Are Strong iPhone Sales Actually a Weakness for Apple?

Apple  (NASDAQ: AAPL  ) may be incredibly successful, but the company's fortunes could shift dramatically if anything disrupts the iPhone business. 

The company has grown increasingly reliant on its phone, which has brought in a steadily increasing percentage of the company's profit since it launched in 2007. Though iPhone has been a growth business for the company, it accounted for more than half of Apple's profits in 2013 and that number is expected to climb in 2014.

Though there is no reason to believe the market for iPhone will disappear any time soon, the music industry likely believed at one point that people would always want a physical copy of the albums and songs they own. Sony  (NYSE: SNE  ) probably also once felt the same way about the Walkman/Discman, and Blockbuster Video was once a growth business that looked unstoppable. 

How much does Apple rely on iPhone?

If counting on one product line for 53.4% of your profit is a cause for alarm, then predicting that the number will grow to 68% is downright disturbing. Of course Apple made nearly $40 billion in 2013, so even its sectors that make a tiny profit are still throwing off dollars that other companies would be pleased to claim for their entire business.

Still if something majorly affected the iPhone business, Apple would be in a vastly different financial situation. 

A reason for short-term optimism

The expected launch of the iPhone 6 explains why Apple expects to grow its profits from iPhone in 2014.

Andy Hargreaves, an analyst for Pacific Crest, told Statista he believes Apple is about to release a 4.7-inch iPhone 6 that could come with an even higher price tag than the iPhone 5S. Hargreaves expects Apple to sell its first larger-screen iPhone for $299 with a two-year contract, which is $100 above what Apple charges for the 5S. This, he said, "will boost sales and most importantly profit margins."

That's excellent news for Apple's business, but it's not necessarily sustainable long-term (though Apple has done a remarkable job since 2007 in doing both sustaining and growing its iPhone business).

Can iPhone business go away?

No product is forever but Apple has proven especially resilient in the face of competitors. Yes, iPhone has lost market share to Android phones, but it has continually grown sales as it keeps a smaller piece of a growing market. I wrote about the idea that Apple is one failed iPhone away from being Blackberry (NASDAQ: BBRY) in an earlier Fool article, and the reality is Apple is unlikely to stumble that badly.

So Apple's greatest competitive threat is not that somehow a phone competitor will create a smartphone that devastates its customer base, but that the concept of smartphones goes away. Just like it was great to be the aforementioned Blockbuster Video until the concept of video rental largely moved from physical to digital rental, it's great to have the top smartphone while people buy smartphones.

Phones are vulnerable on a lot of fronts but wearables seem to be the next contender for the throne.

"It may seem laughable to suggest that people will soon neglect their iPhones in favor of amped-up watches, eyeglasses, rings, and bracelets," Bill Wasik wrote for Wired. "But then again, 10 years ago it seemed laughable to think that people would use their smartphones to email, surf the web, play games, watch videos, keep calendars, and take notes—all once core tasks of desktop PCs."

Apple should move cautiously 

There is absolutely no guarantee that wearables -- which consumers have seemed a little tepid toward -- will replace phones in the near future. What can be guaranteed however is that something -- be it brain implants, watches that project holograms, or some other sci-fi magic -- will ultimately supplant the smartphone.

Apple derives huge profits from the iPhone and that will likely continue for years to come, but it won't continue forever. Deriving 68% of your profits from a single product line that will ultimately go the way of the record player is not a viable long-term strategy. 

There is every reason to believe that Apple knows this. The company's ability to continue to thrive once whatever will replace the smartphone replaces the smartphone depends upon how it diversifies now.  It's not a bad thing to make billions from the iPhone now.

But if Apple is not prepared for whatever is next, than the company -- no matter how great a 2014 it will have -- is built on a shaky foundation.

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Read/Post Comments (12) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 16, 2014, at 8:02 AM, random306 wrote:

    so what would you suggest? buying goog which derives 93% of their revenue from search?

  • Report this Comment On March 16, 2014, at 8:19 AM, fauxscot wrote:

    Of course. Just like living long and staying healthy is a problem for old people. Or spending money is a problem for rich people. Or long distances are problems for shipping companies.

    The issue isn't how much % profit or sales is represented by iPhones, it's how to make that % smaller with even more blockbuster Apple products, which will probably happen. There are really smart people, well backed, working really hard to to exactly that.

