The iPhone has been a blessing for Apple (AAPL 1.62%) over the past decade, fueling the company's transformation into the biggest and most profitable company in the United States. But even though iPhone sales will continue to fill Apple's coffers for years to come, there's reason to believe that its over-reliance on this single product will soon be a curse.
Warning signs have cropped up over the past year to suggest that the Cupertino, California-based company is either approaching or has already passed this inflection point. Most recently, in the second quarter of 2016, quarterly iPhone sales fell on a year-over-year basis for the first time since the product was introduced in 2007.
Although Apple still sold 51 million iPhones during the quarter, that was down by 16% from the 61 million it sold in the second quarter of 2015. The decline was even more dramatic on a sequential basis, falling by 32% compared to the first quarter of 2016 -- though that's not surprising given that Apple's fiscal first quarter ended on Dec. 26, 2015 and thus included the holiday shopping period.
Apple CEO Tim Cook explained that the decline was the result of "strong macroeconomic headwinds." Growth in the United States is lackluster, China has been working to avert a steep economic downturn, and Europe is still deeply ensconced in its own nascent recovery.
But the issue for Apple is not just that it sold fewer iPhones in the second quarter of the year, it's also relinquishing market share. Apple's share of the worldwide smartphone sales fell to 14.8% in the first quarter of 2016. That marks a low point for the company. Its market share in the same period last year was 17.9%. And if you go back to 2012 it was as high as 22.5%.
This is an ominous sign in a market that's already seen multiple companies rise and fall over the span of a single decade. At different points, for instance, Nokia and Blackberry sat atop the industry -- and look where they're at today.
To top things off, the drop in iPhone sales and market share are particularly problematic given Apple's lack of revenue diversification. Its principal competitor, Samsung, which currently tops the industry with a 23.2% share of the worldwide smartphone market, sells everything from kitchen appliances to televisions to cameras to smartphones. Apple, by contrast, looked to the iPhone for two-thirds of its sales last year.
Apple has other products, to be sure, but neither its second or third largest product segment is in a position to pick up the slack. Sales of iPads, its third biggest segment, are also declining, down by 19% in the latest quarter compared to the year-ago period. And while sales of Macs have proven to be more resilient than PCs, its second largest segment is also experiencing declines, down by 12% in the second quarter.
In short, the future for Apple rests now on innovation. The time is coming to an end when it can simply reap what co-founder and former CEO Steve Jobs sowed. Whether Apple can successfully navigate this challenge remains to be seen, but in order to do so it must move beyond its over reliance on the iPhone.