Apple’s services business would benefit from a lower-priced model
Next week, attention will be firmly on Apple’s launch of its new flagship iPhone, but arguably the more important element to watch will be what Apple does with its entry-level iPhone SE. The product assumes a new importance in the wake of Apple’s reported first-ever decline in iPhone shipments in 2018, followed by declining sales in the first two quarters of this year. This would be the first low-cost model from Apple since it launched the iPhone SE in March 2016 at a starting price of $399.
Since then, the iPhone SE has become one of the best-selling phones of all time. In fact, although the device has been around for three and a half years, the iPhone SE continues to be sold by some networks, particularly on prepaid tariffs in Western markets, allowing Apple to capture some part of the entry-level crowd. A decision to update the iPhone SE would enable Apple to gain ground in emerging markets too, where consumers are extremely sensitive to the price of handsets.
Apple’s top two global rivals, Samsung and Huawei, have been introducing lower-priced devices in order to grow volumes in a market that has flattened. Samsung, in particular, has been concentrating on its Galaxy A series of phones, building the line as value-for-money devices. While priced below the company’s popular Galaxy S and Galaxy Note series of top-tier smartphones, the Galaxy A range has helped Samsung gain market share globally.
Next week, Apple will unveil its latest generation of smartphone flagships. They will be expensive devices. When new iPhones were unveiled in September 2018, the iPhone XR, at $750, was considered a relatively low-cost device. To its credit, the XR has sold extremely well in markets around the world.
A lower-cost model would be a smart move for Apple to defend its market share and boost iPhone upgrades at a time when global smartphone shipments are continuing to decline. Bringing in new iPhone users is also crucial for Apple to continue to grow its wearables and services businesses, vital growth areas for the company. Given the brand loyalty that Apple enjoys, iPhone users are more than likely to become iPhone users for life.
Apple’s emphasis on its services business and its objective to double services revenue between 2016 and 2020 to about $50 billion means the hardware business takes on a new significance. The iPhone will remain the company’s engine of revenue and profit for years to come. However, with hardware also the vehicle for a widening range of services with recurring revenue, a lower-cost point of entry for consumers becomes increasingly essential. With competition rising and replacements slowing, the gateway to the Apple ecosystem has never assumed greater importance.
A new, cheaper iPhone could boost sales for Apple next spring, when the life cycle of what would be the iPhone 11 family of smartphones will begin to wane. More importantly, it’s a new beachhead in its quest beyond $50 billion in annual services revenue.
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