Thursday, January 3, 2019

Why It Is So Hard to Sell iPhones This Year

Longer upgrade cycles bit Apple and Wall Street today. Apple acknowledged that its newest iPhones are not selling as well as everyone was expecting, though sales are not necessarily slower than sales of past models. Apple’s stock fell by 10 percent today, and the major indexes fell 3 percent.

There are a lot of problems with selling consumer electronics right now, and analysts haven’t done well in sorting out the various effects. The biggest immediate problem is economic anxiety in China, where consumers fear a recession and have cut back broadly on big-ticket purchases. Of course, it is the same story in the U.K., another significant market for Apple.

There are definite problems with the new iPhone designs. The price sticker is certainly an issue. No phone so expensive has ever sold well. But there is another issue. Consumers think most of the new features are a mistake. The new iPhone is not just a phone, but also, in effect, a medical device. Not everyone wants to carry a medical device around with them. It is a similar story with other new features. In selling the iPhone, Apple has to sell not just the device itself but the lifestyle that goes along with it, and with the latest iPhones, that is a lifestyle that even most iPhone users will find strange and unfamiliar. Will I really use these features? If I do, will I notice the benefit? How long will it take me to learn to use the new iPhone? The perceived learning curve for a new device is a deterrent for customers who already have a perfectly good iPhone. Add the impact of the suddenly higher price, and it’s understandable that customers who fear that Apple lost its way with its latest designs might want to wait until it finds its way again.

The longer life of a mobile phone is, all by itself, an obstacle for manufacturers. When Apple entered the market, it blew up the idea that a mobile phone is an inherently fragile device that requires a replacement every 10 to 20 months. The original iPhone lasted more than twice that long and durability has only improved since. I used my iPhone 3GS, only the third iPhone model, for a decade before replacing it, and even then, it was a newer model with a total price below $50 that prompted me to make the upgrade. By the time I retired the old iPhone 3GS, the case had cracks all over it and the battery life had declined by more than half, but it still worked well. To put it in context, it fared far better than the Motorola phone that I had previously, which cost about the same but was showing a greater degree of wear after just two years. Longer life was the main reason the iPhone decimated the sales of all preceding mobile phone models. Now the durability of Apple devices is hurting Apple’s own sales numbers.

But this is good news for consumers and the environment. By replacing phones less often, we spend less money, generate less trash, use fewer minerals, and in general lighten our collective footprint. The carbon impact isn’t much for a device as small as a phone, but every little bit helps in a world facing runaway climate change.

A new climate-motivated selectivity in consumer purchases is creating a change in perspective and habits. When consumers believe they should go to the trouble of making products last longer, it reduces the opportunity for all factories. The experience around austerity budgets during recessions shows that these changes in habits, once established, do not easily reverse. Replacement cycles for phones and other durable products will not go back to what they were before even if it were to produce an obvious advantage for the purchaser. If people are asking how long they can make a phone last, that question won’t go away. Even if a hesitation about the latest design is the problem, consumers will remember how long their current phone lasted, and that will permanently change their expectations for future phone purchases.

Concern about Internet privacy, one of the big topics of 2018, must also be hurting the market for Internet-connected devices such as phones. Massive privacy breaches at Facebook, Google, and other companies seen as the essential utilities of the Internet make people want to spend less of their lives online. An intention to get away from or depend to a lesser degree on the Internet will make consumers feel inconsistent if they go looking to buy a new Internet device.

Apple can’t solve the problems of the Internet, and it will just have to adjust to the longer replacement cycles of everything, but it can surely do better with its product designs. The main problem with the current iPhone models is that they represent a change in lifestyle that customers didn’t ask for and aren’t sure they want. Apple can focus more of its attention on the things that customers already know they want, and it can put less emphasis on features that customers have to be persuaded to consider. It might be too late to incorporate this shift in this year’s designs, but the marketing angles will see some adjustments, and certainly by next year Apple will have designs that have a more immediate appeal to potential buyers.

I think stock analysts are in denial about the longer replacement cycles that consumers are looking for, along with other trends that represent a consumer shift away from manufactured goods. The expected growth in these categories may never materialize if product lifetimes grow faster than the consumer base is growing. Stocks whose prices incorporate the expectation of future growth may be overvalued right now, and this effect could extend to most of the stocks being traded. During this transition, a wrenching stock market correction will be hard to avoid.