Some much needed perspective on Apple’s first year-over-year quarterly sales drop since 2003, from Daisuke Wakabayashi for the WSJ:
Apple’s revenue and profit for the fiscal second quarter ended March 26 both missed analysts’ expectations. The company also projected that revenue in the current quarter would fall far short of expectations.
Worth noting that Apple’s actual results were very nearly in line with the company’s own guidance for the quarter, given three months ago. (Revenue was within guidance, but gross margins were slightly low.) A year-over-year decline is never good news, and is a possible harbinger of a sustained decline, but these numbers, along with Apple’s guidance for the June quarter, should not have been a surprise to anyone paying attention. Certainly not enough to justify today’s 6.25 percent drop in the company’s stock price, which knocked about $40 billion off the company’s market cap. That’s more than the value of Netflix. Welcome to the casino.
But for all of the concerns about Apple’s growth, the company still generated profits in the March quarter that are expected to exceed the combined earnings of technology peers Alphabet Inc., Facebook Inc., and Amazon.com Inc.
Amazon isn’t expected to announce results until Thursday, and they famously strategically forgo profit for the sake of revenue growth. So let’s take them out and replace them with a company with a history of enormous profits, Microsoft. It’s still true: with $10.5 billion in profit, Apple earned more in the quarter than Alphabet ($4.2B), Facebook ($1.5B), and Microsoft ($3.8B) combined. That’s what happens after an almost unfathomable streak of over 50 consecutive quarters of year-over-year growth — you reach an altitude at which even an indisputably very bad quarter still leaves you with enormous, industry-leading profits.1
A concerning quarter? Yes.
Surprising? Shouldn’t have been.
Alarming? Not even close.
What explains the hysterical response — both from investors, and from the business and tech news media? I long ago gave up trying to understand it. But I am reminded of the Stanford Marshmallow Experiment. Wikipedia:
The Stanford marshmallow experiment was a series of studies on delayed gratification in the late 1960s and early 1970s led by psychologist Walter Mischel, then a professor at Stanford University. In these studies, a child was offered a choice between one small reward provided immediately or two small rewards (i.e., a larger later reward) if they waited for a short period, approximately 15 minutes, during which the tester left the room and then returned. (The reward was sometimes a marshmallow, but often a cookie or a pretzel.) In follow-up studies, the researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index (BMI), and other life measures.
I think an awful lot of investors and members of the news media are like those kids who couldn’t wait: no ability whatsoever to look past the next few months.
But look at how things were going before the iPhone 6. Had the trend of 2012–2014 continued through 2015, iPhone sales last quarter would have been 65–70 million. Instead they were just under 75 million. It’s only in comparison to the huge holiday quarter of 2014 that last quarter looks dull.
I’m reminded of the devotion climate change deniers had to the year 1998. Because of an intense El Niño that year, global temperatures rose well above the trend line, and it remained the hottest year on record for several years. Deniers hit upon this fact, and claimed that global warming had stopped, even though the overall warming trend had continued. The iPhone 6 was Apple’s El Niño.
If sales don’t improve with the iPhone 7, I’ll be willing to believe we’ve reached “peak iPhone.” Until then, the only problem I see is that the iPhone 6 was too successful.
His post has a good chart, too.
I think Dr. Drang nails it. We might be seeing “peak iPhone”. But it could just be a statistical blip, caused in large part by the iPhone 6’s exceptional popularity, along with other factors like the economy in China and currency exchange rates. There’s simply not enough data to know. (It’s worth focusing on the iPhone here, because it accounts for two-thirds of Apple’s revenue. For the next few years, at least, as the iPhone goes so goes Apple.)
The iPhone has always been a seasonal product, but the seasonality changed with the iPhone 4S, which debuted in October 2011. The first four iPhones debuted in June/July, and the Verizon/CDMA iPhone 4 debuted in January 2011. Let’s call the 4S the beginning of the modern iPhone seasonality era — those released in September or very early October, with support for more carriers. October through December is “Q1” in Apple’s financial calendar, and in this modern era, that’s the biggest selling quarter. First, because it’s the quarter in which the new phone arrives, and tens of millions of people want to buy them immediately. There is no product in the world that generates “opening weekend” sales like the iPhone. I can’t even think of another product where people even talk about opening weekend sales, other than other Apple products like iPads and the Watch. The second factor is that it’s the holiday quarter.