    Of course, Apple could start selling profit-free displays and computerized bidets like Samsung and that would help.

    Tim Cook should wake up every day and thank the blogosphere for documenting the obvious. Poor man doesn't have time, though. Busy being successful takes it all.

  • Report this Comment On March 16, 2014, at 9:17 AM, random306 wrote:

    Apple is currently entrenched in the largest share buyback in corporate history. I don't believe pre-announcing future products would benefit long term shareholders (particularly Tim cook and apple execs with options)nearly as much as this bearish anti innovation bashing that has been happening. Until the buyback is complete and the Board makes a decision to not expand it, the short term Low price is a Benefit to all shareholders,with the exception of short term option holders,who should be aware of the short term risks their options hold, and are not shareholders that Mr. cook OR the Board have to answer to until their contracts are fully executed.

  • Report this Comment On March 16, 2014, at 10:18 AM, iphonerulez wrote:

    Everything Apple does seems to have some major downside to the pundits. It's like all of a sudden the whole world is going to simply give up using iPhones because of...(fill in the blank). Apple has already proven time and time again that their iPhones have huge demand and I can't imagine what huge mistake Apple would make that consumers will stop buying iPhones in quantity. With the amount of money Apple has there's really nothing that Apple can't do to produce a high-quality iPhone. Apple probably has some sort of formula it follows to keep consumers begging for new iPhones.

    However, I do wish Apple would take some of that reserve cash and start looking for additional revenue streams that don't have anything to do with hardware. I'd love to see a search engine or some cloud services providing revenue to fill in the iPhone revenue seasonality.

    I don't know how Google suddenly become a far better investment than Apple but Apple might consider looking to at least copying some of the things Google is working on. People keep talking about this "internet of things" being so huge in the future. Maybe it's something Apple might consider getting into, although whatever it is supposed to be is rather vague to me. This so-called "internet of things" doesn't seem to be a very profitable venture but the buzz is getting a lot of investors excited about it.

  • Report this Comment On March 16, 2014, at 11:57 AM, zato3 wrote:

    Microsoft Motley Fool never misses an opportunity to dump on Apple.

  • Report this Comment On March 16, 2014, at 1:54 PM, twolf2919 wrote:

    Thank you captain obvious: Apple better watch out because *some* day smartphones will no longer sell! Wow - I just learned a great insight!

  • Report this Comment On March 16, 2014, at 4:14 PM, MartinMTurner wrote:

    This is somewhat like saying that Ford will be in trouble if people stop buying cars.

    Apple's fundamental values derives not from what it makes, or even how it makes it, but from its attitude. Going back to its origins, Apple released a manufactured computer, the Apple ][, with a keyboard, screen and (subsequently) disk drives, when everyone else was selling build-yourself kits which needed cassette players and plugged into the television.

    Wind the clock on, and Apple gave consumers a Graphical User Interface when everyone else offered a command line prompt, a true laptop when the alternative were 'lunch-box' luggables, a music downloading service when the alternative was pirate sites or ripping CDs one by one, and the first of what is now called 'smartphone' when everyone else offered keyboards and tiny screens.

    As long as there are solutions out there which are inelegant and hard to use, the door will always be open for Apple to innovate new products which make things which were difficult easy.

  • Report this Comment On March 16, 2014, at 4:46 PM, larryw101 wrote:

    @ the author:

    "But if Apple is not prepared for whatever is next, than the company -- no matter how great a 2014 it will have -- is built on a shaky foundation."

    Your use of grammar is as worthless as this article.

  • Report this Comment On March 16, 2014, at 4:47 PM, wasmick wrote:

    Kill!! Fanboys, kill!!

  • Report this Comment On March 16, 2014, at 7:14 PM, henrystar wrote:

    "Yes, iPhone has lost market share to Android phones, but it has continually grown sales as it keeps a smaller piece of a growing market." You mean smaller share, not smaller piece.

  • Report this Comment On March 17, 2014, at 8:34 AM, VanProo102 wrote:

    I'm not particularly an Apple fan. But I have to believe a company with the resources they have isn't working on many new things. Do you people think they sit around waiting for the iPhone to crash before they have a e new product? Same for Google, Ford, and every other company out there, possibly even Microsoft. These companies are under no obligation to share their R&D with any of you.

  • Report this Comment On March 18, 2014, at 1:24 PM, AlbertHall wrote:
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