Apple (OTC:APPL) announced impressive results on Thursday last week. The EPS of $2.91 beat the analysts’ forecast of $2.78 while the revenues of $62.09 billion beat the consensus estimates of $61.4 billion. After the results, the company’s stock dropped sharply with the market capitalization fell below the $1 trillion milestone. The decline was mostly because of the reduced guidance and concerns about the slowing iPhone sales.
Investors were also concerned about Apple’s decision to stop announcing the number of iPhone sales shipped. This was a major announcement and an indirect admission by Apple that iPhone sales would continue to decline. iPhone sales are responsible for more than 60% of Apple’s revenue.
The consensus among investors is that the unit sales will continue to decline. Another consensus is that the decline will be offset by the growth in the services industry.
This article will look at Apple’s ecosystem and explain why Apple has a hanging fruit within its reach. In short, it will explain how Apple can grow its services revenue by creating an iPhone that is affordable to the emerging market buyers.
The biggest challenge Apple is facing is that the unit sales of the iPhone have fallen. As a result, its market share in the smartphone industry has been overtaken by Huawei and Samsung. To cope with the declining unit sales, Apple has moved to hike prices with the hope that loyal iPhone users will continue to ‘overpay’ for the products. Recent data suggests that iPhone X was one of the best-selling iPhones in 2018 selling more than 50 million units.
As shown below, most of Apple’s comprehensive revenues came from the Americas. It was followed by Europe, China, Japan, and the rest of Asian Pacific respectively. A closer look shows that the combined revenues outside of Europe and Americas were more than $20 billion in the fourth quarter.
A recent report from Fortune said that Apple is the world’s most admired companies. Part of the reason for this is that Apple is the most popular phones in the United States. Unlike the past, young people in the emerging and frontier markets now have access to all the major celebrities through social media platforms like Facebook (FB) and Instagram. Since most western celebrities use Apple’s products, most young people in these markets want to associate with Apple’s products.
However, the challenge is that most of the young people in countries like India can’t afford the price tag that comes with Apple’s products. This is mostly because of the import taxes that come with Apple devices, the margin of the sellers, and the currencies factor. For example, in the United States, a brand new iPhone Xs sells for $1349. In India, the same configuration sells for Rs134,900 ($1850). In Kenya, the phone goes for more than $1800.
Similarly, the iPhone Xs Max that sells for $1499 in the United States is sold at almost $2000 in the country.
As a result, the middle class Indian buyers are left with the choice of overpaying for an iPhone or spending less than $500 for an equally good Chinese brand like Xiaomi, Huawei, and Oneplus.
To address this issue, Apple announced the new iPhone Xr. This is the most affordable Apple’s flagship phone of 2018. In the United States, the phone will start at $749. While this is cheaper in the United States, in the emerging markets, the phone is not. It costs more than $1100. Therefore, this solution has not worked out well for Apple.
The next option for the iPhone buyers from the emerging markets is to buy the older models of Apple. The cheapest brand new iPhone in the Apple’s online store is the iPhone 7 plus that goes for $669. However, in India, the same model goes for more than $800.
Therefore, it is clear that Apple has a pricing problem in the international markets where it needs to grow. This presents an opportunity for Apple to reach out to more international customers while maintaining the current customers who are ready to pay more money for premium products.
The opportunity is for Apple to build a smartphone that most people in the international markets can afford. A good way it can do this is to learn from OnePlus. OnePlus – the model I use – is one of the fastest growing brands in the world. Recently, the company sold more than a million phones in India in less than a month. The chart below shows the growth of the phone sales.
The reason for the popularity of OnePlus is that its most premium phone costs less than $700. The cheapest make of the latest OnePlus 6 sells for less than $500. This makes the phone feel premium compared to the cheaper alternatives like Xiaomi and Infinix.
While OnePlus has performed well, it will likely take years before it turns a profit. This is because unlike Apple, it does not have an ecosystem for people to stick with. Apple on the other hand has an incentive for creating a low-priced flagship smartphone.
I recent travelled to India where I carried out an unscientific survey of 20 people who carried a OnePlus device. In the survey, I asked them whether they would buy a OnePlus device or a similarly priced flagship iPhone. 90% of the people I talked to said that they would prefer an iPhone. This means that if Apple had a comparable phone in India, it would outsell OnePlus and other budget-to-premium smartphones.
To be clear, Apple knows that it needs to capture the Indian market. However, the current strategy will not work out. In short, through the Made in India strategy, the company is building the outdated iPhone 6s. The fact is that most tech-savvy Indians will prefer the latest flagships like Samsung and Huawei instead of buying an old Apple model. The chart below shows the market share of the top smartphone makers in India. As you can see, Apple is not even close.
Source: The Verge
The good thing about this strategy is that it will not depress Apple’s margins as many analysts fear. Instead, it will provide incremental margins to the company. This is because the diehard fans of Apple will continue to buy the high end models as they already do. A good number of the new iPhone users too will subscribe to Apple’s products such as Apple Music.
A good example for this is in Apple Pay. The service is now available in 30 countries. India is not one of them. If Apple wants it to succeed in such countries, it needs to focus on getting more people using the iPhone in the first place.
Apple’s Tim Cook has talked about the need for the iPhone to be affordable in emerging countries like India. It is also a fact that Apple’s products are in high demand in other emerging and frontier markets like in Africa with the only problem being the price of the iPhones. By creating flagship products that are targeted to these markets, Apple can easily capture these customers and lock them in its ecosystem. This can help it more than double the Services revenue while increasing the sales of the iPhone.
Disclosure: I am/we are long AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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