Not long ago, it seemed Apple's iPhone was impervious to gravity. For nearly a decade, Apple set a new company record for smartphone sales every three months. No longer. iPhone sales have dropped on a year-over-year basis for two straight quarters. That's bad news for Apple, which makes more than half of its money from the device.
That's not to say Apple is in dire straits. It's still the world's most valuable firm by market capitalization, reliably taking in revenue north of $40 billion every quarter for the past two years. Profits, meanwhile, have hovered around $10 billion. But the iPhone situation puts a great deal of pressure on the company, and CEO Tim Cook, as it prepares to unveil a refreshed model on Wednesday at a high-profile event in San Francisco, California. (The company has not officially said the event is for a new iPhone, but it's safe to say that's what's in store.)
Because Apple typically releases new iPhones on a predictable schedule (every two years for a big refresh, with minor upgrades in between), it's natural for sales to dip somewhat in the months leading up to big new release. Savvy shoppers, of course, are loathe to spend money on a device that's about to be outmoded. Yet if the rumor mill is to be believed, this year's iPhone will offer little by way of major upgrades. In fact, the most notable expected change, the absence of a dedicated headphone jack, could prove a headache for consumers forced to either upgrade their headphones or use an unwieldy adapter. (The shutterbug set, however, might enjoy what's said to be an improved camera system.) Meanwhile, Apple's chief rival in the smartphone arena, Samsung, has lately been emerging as a stronger-than-ever competitor, an embarrassing recall of its latest device notwithstanding.
Apple is also contending with broader changes in the wireless industry. Mobile carriers like Verizon and AT&T are revamping how they sell smartphones. Instead of offering a discounted device every two years, carriers are increasingly selling phones through a kind of payment plan, wherein customers pay for the full cost of their phones over time. That has two effects on consumers, both of which can depress smartphone sales: Shoppers no longer get a biannual nudge to upgrade their device, and they are feeling the full, unsubsidized cost of their often very expensive phones for the first time. To deal with this, Apple recently introduced a payment plan of its own, which offers new iPhones every year, plus damage insurance, for a monthly fee.
Apple is hitting roadblocks in China, too. Once a source of mind-boggling growth, the company's sales in what it calls "Greater China," which includes the mainland and Hong Kong, Macau and Taiwan, dropped 33% in the most recent quarter compared to the previous year. That's the result of three factors: China's slowing economic growth, unfavorable currency rates and hotter competition from local upstarts selling cheaper yet still high-quality smartphones.
Facing flagging iPhone sales, Cook and other Apple executives have spent the last few earnings calls stressing the company's growth in what it calls "services," which include offerings like streaming music and online storage. Indeed, the category is a bright spot for Apple, with revenue hitting close to $6 billion in the most recent quarter, up 19% year-over-year. That may seem a paltry figure in contrast with the company's more than $24 billion in iPhone revenue, but it remains impressive nonetheless. Cook's goal is for services alone to reach "the size of a Fortune 100 company by next year," he told CNBC earlier this summer.
Like any technology company facing headwinds with its flagship product, Apple is investing mightily in innovation. The company's research and development spending could hit $10 billion this year, according to one estimate, up 30% from 2015. Like many Silicon Valley firms, Apple is notoriously tight-lipped about its future plans. Part of that money is undoubtedly going to new versions of hardware like the iPhone, Apple Watch, Mac computers and so on. But the company's recent investments in artificial intelligence and healthcare suggest those are also areas of interest for the company — and potentially very lucrative fields to boot. The persistent rumor that Apple is building an automobile, meanwhile, refuses to die.
Services and skunkworks are indeed reasons to be optimistic about Apple's future. But neither can do much to alleviate the pressures facing the company in the short term. Investors increasingly view Apple as a source of steady, not meteoric, growth. If it can truly wow consumers with its latest gadgets Wednesday, it might delay that narrative from taking a wider hold. Otherwise, it's safe to expect the company won't be setting more eye-popping records any time soon.