Tim Cook Admits Apple’s Not Performing as Well as Expected; Stock Tanks

Reading Time: 9 minutes.

Earlier this week, as we were all trying to get back into the rhythm of a normal work week, Tim Cook dropped bomb on investors. Rather than the $89 to $93 billion in revenue Apple expected for their first quarter of 2019, they now expect “only” $84 billion. That’s around a 6-10% drop in revenue. Five to nine billion dollars just vanished. Investors weren’t happy and, overnight, Apple’s stock plummeted.

What happened? Why didn’t Apple do as well as expected? Why do they need to adjust their predictions?

It’s plain to see, investors, analysts, and customers have all had the same complaint: Apple has gotten too expensive. The iPhone X was supposed to be more expensive because it was an outlier, a celebration model commemorating Apple’s 10 years of the iPhone. Instead, it became the standard. People didn’t line up to buy the iPhone like they did before.

Apple knows their pricing is part of the problem. That’s why the marketing for the iPhone XS and iPhone XR has gotten downright desperate. Apple is showing a side of itself we haven’t seen since the 90’s. It’s clawing for a chance to save their sales without an outright price cut. But Apple’s cautious to blame their pricing. In fact, they’re tip-toeing around the issue, if Tim Cook’s letter to investors is any indicator.

Tim Cook’s Letter

“While Greater China and other emerging markets accounted for the vast majority of the year-over-year iPhone revenue decline, in some developed markets, iPhone upgrades also were not as strong as we thought they would be.”

-Tim Cook, Apple CEO

Tim Cook gave a number of reasons for Apple’s reduction in sales and revenue. Some of them sound like a bit of a stretch. However, when put together, along with the issues he conveniently neglected to mention, Apple couldn’t have been expected to do much better.

The iPhone XR

The iPhone XR is “the people’s iPhone.” It’s the iPhone that’s slightly more affordable (yet still priced like a high-end Android flagship). It’s the new iPhone you should buy if you can give up 3D touch, don’t need a super sharp screen, like the colors, or don’t need portrait mode for non-human subjects. This is the iPhone for the masses, the “affordable” (it’s still overpriced) iPhone. However, Apple released it in October, a month later than they typically release iPhone models. As a result, sales of the iPhone XR were lower this quarter than they would have been if it had gone on sale sooner, Apple rationalizes.

China Syndrome

Apple also blames the strong U.S. dollar for creating “foreign exchange headwinds,” reducing revenue growth in countries outside of the U.S. after the exchange rate forced price raises in non-U.S. countries. Furthermore, global economic slowdowns have lead to fewer purchases of “luxury” goods like the iPhone. The iPhone is priced much higher than its competition, and buying an iPhone when funds are low would be foolish.

There’s another problem in China. Trump started a trade war with the country. This has had compounding effects. Tariffs on imports have increased, and this alone has cost Apple. However, Chinese companies have been able to market patriotism to the Chinese. Some companies will punish people for using iPhones. Thanks to Trump’s attacks on China, the demand for American products is down in the country.

Adapt, Repair, Don’t Replace

Battery problems in the iPhone 6, iPhone 6s, and other models prompted a new version of iOS. This “feature” slowed phones down if the iPhone seemed to have a battery that couldn’t hold a charge. Consumers were outraged. In response, Apple started a $29 battery replacement program. For $30, your old iPhone could last as long and run as fast as it did when it was new. Then, Apple released iOS 12, which features efficiency improvements specifically for older devices. This made Apple’s older phones faster than ever. As such, users wouldn’t want to upgrade.

Consumers are also still “adapting” to a world without carrier subsidies. It used to be that consumers would never know their iPhone was actually a $600 device. Instead, they’d pay $200 up front and their carrier would bill them for the remaining $400 over a two-year time period. But cell phone manufacturers wanted their users upgrading yearly, and cell phone carriers knew they could get people to pay the same price they have been paying monthly, only without the subsidy, if they allowed unlimited data place. Carriers made their move, and consumers are still unwilling to unload the cash up front to upgrade.

Apple tried to mitigate this with their iPhone upgrade program, which, for a monthly fee and trade-in, puts a new iPhone in your hand every year. The plan hasn’t been popular with most consumers, who simply don’t want a new smartphone every year or even every two years anymore.

Some Good News

“There are more Apple devices being used than ever before, and it’s a testament to the ongoing loyalty, satisfaction and engagement of our customers.”

-Tim Cook, Apple CEO

Tim Cook did have some good news. There are more active iOS devices than there ever have been before. Apple saw the largest activation day ever this Christmas. People still love iPhones, they’re just not buying them as often. This could mean Apple just needs to create more excitement on launch day, rather than relying on “special occasion” purchases.

What Apple Didn’t Mention

In Tim Cook’s letter, there are quite a few omissions. These are either things that are more difficult to quantify or more difficult to admit. Cook didn’t specifically call out Chinese patriotism for declining iPhone sales, though this could be something that could impact Apple for many years. Trump’s trade war may have done decade long damage to American brands.

