Apple predicted an iPhone sales drop. Here it comes

The company probably saw weak demand for its top-selling product in its fiscal second quarter, setting the stage for a tough 2016 for CEO Tim Cook and his team.

Shara Tibken Former managing editor
Shara Tibken was a managing editor at CNET News, overseeing a team covering tech policy, EU tech, mobile and the digital divide. She previously covered mobile as a senior reporter at CNET and also wrote for Dow Jones Newswires and The Wall Street Journal. Shara is a native Midwesterner who still prefers "pop" over "soda."
Shara Tibken
4 min read

We aren't buying enough new iPhones.

That's why Apple is expected to tell investors something it's never had to say before during its quarterly earnings call: iPhone sales likely dropped for the first time since the game-changing device went on sale in 2007.

That drop isn't a surprise to those who've been listening. Apple CEO Tim Cook and his team in January predicted a slide in total revenue and cautioned that iPhone sales would see their first-ever slump in the three months ended in March. The company reports fiscal second-quarter results Tuesday.

Analysts think iPhone shipments tumbled nearly 20 percent from the same quarter a year ago. Analysts, on average, expect Apple to sell about 51 million iPhones in the three months that ended in March, according to Morgan Stanley. That's down from 61.2 million units in the March quarter of 2015.

The bigger worry is whether this signals a tough year overall for the world's largest public company. Analysts who cover Apple think that's exactly what it means, citing the ho-hum reaction to last year's iPhone model, the 6S.

"Given the similar form factor for the iPhone 6S and softer smartphone global demand trends, we anticipate down year-over-year iPhone sales for the remainder of [fiscal] 2016," said T. Michael Walkley, an analyst with Canaccord Genuity.

Apple didn't have a comment ahead of its earnings report.

Phone ennui

Walkley's not alone. Most analysts polled by Thomson Reuters expect Apple's revenue to slide about 3 percent this year as fewer people buy iPhones. The reason for that concern is simple: More than two-thirds of Apple's sales come from the iPhone. One bad quarter of phone sales translates into a bad quarter overall.

Revenue could drop about 10 percent in the second quarter to $52 million and slip about 4 percent to $47.4 billion in the quarter ending in June.

Watch this: Apple Watch: One year later. Are you still wearing it?

The year is off to a tough start for many tech companies. Intel, the world's biggest provider of chips for computers and servers, is cutting 11 percent of its workforce as it grapples with a steep drop in PC sales. IBM reported a 14-year low in quarterly sales. And Netflix raised concerns about winning over fewer subscribers in its overseas and US businesses. Even Alphabet, the parent company of Google, reported disappointing sales and profit.

For Apple, the problem is that people just aren't excited about phones. The devices haven't really changed that much over the past few years -- at least not enough to get you running to the Apple Store and buying a new model every year or two. Apple's current flagship phones, the iPhone 6S and 6S Plus, didn't add enough new features to persuade most iPhone customers to trade up.

And the economy in China, one of Apple's most important markets, has been struggling. China also can be difficult to deal with, as evidenced by the shutdown of Apple's iTunes Movies and iBooks services just seven months after they started operating in the country.

Apple's first smartwatch -- the Apple Watch, which hit the market a year ago -- hasn't sold in high-enough numbers to boost the company's sales, and its iPad business has dropped every quarter for the past two years, even with the introduction of the 12.9-inch iPad Pro in late 2015.

iPhone SE (2016) is the iPhone Mini

See all photos

To help boost excitement, Apple last month added a smaller iPad Pro to its lineup and released a new 4-inch phone, the iPhone SE, to appeal to customers who like smaller devices. It also sweetened the appeal of the SE with a $399 price tag, making it the least expensive new iPhone Apple has ever sold. (The iPhone 6S starts at $649.)

Andy Hargreaves, an Apple analyst for Pacific Crest, said the iPhone SE should stop consumers from buying old iPhones to get the smaller screen size.

But even if the iPhone SE becomes more popular, it's not as important to Apple's future -- and financial results -- as its flagship phones. Analysts have given up on Apple this year and instead are looking to 2017. They hope the next iPhone, likely called the iPhone 7 and expected in September, will give Apple the boost it needs.

UBS analyst Steven Milunovich expects iPhone shipments to rise at least 5 percent to 10 percent in 2017. "Even without killer new features, the iPhone 7 should prompt improved upgrade demand with more than 200 [million] iPhone users not having moved to a large screen," he noted. "We are not at peak iPhone."

But that's next year. For now, Apple has to deal with the fact that we're just not that into the iPhone.