Q2 — January through March — has always shown a decline from Q1. Here are the numbers for Q2 iPhone unit sales in the modern era (and 2011 thrown in for comparison):
|Unit Sales (Millions)|
|Q2 2011 (iPhone 4)||18.7|
|Q2 2012 (iPhone 4S)||35.1|
|Q2 2013 (iPhone 5)||37.4|
|Q2 2014 (iPhone 5S)||43.7|
|Q2 2015 (iPhone 6)||61.2|
|Q2 2016 (iPhone 6S)||51.2|
The same numbers (minus the pre-modern-era 2011) in a chart:
In chart form, you can see what an anomaly last year was with the iPhone 6. But given that you can almost draw a straight line connecting the other four points in the chart, I’m not willing to call it a peak yet. But even if we see a return to growth, it might take several years before we see another Q2 with over 60 million units sold. ★
Another bit of perspective, from Shira Ovide at Bloomberg: “Apple by any measure — except for its own historical standard — is an incredible company. Its $10.5 billion in net income for the last three months was more than the yearly profits of all but 15 companies in the S&P 500 index, according to Bloomberg data.” ↩︎
I’ve been meaning to write more about this. Perhaps comparisons to Google search are a red herring, and the right comparison is to Amazon, and retail co-op. Pay for placement, just like in grocery stores. Amazon has done this forever, and in the markets where they’re dominant (like books) they really turn the screws on manufacturers and publishers with the co-op fees. Think of search terms as being like the aisles in a grocery store, and the paid promotions are the endcaps. The retail co-op argument also fits better with the purported 100-person team size. Most of them would be sales people, not engineers or designers.
If Apple does it right, I think it’s just a new thing in the App Store that won’t make anything worse — but won’t address any of the longstanding problems, either.
If they do it wrong, they’ll allow shitty things like buying your competitor’s app’s name.
Also, Arment raises a good question, wondering about the motivations of whoever leaked the story to Bloomberg:
Either to warm us up to the idea so we’re not so mad in June, or by someone inside who doesn’t think it’s right and wants ammo to win the argument internally.
I’ve been wondering about this too. I don’t think it makes sense that it’s a trial balloon from someone in favor of the program. Apple doesn’t care about “warming us up” to changes. They don’t care. I think it makes more sense as a leak from someone opposed to it, and who foresaw that it wouldn’t go over well. Damn curious either way, though. ★
“Not as clumsy or random as a blaster. An elegant weapon, for a more civilized age.” —Obi-Wan Kenobi
After WWDC last June, I wanted to spend some time testing the iOS 9 betas without installing them on my iPhone 6. I used my year-plus old iPhone 5S instead. I’ve done this in years past, as well, but this time was different. In previous years, this has always been borderline torture. Each new iPhone since the 3G1 has always made the previous year’s model feel slow, and installing a beta version of iOS on the year-old phone has sometimes exacerbated that.
But I had a very different experience going back to my 5S. I liked it. I didn’t stick with it for more than a few weeks, because it was slower, and the camera wasn’t as good, but I sure did like how it felt in my hand.
Apple has called the Watch their “most personal device ever”, but I would argue that the iPhone remains the most personal. For one thing, I doubt there’s anyone who spends more time interacting with their Watch than their iPhone. For another, it’s the device we hold in our hands. The one we touch the most.
Feel matters. And to me, the classic 4-inch display form factor shared by the iPhones 5, 5S, and now SE feels the best in hand. This is obviously highly subjective, but in my mind it’s not even a close call. There are obvious reasons to prefer the larger 4.7- and 5.5-inch models, but how they feel in your hand isn’t one of them.
I prefer the flat sides. (It stands up!) I prefer the small circular volume buttons. I prefer the power button at the top, rather than directly opposite the volume-up button. I absolutely loathe the camera bump on the 6/6S; the lack of said bump on the SE feels downright luxurious in contrast.
There have been six basic iPhone form factors to date. (Seven, if you choose to count the Plus-sized 6 and 6S separately.)
With the introduction of the new iPhone SE, the iPhone 5-style industrial design is the first to be used for three separate product generations. But it’s worth noting that this form factor skipped a generation — there was no 4-inch iPhone with iPhone 6-class internals. It truly says something that an industrial design first introduced in 2012 remains utterly modern and relevant in 2016.
In my real-world use, the iPhone SE is very much exactly what I was hoping it would be: a 4-inch iPhone with iPhone 6S performance and camera quality. There are some differences:
The iPhone SE has a slower first-generation Touch ID sensor. I don’t mind this at all in practice, and I actually enjoy being able to use the home button to see the lock screen. (As I noted in my iPhone 6S review, the second-gen Touch ID sensor is so fast that it’s difficult to use to show the lock screen — it unlocks the phone with even the briefest tap. You have to use a fingernail or unregistered finger.)
The iPhone SE display remains unchanged from that of the 5S, with a contrast ratio of 800:1. The iPhone 6S has a contrast ratio of 1400:1. Noteworthy, but by no means a deal-breaker.
