Yesterday, a rare thing happened: Apple CEO Tim Cook penned an open letter to investors explaining an update to the company's revenue projections. You can read the full letter here, but the basic gist is pretty simple: the iPhone is not selling as well as Apple said it would, and the company is now formulating a new strategy in response.
After the letter hit the internet, Apple stock took a nose dive, dropping nine percent in pre-market trading. Nine percent may not seem like much, but it's literally billions of dollars.
Apple investors were clearly very surprised by Cook's letter. However, what's really surprising about the letter isn't the contained information, it's that Apple took this long to admit what's happening.
The smartphone industry isn't doing so well
Over the past two years, overall smartphone sales have declined. In late February 2018, a report surfaced announcing, for the first time ever in the history of the smartphone industry, smartphone sales went down year-over-year from 2016 to 2017.
In Q4 2016, smartphone sales topped out at about 432 million units sold. In Q4 2017 there were only approximately 408 million units sold — about 5.6 percent less.
The global industry in 2018 wasn't much better. Although there was minor growth compared to 2017, sales likely won't match the 2016 peak.
Ignoring overall industry trends, there were some bright spots. Huawei and Xiaomi, in particular, both found incredible growth in 2018. OnePlus also did exceptionally well, selling more smartphones in 2018 than it ever has before.
Overall, the smartphone industry is struggling with some major growing pains.
Despite these success stories, major players found it hard to sustain industry growth. Sales for the Samsung's flagship Galaxy S series have declined with every new iteration since the Galaxy S7. In response to this, Samsung pushed up the release of the Samsung Galaxy Note 9 to try to drum up more sales. We expect Galaxy Note 9 sales to be lower than those for the Galaxy Note 8, though Samsung's Q4 2018 financial reports haven't been published yet.
What is happening? Why aren't phones selling as well anymore?
There are lots of reasons, but the biggest problem is saturation: pretty much everyone in developed nations around the world owns a smartphone. If someone owns a phone, it's harder to sell them another one, especially if the one they own works perfectly fine.
In other words, we've reached a crossroads where smartphone OEMs now have to strategize more on getting people to upgrade their current smartphone, rather than buy their first one. For the past few years, companies have been trying to do both, but going forward they'll have to focus much more on one rather than the other.
For some reason, Apple thought it was above the fray
Each quarter, Apple holds a public investors call where Tim Cook lays out what's happened with Apple's sales and revenue over the past few months and what will happen in the future.
If you listened to these calls over the past year — and didn't investigate further — you would think everything is awesome.
"We're thrilled to report another record-breaking quarter that caps a tremendous fiscal 2018, the year in which we shipped our 2 billionth iOS device, celebrated the 10th anniversary of the App Store and achieved the strongest revenue and earnings in Apple's history," said Cook the most recent investor call this past November.
During the call, Cook and his team laid out the following projections for its first fiscal quarter in 2019:
- Revenue between $89 billion and $93 billion
- Gross margin between 38 percent and 38.5 percent
- Operating expenses between $8.7 billion and $8.8 billion
- Other income/(expense) of $300 million
- Tax rate of approximately 16.5 percent before discrete items
Apple posted a quarterly revenue of $62.9 billion prior to that call, which means the company expected to make up to $30 billion more in the following quarter — at least until yesterday's letter.
Apple was banking on the release of the iPhone XS, iPhone XS Max, and especially the iPhone XR to bring in that extra money. The company likely assumed those devices would sell like hot cakes through the holidays, bolstering revenue to yet another record-breaking quarter.
However, the Cook letter from yesterday proves Apple won't meet those lofty projections, and investors are not at all happy.
Sorry, Apple, but you're not immune
I don't have an insider's view of Apple, but this whole situation makes it seem like the company views itself as existing outside the "normal" smartphone industry. It definitely doesn't.
Apple might be one of the biggest and most important industry players, but it is still playing the same game as every other company.
Perhaps Apple thought it was protecting its investors by not dishing out all the pertinent info. Perhaps it was nervous about stock tanking and wanted to wait until the last possible moment. Whatever the reasoning, the writing was on the wall, and Apple didn't admit until yesterday it would be affected, which is obviously a really bad business move.
There was plenty of prior information showing iPhone sales were not going well. Sure, when the iPhone doesn't sell "well" it is still likely selling more than almost any other smartphone, but predictions from popular investment experts painted a bleak picture. Reports from companies manufacturing iPhone parts also should have raised some eyebrows.
Proof the iPhone wasn't selling well was all there — you just had to look.
For example, investment analyst Ming-Chi Kuo originally slated the iPhone XR as being a big seller. However, he then changed his tune, dropping his shipment estimates by 30 percent.
Apple also allegedly told iPhone part suppliers to cut down planned orders pertaining to the latest models, further fueling speculation Apple knew the latest iPhone models were struggling to meet estimates.
Perhaps the biggest sign things weren't altogether good with Apple came with that investment call I mentioned earlier. It was the first ever call in iPhone history where the company didn't give hard sales numbers for the device.
So, analysts were predicting iPhone sales drops, manufacturers were slowing down production, and Apple was mysteriously holding back how many iPhones it sold in the previous quarter.
It seems Apple investors didn't put all this together — and really, why would they? On the last investors call, Apple said business was great and the next few months would be strong.
Now we know what's really going on because Apple finally admitted it — months later than it should have.
Apple needs to change its game plan, just like everyone else
Samsung had to revamp its strategy for the Samsung Galaxy Note 9 in response to slower-than-expected sales of the Samsung Galaxy S9. Around the same time, the company also revealed it will revamp its mid-range products to offer more cutting-edge features, drastically alter its release strategy for the Samsung Galaxy S10, and focus more on bolstering sales in developing markets like India and China.
Samsung is doing all this because its sales are dropping and it needs to change course to stay on top. It makes perfect sense — even if the company has also been slow to realize these trends (but that's a whole other article).
Android OEMs are revamping their strategies in response to the slow market, and Apple can't afford not to follow suit.
If Apple wants to stay on top, it needs to throw out the old rule book too. It needs new, enticing features to its future iPhones to convince customers to upgrade, rather than releasing slightly-altered versions every other year. It needs to offer different types of phones at different price points to attract Android users who can't afford an ultra-premium iPhone. It needs to stop ignoring developing global markets where it is being crushed by smaller players like Xiaomi and OnePlus.
In other words, Apple will have to do exactly what every other company is doing.
The Cook letter was a wake-up call
The popular contention is Android fans detest Apple and Apple fans don't think about Android much. While that might be true in some cases, the smartphone industry as a whole is in some hot water, and every company needs to work hard to pull themselves out.
With that in mind, Apple will have to start paying more attention to what's going on with the rest of the industry — which means paying attention to Android. On the flip side, Android OEMs should also be paying attention to Apple. This recent turn of events shows exactly what will happen when a smartphone company ignores the market and assumes the problems affecting Company A don't affect Company B.
Apple better have something pretty monumental up its sleeve for September 2019 when it will likely launch the next set of iPhones. The iPhone XS is a marginal upgrade over the iPhone X, which is probably a big reason customers aren't buying as much as expected. If the company tries to push a slightly upgraded version of the XS this year, things probably won't go very well.
NEXT: For phones over $800, Apple owns 79 percent of the global market
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