Prices Go Up, Sales Go Down

Apple: *jacks up the price of iPhones every single device iteration*

Consumers: *retains and repairs older handsets because Apple keep jacking up the price*

Apple: *profits go down because consumers aren't idiots*

Also Apple: pic.twitter.com/Fc5U9g33nf

— Peter Hayes (@ThatPeterHayes) January 3, 2019

While Tim Cook did mention unsubsidized pricing, he conveniently neglected to mention that this year was the year of the most expensive iPhone ever. People just don’t believe the iPhone XS or even the iPhone XR are worth the price. This year, the “affordable” option is priced as high as Apple’s previous flagships. However, in comparison to those flagships, it has a worse screen and no 3D touch. It feels like a compromise.

The iPhone XS features many of the hardware aspects of its Android competition, but costs hundreds of dollars more. It’s even more expensive than the Samsung Galaxy Note 9 through a carrier, which has an adjustable aperture camera and a stylus. The iPhone XS doesn’t have this camera tech, and it doesn’t have Apple Pencil support. Furthermore, it doesn’t have a fingerprint sensor, which many users prefer to Face ID, especially vision impaired users. Many Android devices have smaller or no notches, headphone jacks, and other features users want out of a smartphone that Apple refuses to add.

Stale iPhone Design

Let’s not forget the stale design of the iPhone XS. I’m not just referring to the fact that it’s nothing more than an upgraded wide angle camera (the telephoto camera is still terrible) and processor over the iPhone X. I’m referring to the fact that it’s nothing more than a taller iPhone 6 without a home button. Camera bump? Rounded corners? Difficult to hold without a case? Sure, the glass is back, and there are now two cameras, but, really, the design elements are still the same, and no one liked it then. The iPhone 6 was such an unpopular design, Apple had to bring back the design of the iPhone 5 in the form of the iPhone SE to appease customers.

Where’s My Reasonable iPhone?

Speaking of the iPhone SE, where’s the reasonable smartphone? Apple’s smallest new iPhone has a 5.8″ display! Apple’s smallest new iPhone is a phablet. Where’s the smaller design iPhone? Where’s the one handed iPhone with superior battery life, pocket-friendly sizing, and the processors and cameras from the new model? Consumers want a phone in this territory. The iPhone SE was incredibly popular.

Something with the body size of an iPhone SE or even the iPhone 4 with a full screen display, dual cameras, and Apple’s latest processors would sell. I’d probably buy it! I don’t need a huge display. Look at my home screen! I prefer minimalism. I would seriously consider a smaller phone that’s more durable, has better battery life, and is easier to hold. Many people are still holding on to their iPhone SE devices in the hope that Apple will come to their senses and release a single smartphone that isn’t insanely huge.

iOS Yawn

iOS is boring. It has had the same grid of icons, the same notifications, the same call screen, the same overall design for years. Some UI elements are decades old, and it shows. The iPhone doesn’t feel customizable, personable, exciting, or new, in part because iOS is such a bore. Since iOS 12 was made for old devices, and there’s nothing new about it that would push an upgrade, like a new feature that only exists on newer iPhones, people don’t feel the push to upgrade.

More Durable iPhones

Or, rather, more waterproof iPhones. If you drop your iPhone and the screen cracks, you get the screen replaced and go about your day. But if the iPhone fell into water and broke, you had to get a new iPhone. Now, iPhones are waterproof. That means fewer people upgrade due to water damage. Tens of thousands of people stuck with their iPhone this year because it survived water damage. Apple built the iPhone to last, and now it’s lasting.

Unsustainable Upgrade Model

If you ask your users to pay a substantial price for an iPhone, but promise them it’ll last them 3+ years, and therefore is a good investment, they might buy into it. However, you’ll have to convince these people every three years that an upgrade is worth the cost. If, during that time, someone did have a problem with their iPhone, you’ll lose them. Even if they didn’t, they’ll be upgrading so infrequently that you’ll almost have to treat them like a new potential customer each time, convincing them to choose an iPhone over the cheaper Android phones that seemingly are just as good. It relies on an extreme level of customer loyalty that even Apple would struggle to pull off.

Economic Anxiety

The last time we had a president who didn’t care about long term economic progress, believed in trickle-down economics, and tried to deregulate large institutions, we were hit with a recession that doomed an entire generation of people. Many millennials entered college, took out loans on the promise of a strong economy, and graduated to find a recession, no jobs, and expensive housing.

These people are only just starting to find solid footing, financially, and we have another president who doesn’t care about forecasts, is selfishly motivated, believes in trickle-down economics, and has already pushed for deregulation. We’ve seen this before and we know what’s going to happen. The economy is likely headed for recession under Trump—possibly even before 2020, according to his own advisors—and Trump reportedly doesn’t care about financial risks because he won’t be president by the time something happens.

