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Apple: a crack in the iPhone

Ed Monk

Ed Monk - Fidelity Personal Investing

I read the news about Apple’s shares falling 8% on an iPhone that has a great big crack running down its screen.

I dropped it about six months ago but have gradually stopped worrying about replacing either the screen or the whole phone. It still basically works and a new one is just so expensive, isn’t it? My contract’s up soon so maybe I’ll do it then. Or maybe I won’t. These days I’m happy to live with a beaten up iPhone.

Apparently I’m not alone. Figures from researchers BayStreet claim that iPhone owners in the US now wait almost 36 months to upgrade, up from 24 months in 2014, and this trend is just one of the reasons why Apple shareholders are suffering this morning.

The company warned the market last night that its global sales would be lower in the first three months of 2019 - down to $84bn from a previous forecast of between $89 and $93bn. There will also be a slight trimming of profit margins, it said.

iPhone owners like me in developed markets aren’t rushing to get the latest model as we once did. Price rises for Apple products have accelerated markedly in the past year and many users have decided that the latest models aren’t enough of an upgrade to justify the cost.

Some of them, as the company told investors, have chosen instead to take advantage of an offer to replace the battery on their old handsets - an offer the company was prompted to make after it admitted intentionally slowing down old iPhones to prevent sudden shutdowns. The offer of a battery replacement - costing $29 instead of $79 - ran for more than a year and ended on 31 December.

It isn’t only in established markets that Apple has problems. It blamed most if its sales slowdown on China which accounts for 15% of its sales and where the economy is growing less quickly, it suggested, thanks to trade tensions driven by President Donald Trump.

The change in fortunes has happened remarkably quickly. As recently as August, Apple was toasting becoming history’s first $1trillion company on the back of better-than-expected sales. At that stage the company accounted for 4% of the S&P 500, but the market has been growing wary since then. Handset parts suppliers have been reporting a slowdown in demand for the latest handsets and Apple has been unusually forward in pushing its new-for-old trade-in schemes, suggesting new sales have been slowing.

All this will lead investors to ask whether we have reached ‘peak iPhone’ - the point where sales growth ends and steady decline begins. I’m wary of that view, on the basis that demand from emerging markets like China is bound to fluctuate and will improve if growth there firms up. Any impact from worsening trade relations between China and the US will disappear if there is a sudden change in the political climate.

What’s harder for the company to explain away is the cooling demand from people like me who are happier walking around with a cracked iPhone than we once were. After a series of great leaps forward in smartphone performance since the first iPhone in 2007, improvements in the latest models these days seem more modest.

Moreover, Apple’s impenetrable brand power is looking less shiny. The battery ‘throttling’ controversy, along with widespread annoyance at Apple’s decision not to include conventional headphone sockets on the latest iPhones - forcing users to buy expensive Bluetooth versions or clunky ‘dongle’ adapters - reinforces the view that the company is now in the mode of squeezing every last cent it can from loyal users.

The share price falls of the past week reminds us that no matter how revolutionary a company may seem it is still subject to some old-fashioned rules. Brand can get you a long way but products that consumers love, priced at a level they consider offers value, matter more.

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