‘The iPhone is the Only Product That Matters’

Seeking Alpha has written an article discussing the dominance of the iPhone – over Apple’s own products. In the introduction, the website notes, ‘From a financial and business perspective, the iPhone is the only product that matters. The iPhone is amassing so much power at Apple, it is difficult to imagine any product being able to dramatically surpass the iPhone in terms of importance over the next five years’.

In the last eight years, the iPhone has been responsible for 50% of Apple’s revenue ($443 billion) and 60% of gross profit ($200 billion). As many as 250 million units are being sold each year. In the first half of 2015, the iPhone was responsible for 69% of Apple’s total revenue, up from 57% the year before, and 81% of gross profit, up from 68%. Much of this is due to strong sales in China.

AboveAvalon image of iPhone Gross ProfitIn a hypothetical situation in which Apple missed its quarterly iPhone sales target by 10% (5 million units), the company’s earnings-per-share (EPS) would have fallen 10%. If iPad or Mac sales had been missed by the same amount, the resulting EPS impact would have been classified as a rounding error!

With great power comes great responsibility – and risks. Apple must now work harder to keep its audience engaged and avoid fragmentation between iOS versions. iOS 9 includes several features to help people upgrade from iOS 8, including the temporary deletion of apps to install the new version.

It can be difficult now to introduce new hardware or software designs for the iPhone, as users are opposed to change. The larger the user base, the larger the variety of tastes and desires – and the iPhone has a very big user base! The end result could be a change that alienates a group of customers, such as the adoption of the new ‘Lightning’ connector. Apple has never failed to embrace change, however.

‘One of the biggest risks that Apple faces from a strong iPhone is that the product’s importance leads management to ignore other opportunities that may seem too small to matter and are unlikely to reach the iPhone’s stature in terms of revenue and profit’, writes SA. In reality, these risks must be taken, if the company hopes to eventually create a product that can outsell the iPhone. Apple appears to be aware of this risk, having invested in the Apple Watch, which targets a comparatively small market.

SA predicts that the next five years will see a focus on products and services designed to increase the iPhone’s value proposition, rather than focusing on replacing it. It is impossible to say that a product will never be developed that does this, however. A quote by Steve Jobs, which has been displayed at Apple’s headquarters, is very relevant to this situation:

“If you do something and it turns out pretty good, then you should go do something else wonderful, not dwell on it for too long. Just figure out what’s next”.