Technological change often comes faster than what the people in it’s thrall can predict. It wasn’t that long ago when you and everyone else you knew were probably using AOL Instant Messenger, around the same time that dude, you were getting a Dell. Then one day you weren’t. Blackberrys used to be so popular that “to bbm” someone made it into the dictionary, but then the devices all but disappeared. These inflection points are seldom based on the companies failing their customers, but rather because consumers simply moved on.
Apple’s success in the past year with the iPhone 6 has been so spectacular that it’s hard not to assume it will go on. Unfortunately that’s usually when the turn starts, without anyone noticing. To question whether the iPhone’s cultural and economic dominance is peaking is not to say that one of its competitors will overtake it, as It wasn’t MSN Messenger or Hewlett Packard that took down the major players of their day, but rather their customers’ apathy. Apple now stands at the same precipice.
The first threat to the iPhone’s ongoing success is the iPhone’s ongoing success. Apple realized long before any of its competitors that portable technology is as much a fashion item as it is a gadget, and marketed its products accordingly. But now that so many different kinds of people own an iPhone, it’s no longer cutting edge fashion. Being popular in the tech world might feed on itself, but being too popular in fashion is dangerous.
The second threat to the iPhone, and smartphones in general, is the success Apple and its competitors have had in cramming every imaginable feature into the latest devices. Today’s iterations are more like “a computer in your pocket” than a communication device, and that’s a liability. Once smartphones become little computers then the only improvements left to be made are incremental. The next model will be a bit faster and have a better camera, but what it probably won’t have is a revolutionary feature that will dramatically shift user experience. There was a time in the PC business where the release of every new Windows version or Intel processor was a milestone and a boost to sales, but the changes eventually became incremental, and it was PC makers who paid the price.
Not all aspects of the iPhone’s dominance have followed historical precedence however. Thanks to the unique position of wireless carriers in the smartphone market, Apple (and to a lesser extent its rivals) have enjoyed heightened US adoption thanks to the carrier subsidy model. When smartphones first came out it wasn’t a given that everyone would jump to an expensive data plan. To drive adoption major carriers like Verizon and AT&T decided to subsidize smartphone purchases in exchange for locking customers into a 2 year contract. This model was beneficial for iPhone sales in several ways.
The overall cost of owning an expensive phone and upgrading regularly was now lower. Since the monthly data bill did not change whether you were under contract or not, all consumers were encouraged to always upgrade to the latest model as soon as possible. iPhone owners enjoyed a third perk, as iPhones on average cost more than their competitors. Since the carriers decided to make the initial contract fee $200 regardless of whether you were signing up for a $700 iPhone or $500 Android device, iPhone users were effectively being subsidized by non-iPhone users.
All of these benefits are about to end. As smartphones have gone mainstream, carriers no longer need to subsidize the phones to get users to pay for data plans. To them it doesn’t matter if you have the latest iPhone or your old phone from 2 years ago. This is why they have been moving towards a monthly installment model and Verizon, the nation’s biggest, recently announced an end to all phone subsidies and contracts. Instead subscribers can now either bring in their own phone, pay full price for a new one or go on an installment plan where they pay the full cost of the phone in monthly increments.
This move from Verizon is bad for all smartphone makers because for the first time consumers are forced to choose how much they spend on a new phone. Back when all new phones still cost $200 the incentive was to choose the most expensive option (which was almost always an iPhone) and to upgrade regularly. But now by using an old phone or choosing a cheaper one consumers can save money. Those savings occur either all up front or on a monthly basis, so the likelihood of impulse purchases of the latest and thus most expensive models will go down. If a user doesn’t upgrade at all their monthly bill will drop substantially once their existing phone is paid off, making the cost of a new phone that much more apparent.
As the dominant market leader and the company with the biggest margins Apple has the most to lose to these changing industry dynamics. Premium brands always benefit the most from an industry subsidy, but when that subsidy ends, they suffer the most. It would be one thing if Apple could counter the de facto price increase on all iPhones going forward with significant improvements, but alas the commoditization of smartphones in general means those days are behind us. Consumers are about to be asked to pay more for a phone that stands out less.
In the past few weeks Apple’s stock has seen significant turmoil, along with the rest of the market. Although some of Apple’s decline has been rightly attributed to the economic turmoil in China, the changing industry dynamics in the US should not be ignored. Current reports indicate that Apple has ordered a record number of units from its suppliers for the release of the upcoming iPhone 6s. Record uncertainty is about to meet record supply.
Although Apple offers many other products none of them come close to to the iPhone in terms of sales volume or profits. That is why in the coming years the company will live or die by its flagship product. To borrow their long time marketing slogan, if it’s not an iPhone, then its not an iPhone.
Looking back to the Dell example, it now seems fairly obvious that the stock and company were bound to fall down to earth as its products became increasingly commoditized while lower cost competitors moved in, and sexier gadgets like smartphones took center stage. Someday future analysts might feel the same about Apple and its historic iPhone success.