Apple's iPhones hit a wall. Now we know how bad it is

The company's got a lot of problems to fix.

Ian Sherr Contributor and Former Editor at Large / News
Ian Sherr (he/him/his) grew up in the San Francisco Bay Area, so he's always had a connection to the tech world. As an editor at large at CNET, he wrote about Apple, Microsoft, VR, video games and internet troubles. Aside from writing, he tinkers with tech at home, is a longtime fencer -- the kind with swords -- and began woodworking during the pandemic.
Ian Sherr
4 min read
Angela Lang/CNET

When Apple warned earlier this month that sales over the holidays were as much as 11 percent lower than expected, it was a shock. Now it looks like a trend.

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On Tuesday, Apple forecast sales of between $55 billion and $59 billion for the second fiscal quarter, compared with average Wall Street estimates of about $59 billion. The forecast follows disappointing fiscal first-quarter revenue the company reported in its results. 

The sales forecast is the latest data point for Apple watchers, who for years have wondered when iPhone sales would hit a theoretical limit for how many million could be sold every quarter. Now it seems they might have an answer.

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Apple is estimated to have sold 66.6 million iPhones in its first fiscal quarter, which ended Dec. 29, down 15 percent from a year earlier, according to Bernstein analyst Toni Sacconaghi. Apple stopped publishing unit sales, meaning there's no official account for the number of iPhones, iPads or Macs sold. The company said it tallied nearly $52 billion in iPhone sales, down 15 percent from the same time a year ago.

It's unclear what's caused Apple to hit the wall. Some analysts blame the company's high iPhone prices. Apple now charges more for many of its phones than it does for the entry-level MacBook Air , which starts at $999. The colorful entry-level iPhone XR , which starts at $749, is the only new Apple phone to come in under the popular laptop's price. Meanwhile, cell carriers have cut subsidies as well.

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In a letter Apple shared with investors Jan. 2, CEO Tim Cook pointed to an economic slowdown in China and the country's "rising trade tensions with the United States." He also said the company struggled to make enough products to sell to customers and that when it did, a stronger US dollar effectively raised prices overseas. Following up on a call Tuesday, Cook also blamed the lack of subsidies amplifying the sticker shock of its phones. 

Apple on Tuesday said it counted $84.3 billion in revenue, down more than 4 percent from a year earlier. That wasn't much of a surprise, considering the company issued a rare warning Jan. 2 that it would miss its forecasts by as much as $10 billion.

"While it was disappointing to miss our revenue guidance, we manage Apple for the long term, and this quarter's results demonstrate that the underlying strength of our business runs deep and wide," Cook said in a statement Tuesday. He added that Apple would continue to innovate, saying "we are not taking our foot off the gas."

Apple's shares, which had fallen more than 1 percent in regular trading Tuesday, rose more than 5 percent after the earnings release to $163.47 per share.

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Sour Apples

Apple's quarterly earnings were a strong reminder of just how important the iPhone is. 

Apple saw growth in all its other product categories, like the Mac and wearables. But with the iPhone representing more than 60 percent of Apple's sales, those successes weren't enough to blunt the iPhone's troubles.


Don't blame low iPhone sales just on China.

Angela Lang/CNET

Still, some investors focused on the growth of those businesses, particularly services, which include the App Store and Apple Pay . Those businesses will help Apple diversify and become less reliant on its popular handheld.

"I hope that Apple will be able to move even further away from selling devices -- towards expanding the services ecosystem," Michael Obuchowski, the chief investment officer at Merlin Asset Management, said in an email. He added that he hoped Apple would open its services more widely so that people using devices running non-Apple systems could use them, a step the company hinted at earlier this month when it said iTunes and AirPlay would be available on TVs made by a host of manufacturers. 

Obuchowski's firm owns Apple shares.

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True to Apple's earlier statements, markets outside the US played a role in the iPhone's slide. Sales in Europe, Greater China and Japan all fell. Sales in the Americas and the "Rest of Asia Pacific" rose.

The sales drops outside China were worrying to Moor Insights & Strategy analyst Patrick Moorhead. "This leads me to believe it's a product issue, namely the iPhone, keeping consumers from upgrading," he said. Larger issues like the trade war between China and the US wouldn't affect Europe or Japan as much.

But Cook said Apple's cheap battery replacement program played a part too. The $29 battery replacements, offered in response to a controversy over the way the company's software treats older batteries, pushed new iPhone sales down.

Despite its issues, Apple is still making money. Net income fell less than 1 percent, to $19.9 billion, or $4.18 per share. That was higher than Wall Street's expectations of $4.17 per share.

Too expensive?

Ever since Apple released 2017's iPhone X for $999, a whopping 53 percent price increase from the entry level iPhone 7 from 2016, tech watchers have wondered exactly how much Apple could get away with charging. The iPhone X's success suggested an answer.

Now that Apple has hit a wall, the question is being raised again, particularly after the company released a $999 iPhone XS last year alongside a larger iPhone XS Max , which cost $1,099.

Cook dismissed that concern, arguing instead that higher costs overseas were to blame. "I do think that price is a factor," he said, but it was a perceived price in local currencies. To counteract that, Cook said Apple has begun lowering prices for its phones overseas so that the amount people pay is roughly the same as what it was last year. 

First published Jan. 29 at 1:35 p.m. PT.
Updates, 1:55 p.m.: Adds details; 2:52 p.m.: Includes more details from Apple's earnings conference call; 4:09 p.m.: Adds investor comment.

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