Ap­ple woos new iPhone fans as upgrade looms

Uptick in users in last quar­ter bodes well with 10th an­niver­sary launch pend­ing

The Hamilton Spectator - - BUSINESS - ALEX WEBB

Ap­ple at­tracted a swath of new iPhone cus­tomers over the hol­i­day pe­riod, au­gur­ing well for a more sig­nif­i­cant upgrade to its flag­ship prod­uct this year — and the ser­vices rev­enue that these de­vices are in­creas­ingly gen­er­at­ing. The shares climbed to their high­est price in more than 17 months.

Ex­ist­ing users up­graded to the lat­est iPhone 7 mod­els at about the same rate as the iPhone 6S a year ear­lier, chief ex­ec­u­tive of­fi­cer Tim Cook said in a con­fer­ence call with an­a­lysts.

Yet Ap­ple still man­aged to sell 3.5 mil­lion more phones in the three months ended Dec. 31, in­di­cat­ing growth was driven by new cus­tomers.

The iPhone 7 rep­re­sented a mod­est up­date to its pre­de­ces­sor, the 6S, adding wa­ter re­sis­tance, an im­proved cam­era, battery life and pro­ces­sor while re­tain­ing sim­i­lar styling. Ex­pec­ta­tions are mount­ing for a more sig­nif­i­cant upgrade to Ap­ple’s flag­ship prod­uct later this year, which is the 10th an­niver­sary of the iPhone’s launch. That may per­suade more ex­ist­ing iPhone users to open their wal­lets for the next model.

“When we’re able to innovate with new gen­er­a­tions of prod­ucts, clearly that plays a role in the upgrade rate,” chief fi­nan­cial of­fi­cer Luca Maestri said.

Ap­ple’s re­search and devel­op­ment bud­get is grow­ing apace, hint­ing at new in­no­va­tions or prod­ucts in the works. R&D spend­ing jumped 19 per cent to $2.9 bil­lion in the first quar­ter.

Sam­sung Elec­tron­ics re­called its flag­ship Gal­axy Note 7 smart­phone in Septem­ber af­ter a fault that caused some bat­ter­ies to burst into flames. That re­duced com­pe­ti­tion in the mar­ket for large, high­end smart­phones and likely helped at­tract new cus­tomers, ac­cord­ing to New York-based BTIG an­a­lyst Walt Piecyk.

“Once they get you in their ecosys­tem, they’ve got a far bet­ter shot at get­ting you to buy an­other one of their phones,” Piecyk said. “If any­thing, the fact that it wasn’t stick­i­ness and ser­vices and up­grades makes you feel bet­ter about fu­ture growth.”

Amer­i­cans are tak­ing longer to upgrade their smart­phones, partly be­cause wire­less car­ri­ers have phased out plans that of­fer dis­counts for new de­vices ev­ery two years. That puts more pres­sure on hand­set mak­ers to find new cus­tomers — some­thing Ap­ple pulled off in late 2016.

Last year, Ap­ple suf­fered a rare year-over-year rev­enue de­cline, as iPhone sales tum­bled, par­tic­u­larly in China, where com­peti­tors such as Oppo and Vivo in­tro­duced cheaper phones with sim­i­lar per­for­mance. In the first fis­cal quar­ter, sales in main­land China grew, ex­clud­ing the ef­fect of a strong U.S. dol­lar, Cook said.

Cook’s re­sponse to last year’s sales de­cline was to push more ser­vices, such as Ap­ple Mu­sic, the App Store and iCloud. These busi­nesses are more prof­itable than iPhones and iPads, and they in­crease the chances cus­tomers will buy fu­ture Ap­ple gad­gets be­cause users’ apps and data are tightly woven into the com­pany’s op­er­at­ing sys­tems.

Ser­vices rev­enue grew 18 per cent to $7.2 bil­lion in the most re­cent pe­riod. Ap­ple said it aims to dou­ble the an­nual to­tal to more than $50 bil­lion by fis­cal 2021.

“The App Store is go­ing to be a sig­nif­i­cant driver of growth,” Maestri said. “A lot of it comes from the fact that our in­stalled base of de­vices around the world con­tin­ues to grow very well.”

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