getting a healthy update later this year. (Although I just purchased a brand new 13" 256 gig one... I believe it could use some updates... I simply couldn't wait 5 months for the new one to come out.) But be that as it may, it will be nice to see it updated. The iPhone is another issue all together. I think Apple is sort of stuck in the middle on this one. The iPhone 6s is a great phone, but in my opinion, not as ground breaking as the 4s or 5s at the time. From what I am seeing in the "leaked" reviews and speculation, the iPhone 7 isn't going to be all that ground breaking. Its the iPhone 8 that will supposedly deliver a totally new design and form factor. I just don't think Apple will have had enough time between the 6 and 7 to do any major, highly significant changes. So why would I get rid of my 6 for a makeover phone in the 7. Why not just keep my money in my pocket and wait for the 8 to come out that should be a completely different phone? I think a lot of people will ask themselves that question and end up holding on to their 6 models for an additional year. As one of the other posters said.... why fix it if it isn't broken? This would not be good news for Apple in terms of iPhone sales. I assume Tim Cooke has taken this into consideration in his sales projections for the remainder of 2016 and into early 2017. Not sure where Apple is with the watch, but knowing that a new model is in the works and should be available by 3rd Quarter... again, if I were considering one, why would I buy the current model? Again, I think Apple is sort of stuck in the middle here. It seems that they are caught in a product cycle valley at this point. I'm sure it will correct itself as the new models are released as their are always those who want the latest versions... no matter how insignificant the changes are.