Why Apple isn't worried about flagging iPhone sales

As you may have noticed, the iPhone's market share is slipping—but here's why Apple's outlook is still bright

Why Apple isn't worried about flagging iPhone sales
Adam Patrick Murray

If I’m honest, I’ve been bored by the iPhone for some time. The nature of my job demands that I stay abreast of the latest and greatest devices, but I couldn’t muster much excitement when I began ordering my iPhone 7. When presented with a week’s wait, I dumped my cart.

Since ordering and regularly using the Google Pixel, I’ve regained my interest in mobile devices. Quite bluntly, the Pixel is a better phone and delivers a better software experience, which I never thought I’d write about Android.

Even so, something is keeping me in the Apple fold, beyond the iMessage walled garden. This element will also generate Fortune 100-size revenues in 2017. That thing? Apple Pay. Judging by Apple’s earnings, I’m not alone.

Calm before the storm

Viewed through the lens of device sales, Apple is in serious trouble. Last year it appeared that Apple had found a way to defy the gravity of basic economics and would continue selling high-margin phones to consumers who could only afford low-margin options. The gravy train kept chugging along, and I posted a mea culpa for my premature skepticism.

Perhaps I shouldn’t have. Maybe I should have stuck to my original premise that Apple is going to have to figure out how to be cheap if it wants market share.

On its earnings call, Apple revealed yet another quarter of iPhone slide. No amount of superlatives from CEO Tim Cook could mask that the market has grown tired of same-old, same-old from Apple’s smartphone line.

According to Strategy Analytics, which tracks smartphone shipments, Apple’s overall market share declined to 12.1 percent, down from 13.6 percent in Q3 2015. Samsung, the market share leader, also declined over that same period, from 23.7 percent to 20.1 percent. Who picked up the slack? Huawei, Oppo, Vivo, and other low-cost manufacturers.

And yet ... there’s hope.

The song remains the same

That hope has little to do with the iPhone itself—despite those hinted redesigns coming in 2017. Instead, it has everything to do with Apple’s services business, which grew 24 percent in the quarter and merited Cook’s effusive “incredible” adjective.

This is becoming a familiar refrain. I wrote about Apple’s Services business in January 2016 and again in July 2016. But those posts reflect relatively early diagnoses of Apple’s quandary and a growing realization that the erstwhile computer company was becoming steadily more proficient in the very items that have generally escaped its abilities these past few years: cloud-based services.

At the center of its services revolution is Apple Pay, a business growing so rapidly that, Cook noted, “We expect it to be the size of a Fortune 100 company in fiscal 2017.” The heart of that business is Apple Pay.

Some facts about Apple Services:

  • Apple Services revenue grew by 24 percent year-over-year, from $5.086 billion in Q4 2015 to $6.325 billion in Q3 2016.
  • The Services business has roughly doubled over the past four years.
  • Apple Pay transactions jumped nearly 500 percent year-on-year in Q3.
  • Apple Pay completed more transactions in the month of September than it did across all of fiscal 2015.
  • Despite suggestions the mobile app market has peaked, the App Store growth rate has now accelerated for five consecutive quarters, hitting 43 percent in Q3.
  • App Annie data indicates that the App Store generated 100 percent more revenue (globally) than Google Play in Q3.

Personally, Apple Pay has become my default payment preference. While it’s still not accepted at most retailers that I frequent, slow chip-and-pin machines have been begging me to try to use Apple Pay whenever I can. Based on Apple Pay’s rising fortunes, I’m not alone.

Yet, there’s danger

Apple’s services, then, are keeping me in the fold. Over time, however, the company will need to marry the services experience with Apple’s original strength: world-beating phones.

Yes, it matters that Apple is rolling out Apple Pay to web browsers. Based on Adobe Digital Insights data, which tracks 80 percent of all online transactions, smartphone visits to retailer sites increased 33 percent year-over-year, but aren’t yet converting shoppers into buyers at the same rate as desktop websites. Smartphones drive 32 percent of traffic but only 16 percent of revenue, while desktop drives 59 percent of traffic (down 6 percent year-over-year) and 75 percent revenue (down 2 percent). Apple Pay should help to shore up the smartphone’s ability to convert shoppers.

This isn’t enough for Apple. It doesn’t need to be a market share leader to make a lot of money from iOS-based services like Apple Pay and the App Store. It does, however, need to have a steady foundation of market share upon which to build its mobile services business. This, in turn, requires smartphones that more consumers actively covet.

In sum, Apple seems to have hit stasis on smartphone sales even as its services revenue booms. What it will ultimately need will be symbiosis between robust growth in both phones and services.