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The Most Troubling Thing About Apple's iPhone Sales Decline

By Ashraf Eassa - Feb 4, 2016 at 9:30AM

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The iDevice maker's strongest product lineup yet isn't enough to stop iPhone from declining.

After much speculation in the press, Apple ( AAPL -0.61% ) confirmed with its revenue outlook for its first fiscal quarter that iPhone sales would drop year-over-year during the company's fiscal first quarter -- the first ever in the history of iPhone.

Apple CEO Tim Cook blamed this year-over-year decline on a couple of factors. Firstly, he observed that in the first quarter of fiscal 2015, Apple was significantly supply constrained on iPhone 6/6 Plus, pushing out some demand to the second fiscal quarter. Secondly, he claimed that the macroeconomic environment had deteriorated meaningfully from a year ago, impacting foreign exchange rates and ultimately demand.

The first is kind of meaningless though as if that demand hadn't been pushed from fiscal Q1 to fiscal Q2 last year, Apple would have simply seen a year-over-year iPhone decline in its most recent quarter. The second certainly makes sense, though.

At any rate, even with these good, shall we call them, excuses, there is one thing that's quite troubling about this seemingly steep decline.

Apple's strongest product lineup ever is failing to drive growth
When Apple introduced the iPhone 6/6 Plus last year, the company's product stack was essentially as follows:

  • iPhone 6/6 Plus at the high end
  • iPhone 5s in the mid-range
  • iPhone 5c at the low end

Following the iPhone 6s/6s Plus launches, Apple's product stack looked as follows:

  • iPhone 6s/6s Plus at the high end
  • iPhone 6/6 Plus in the mid-range
  • iPhone 5s at the low end

With this year's lineup, customers could get phones that were better in almost every way than their predecessors at the high end, and the company's mid-range offerings improved substantially as a result of the iPhone 6/6 Plus slotting in there. Even the company's low-end device is quite a nice phone that still holds up in terms of performance and industrial design today, about two-and-a-half years following its launch.

Yet, with such a strong product lineup across the price points that Apple typically participates in, the company is still looking at a fairly substantial decline in iPhone units in the coming quarter. Cook did try to offer some reassurance that Apple's fiscal second quarter would be the trough in terms of year-over-year declines, but at this point I don't think anybody is expecting growth from iPhone during this fiscal year.

More innovation will help, but can Apple sustain it?
I believe that had the iPhone 6s/6s Plus been more compelling products vis-a-vis last year's iPhone 6/6 Plus, it may have been able to drive more robust upgrade activity to the latest model and/or share gains (though Cook did mention record "Android switcher" levels during the first fiscal quarter).

The iPhone 7 that's coming later this year should help, especially if the rumors that Apple will be doing a special dual-lens variant of the iPhone 7 Plus are true (big jumps in camera quality are always welcome).

However, from a longer-term perspective, one has to wonder whether Apple can continue to deliver substantial enough innovations to ensure that the iPhone stays on a growth path for the foreseeable future. There are some obvious areas of improvement that I see over the next couple of generations that I think will help, but beyond that the picture seems to get a little bit fuzzy.

Of course, that's part of the reason that Apple is spending so much money on research and development. Unfortunately, Apple can't allow the investment community to get a sneak peek at what's in the pipeline for very obvious reasons.

In my mind, investing in Apple is a bet that the company can deliver sustained product innovations, particularly in iPhone, in the years and decades to come.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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