The iPhone SE has a significantly inferior front-facing camera. I almost never use this camera, so again not a deal-breaker.
The iPhone SE lacks a barometer, which is used for more accurately measuring the flights of stairs you ascend and descend.
No 3D Touch. After almost two weeks of using the SE, I almost forgot to mention this.
Update: Looking at Geekbench’s public results for “iPhone8,4” (the SE’s model number), they’re all running at 1.85 or 1.83 GHz. Not sure why it’s showing 1.77 on mine. Let’s call the difference literally negligible — the SE really seems to be just as fast as the 6S. Update 2: Turns out GeekBench’s clock speed numbers are only estimates. The SE really is just as fast as the 6S.
The technical limitation of the SE that makes the most difference for me, personally, is that its largest storage capacity is only 64 GB, instead of 128. My iPhone 6S is using just under 90 GB of storage. I was able to restore my SE review unit from a backup of my personal 6S, but after it finished downloading and restoring everything, there wasn’t any space left at all. It was easier for me to just wipe the phone and start clean.
Ultimately, the biggest reason to prefer the 6S over the SE is the glaringly obvious one — the larger display, which can either show more content, or (in Zoom mode) show the same content at a larger size.
If your eyesight is strained by the smaller 4-inch screen, that alone might seal the deal. Another advantage to the bigger display: a bigger on-screen keyboard that makes typing faster and less error-prone. I’ve been using the iPhone SE for close to two weeks, and the single most surprising thing to me is how many more errors I make while typing compared to the 6S. For anyone who does a lot of typing on their iPhone, that could be the deciding factor.
Me, though, I typically don’t do a lot of typing on my iPhone. I do a lot of reading, and I tend to flag things to deal with later, when I’m on a Mac. And for that, the smaller 4-inch display is actually better, simply because I can easily reach from corner-to-corner with my thumb while holding the phone in one hand. The iPhone SE is a credible one-handed device. The iPhone 6/6S, not so much. The iPhone 6/6S Plus, not at all.
It’s all about trade-offs, of course. But one-hand-ability is so nice a feature that Apple even dedicated a Jeff Daniels-narrated TV commercial to it when the iPhone 5 shipped. “Pretty sure it’s the common sense thing”, indeed.
I also find the smaller size and flat sides make me feel much more sure-handed when using the iPhone SE camera.
There’s another significant difference between the 6S and SE — price. The 16 and 64 GB versions of the iPhone 6S cost $650 and $750, respectively. The same capacity versions of the SE are only $400 and $500. Those are extraordinary price points for an iPhone with the current top-tier A9 SoC and camera. You save an entire third of the price by choosing a 64 GB iPhone SE over a 64 GB 6S. You save $150 and get far more storage by choosing a 64 GB SE instead of a 16 GB 6S.
Yes, it has a smaller display with fewer pixels (and, as noted above, a lower contrast ratio). Yes (again, as noted above), there are a few other technical aspects that are inferior to the 6S. But these are noteworthy, groundbreaking price points for the iPhone.
The iPhone 6S and iPhone SE are both great products, and both have great sizes — but for entirely different reasons. The SE is easier to pocket, easier to hold, and easier to use one-handed. The 6S displays more content, and is better for two-handed use — particularly when it comes to thumb-typing. Judging between these two devices, with no consideration for future devices, I personally am completely torn. But I lean toward the SE.
But therein lies the rub: there are future iPhones coming, and my guess is that the 4-inch size will soon again be relegated to the second-tier, spec-wise, in the product lineup. When Apple introduces new iPhones in September — presumably the “7” and “7 Plus”, but you never know when Apple will change its naming scheme — I expect only 4.7- and 5.5-inch models. Nor do I expect an updated 4-inch model with 7-class specs in March next year.
For anyone with an iPhone 5S (or older) who has been holding out on an upgrade in the hopes of a new top-tier “small” iPhone, the iPhone SE is cause for celebration. If you are such a person, run, don’t walk, to buy one. You will be delighted.
If you’ve already upgraded to an iPhone 6 or 6S and have made peace with the trade-offs of a larger, heavier, less-grippy-because-of-the-round-edges form factor, the appeal is less clear. Me, I talk the talk about preferring the smaller form factor, but ultimately I’m a sucker for top-of-the-line CPU/GPU performance and camera quality. For the next six months or so, the iPhone SE stands on the top tier. After that, it won’t — I think — and it’ll be back to the 4.7-inch display form factor for me. So why bother switching back for just a few months? I keep asking myself.
And then I pick up the iPhone SE, and hold it in my hand. ★
The iPhone 3G had the same CPU as the original iPhone. Kind of a weird fact, in hindsight. ↩︎