Between that, fears of AI and automation removing many blue collar jobs, and the fact that many Americans are still struggling from the last recession, and you could understand why someone wouldn’t want to pay $1,000 for a smartphone. They’ll be especially reluctant to buy one that’s bland and unexciting. In fact, people will be less likely to invest or take loans or credit. They’ll hold on to their money in savings and pray they can save enough money to withstand another economic shutdown.

Market Reaction

Here are a few reactions from Wall Street:

• Nomura: Reduce share price target from $185 to $175 (-10)
• Bank of America Merrill Lynch: $220 to $195 (-25)
• Morgan Stanley: Dropped price target from $236 to $211 (-25)
• Citi: Reduced share price target from $200 to $170 (-30)
• UBS: Lowered their price target from $210 to $180 (-30)
• Goldman Sachs: Dropped share price target from $182 to $140 (-42)
• Wells Fargo: Lowered from $210 to $160 (-50)
• BMO Capital Markets: Lowered price target from $213 to $153 (-60)
• Wedbush: Share price target from $275 to $200 (-75)

Of these analysts, we’re seeing an average expected share price target drop of around $39. The average expected stock price target is now $176. That’s around $28 higher than Apple stock is currently trading. Some would say that means it’s time to buy the dip. Others believe that Apple could be in its death throes. Without innovation in 2019, the company could wither. Apple is a company build on innovation and brand loyalty, and it hasn’t been inspiring the latter with the former recently.

No one’s certain if Apple can recover from this. If they do, it’ll be a spectacular opportunity. If they don’t, it could mean a fortune lost in stock prices.

Has anyone else been staring at Robinhood intensely over the last few days?

Apple’s Future

Peak iPhone?

There’s a sad possibility here: we’ve reached the end of the smartphone era. We’ve reached peak smartphone market saturation. Everyone who would have a smartphone already does. Now Apple has to convince their users to upgrade and stay within their ecosystem. That’s not easy with boring updates.

It seems Apple has been propped up on flaws in their devices. Tim Cook himself admitted that broken batteries were a reason people upgraded their devices, and now will hold on to their iPhones because they were able to replace their batteries for just $30. How long as Apple been propped up on lousy batteries, waterlogged iPhones, and iPhones that slowed down after upgrading to a new OS? Is the fact that iPhones are more durable and long lasting, especially since Apple has entered an upgrade-only economy, a serious problem for the company?

It would appear so.

Innovation on the Horizon?

“Most importantly, we are confident and excited about our pipeline of future products and services. Apple innovates like no other company on earth, and we are not taking our foot off the gas.”

– Tim Cook, Apple CEO

When a market gets saturated, it needs to innovate. If people stop seeing a reason to upgrade or buy into a new product category, they’ll stop, and the company will die. It happened to Nokia. Their smartphones were infamously durable and people didn’t see much of a reason to upgrade until smartphones started coming out. Then they went with different brands because Nokia wasn’t at the forefront of that revolution.

If Apple wants to survive, they need to be the ones to push the next great thing. They may have started already. Wearables. The Apple Watch and AirPods are a combination that could push users into a smartphone-free future. Perhaps smart glasses with AR, or a combination of devices that provides the information people demand. If Apple doesn’t push us into the next great thing, and do it perfectly, the company could go the way of Nokia and Blackberry.

Apple’s Pipeline

We can’t make predictions on what Apple’s going to release in 2021. However, we can take a look at 2019. This year, we’re expecting an update to Apple’s AirPods, a potential AirPower charging mat for Apple’s devices, the long-anticipated Mac Pro, a fresh iOS update with iOS 13, and a new iPhone. If Apple learned anything from 2018, the 2019 iPhones might actually be affordable and exciting.

Apple’s also working on improving the trade-in process. They want users to not think of the full price of an iPhone, to instead consider the trade-in price. This is why the upgrade every year program makes buying a new iPhone a matter of just ordering it and paying an activation fee.

Tread Water Before You Swim

Apple’s Christmas activations were its best ever. Perhaps this is a momentary stall for Apple before business returns. Perhaps next year Apple will lower prices, release more affordable models, or consumers will become accustom to the higher prices. We don’t yet know if Apple’s working on the next great thing, or if their next gamble will pay off. But if history is any indicator, Apple will survive. Apple always has found a way to survive, innovate, and thrive, in that order.

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Sources:

• Tim Cook, Apple
• Alex Cranz, Gizmodo
• Luke Dormehl, Cult of Mac
• Roger Fingas, AppleInsider
• Chaim Gartenberg, The Verge
• Jake Kanter, Business Insider
• Gordon Kelly, Forbes
• Ben Lovejoy, 9to5Mac
• Chance Miller, 9to5Mac
• Ron Miller, TechCrunch
• Joe Rossignol, MacRumors
• Charlie Sorrel, Cult of Mac