- Asked about iPhone sales during Apple's earnings call on Tuesday, CEO Tim Cook acknowledged that smartphone sales may shrink.
- It is jaw-dropping to hear Cook say he would be OK with phone sales in decline. The iPhone has seen repeated recent quarters of declining sales.
- What's really going on? The installed base of Apple devices is growing by double digits.
- Because of that, software-services revenue could soon overtake iPhone revenue.
- Apple is entering a new era. It is changing from a device company that also makes software into a software company that also sells devices.
Apple CEO Tim Cook said during his earnings call Tuesday night that he would be OK if the smartphone market "shrinks." He's comfortable with that, he said, because "it's a great market because it's just huge," so a slight decline in sales doesn't really matter.
It was a throwaway line in a longer discussion about the role of software services — apps, TV, music, etc. — that now drive Apple's revenue growth.
But for those of us who parse every Cook statement for hidden meaning, this was significant. Cook previously had never publicly said he would be OK with declining sales. On Tuesday, an analyst asked him about Apple's pattern of flat or declining iPhone sales. Here is his answer, emphasis ours:
"I think the smartphone market is very healthy. I think it's actually the best market in the world to be in for someone that is in the business that we're in. It's an enormous sized market and whether it grows, from our point of view, whether it grows 1% or 2% or 5% or 6% or 10% or shrinks 1% or 2%, it's a great market because it's just huge. And so that's kind of the way that I view that."
Is Cook acknowledging that iPhone sales could shrink by up to 2%? The other interpretation is that he is not talking about the iPhone but referring more broadly to the smartphone market as a whole. That doesn't help Apple much, however, because the iPhone historically tracks the broader market or (mostly) underperforms it, in terms of sales growth, according to IDC:
And of course, Cook knows iPhone sales have declined, repeatedly, across several recent quarters. Either way, Cook is contemplating a world in which iPhone sales decline:
Since 2007, the vast majority of Apple's revenue has come from the iPhone. The legacy MacBook business is a distant also-ran compared with the iPhone. So for Cook to imagine a universe in which the iPhone declines, even by a couple of points, is astonishing.
Apple's topline revenue grew 17% in the latest quarter, despite iPhone unit sales remaining flat year-on-year. Much of this was driven by the average selling price of iPhones rising by 11%, to $728, which shows Apple's bet on a $1,000 iPhone paid off big time.
But how high can the price of new iPhones really go? Is it sustainable to expect customers to keep shelling out more than a grand on a new phone? Or is it more realistic to get people to spend more on an Apple TV or music subscription each month?
Apple has to change — and Cook signaled that change Tuesday night. Apple is evolving from a phone company to a software and content company.
Apple has a new Death Star
As the CEO made clear, the iPhone universe of all owners new and old — the installed base — is Apple's new Death Star.
Here is how Cook sees that panning out (emphasis ours):
"We had a stellar quarter in services, which generated all-time record revenue of $9.5 billion fueled in part by double-digit growth in our overall active installed base. We feel great about the momentum of our services business, and we're on target to reach our goal of doubling our fiscal-2016 services revenue by 2020."
How big is that installed base? Greater than 1.3 billion devices.
Services today are $9.5 billion, up 31% on 2017. In 2020, Cook expects them to double to about $20 billion. That's only two years away. For context, iPhone sales in the same period were $30 billion. The installed base (and the software services the customers buy) is already growing faster than iPhone sales.
So it is easy to see services eventually eclipsing the iPhone as Apple's single biggest revenue sector.
That heralds a new era for Apple.
Since the first iPhone launched in 2007, Apple has been a device company that also makes money from the software that sits on those devices. Sometime in the next few years, the company will flip, and Apple will become a predominantly a software company that sells devices to underpin that ecosystem.
A bit like Google, in other words.
