Apple’s Service Era Emerges Even as Lower Prices Stabilize China iPhone Sales

Two quarters ago, Apple saw its sales numbers in China crashed. I wrote that Apple was making a mistake, thinking that its customers did not have choices as it continued to misfire on “pricing“. With its attitude of increasing prices, Apple customers left in droves in China. Apple paid the price with lower market share!

In this world, you can do many things in the market. But one thing I will suggest you do not do is to assume that your customers and consumers are stupid. Yes, we get into that phase where we think we can do anything and get away with it. People, it does not work that way. The last time Apple reported earnings, it was the most capitalized private company on earth. Today, it has lost hundreds of billions of dollars on market value.

What was Apple’s problem? It misfired on its pricing. And when that happened, customers revolted, leaving the one oasis in the company (the iPhone) and sales dropped 15%. Apple made an increasingly commoditized product category a fashionista product, putting the cost of iPhone out of the reach of many people.

The drop on iPhone sales was not going to hurt just on monetary terms, the planned transition into services (which grew 19% to a record $10.9bn for quarter ended 31 December) depends on more people using the devices since services win on volume. That explains why Apple wants to lower prices so that it can get many devices out of the stores. In most markets, Apple had already re-priced iPhone to make the device affordable for customers.

Fast forward to last quarter, Apple made some changes. Yes, Apple reduced the prices on iPhone and in the process stabilized China iPhone sales. The results were not clearly pretty—profits and revenues fell, and iPhone sales dropped by 17%, their sharpest decline ever—but executives said price cuts in China led to a pickup toward the end of the quarter, sending shares up more than 10% in after-hours trading, as reported by Quartz.

The company announced its second-quarter earnings today (April 30). Wall Street had been expecting Apple to generate around $54.77 billion in revenue for the quarter, according to Nasdaq—in fact it posted $58.02 billion. While investors will likely be pleased that Apple came in above expectations, that revenue figure is still a drop of about 5% over the same period last year, when the company generated $61.1 billion.

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The iPhone has been Apple’s cash cow for over a decade now. As Apple has struggled to break into emerging markets like China and India, where brand loyalty is less important than value for money, it has had to find new ways to generate additional cash from existing customers. For the past three years, its services business—which includes sales of apps, games, movies, music, cloud storage, and Apple Pay fees—has been the company’s second-largest business. Services have eclipsed sales of Macs, iPads, and everything else the company sells beside phones.

The company’s strategy on services is also paying off. Largely, if Apple reduces prices of hardware, it can get the products in the hands of many to grow the service revenue.

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