First, the obvious: Apple had another bad quarter of iPhone sales, with units down 20 percent year over year. And unit sales of Macs and iPads were also down from the same time last year. And even if services sales were up by 19 percent, it doesn't come close to making up for the mobile device deficit, even if the earnings release does quote CEO Tim Cook saying, "We had a very successful launch of iPhone SE and we're thrilled by customers' and developers' response to software and services we previewed at [Apple's Worldwide Development Conference] in June." So, is it time for entrepreneurs in the mobile space to get nervous? Well, if not nervous, at least thinking and planning really hard.
Growth that never ends is called cancer. When Apple iPhone sales dropped in the first calendar quarter of this year, there should have been a sense that it was bound to happen someday. After all, the previous quarter had an impossible predecessor for comparison. In the quarter ending in December 2014, Apple experienced its largest jump in iPhone unit sales ever when it had a big breakthrough in the Chinese market and started selling the iPhone 6 and, most importantly, the large-screen option.
This last quarter, ending in June 2016, technically beat analyst estimates. Revenue was $42.4 billion compared to average analyst guess of $42.09 billion. Earnings per share of $1.42 were certainly higher than the average estimate of $1.38. But the downward direction of unit sales continues, as the following graph I put together shows:
Apple's biggest problem, and no surprise at this point, is that revenue is completely and utterly dependent on iPhone unit sales and margin. No other product line of the company comes even close. For entrepreneurs, the question arising is how to deal with a market when you've tied your fortunes to the products of a major player.
The stream of Apple products has been more like a river of gold to many entrepreneurs. There were plenty of places to provide something ancillary -- if you were willing to pay the tithe to Momma Apple for using things like patented custom connectors or the company's branding -- and customers proved that they'd spend money.
But the market has changed. Mobile is everywhere and carriers in the U.S., which has been Apple's biggest iPhone market, stopped paying subsidies for people to continuously move up to a new device every two years. The hit on Apple has been big: Revenue in the Americas was $17.9 billion this last quarter but $20.2 billion the year before. Even though people were still paying the entire cost of the phone through higher subscription rates -- did anyone think the carriers were just being nice? -- it looks different when you're seeing a bill for the full amount, even if you know it's being broken up over time. In addition, that drop looks like nothing when you see China having gone from $13.2 billion in 2015 to this year's $8.8 billion. Huawei Technologies, a Chinese manufacturer of mobile phones, has also been going strong, taking local business.
As an entrepreneur, depending overly on a major line of business can be disastrous, as suppliers to 800-pound gorilla retailers over the decades have found. If their sales begin to waver, so will yours. That's exactly what's happening here.
Throwing the baby out with the bath water is not a smart reaction. Apple continues to sell tons, just not as many tons as before, so your market size begins to shrink. There's a chance that the upcoming iPhone 7 will give consumers so much wallet itch that units jump up again. And during the earnings conference call Cook said that ongoing sales reduced inventory in the retail channel by 4 million units, which means a hit in the fall could have an outsized impact.
Still, some analysts are saying that Apple has peaked. If you're an entrepreneur, you don't want to chance them being right. Running a business is in large part for the allure of being the captain of your ship and fate. For all those who were too dependent on Apple's stature, it's time to step back and steep yourself in innovation of all kinds. Look at new products and markets. Consider what else you could be doing and where it might take you. Even if Apple sales jump up again, the spell has been broken, at least temporarily. Don't let yourselves be lulled back to sleep.