Tepid de­mand for lat­est iphone a con­cern for Ap­ple

Mint ST - - CORPORATE - BY SHIRA OVIDE feed­back@livemint.com NEW YORK

It was al­ways go­ing to be tough to get a han­dle on the ini­tial sales suc­cess of the lat­est iphone mod­els. But some early signs are not en­cour­ag­ing for Ap­ple Inc. The lat­est dour data came from AT&T Inc. late on Wed­nes­day.

As part of an early dis­clo­sure of se­lected third-quar­ter fi­nan­cials, the com­pany said the num­ber of its mo­bile sub­scribers that had swapped out old smart­phones for newer mod­els fell by 900,000 from the third quar­ter of 2016.

The quar­ter in­cluded about a week of US sales for Ap­ple’s iphone 8 mod­els, one of two new smart­phone lines the com­pany de­buted last month. If the iphone 8 had been a hit out of the gate, then I would have ex­pected AT&T’S upgrade num­ber might at least have fallen less dra­mat­i­cally.

Some an­a­lysts have ex­pected new smart­phones from Ap­ple and other com­pa­nies to push up the share of peo­ple who upgrade to new phones, af­ter sev­eral years of trend­ing down­ward. But Jef­feries an­a­lysts es­ti­mate that AT&T’S dis­clo­sure im­plies an upgrade rate of roughly 4% in the quar­ter—mean­ing that is the share of AT&T’S ex­ist­ing cus­tomers on rolling con­tracts who opted to trade up to a newer smart­phone. The stock­re­search firm had ex­pected a rate of 4.5%. In the third quar­ter of 2016, AT&T said its upgrade rate was 5.1% for its US con­tract cus­tomers.

One week of sales from one phone car­rier isn’t enough to call the iphone 8 a hit or a flop. But as­tute Gadfly read­ers know th­ese phone up­grades are es­sen­tial for Ap­ple. AT&T’S dis­clo­sure is only one data point, but it con­trib­utes to the feel­ing that Ap­ple may have mis­fired with the iphone 8.

Since Ap­ple re­leased the iphone 8 and its more-ex­pen­sive iphone X si­b­ling, in­vestors have al­ter­nated between worry and en­cour­age­ment. The ini­tial pro­fes­sional re­views of the iphone 8 weren’t over the moon.

Par­tic­u­larly when com­pared with the iphone X, the iphone 8 seemed like the less­capable kid sis­ter, and not much of an im­prove­ment on the prior year’s iphones.

Many an­a­lysts have said peo­ple who are most likely to buy new iphones will wait un­til Novem­ber or later, when the iphone X model will go on sale.

The op­ti­mistic take is that slow ini­tial sales of the iphone 8 line are a good sign for Ap­ple, be­cause it may mean more peo­ple will in­stead buy the more-ex­pen­sive iphone X.

But Ap­ple ab­so­lutely needs the iphone 8 to sell well, too. There is a lim­ited sup­ply of es­sen­tial parts for the iphone X mod­els, and the com­pany can’t make enough to cover the 250 mil­lion or so new iphones ex­pected to be sold glob­ally in the next year.

The iphone 8 needs to be a palat­able Plan B for those peo­ple who can’t get their hands on the lim­ited num­ber of iphone X mod­els, or can’t stom­ach the $1,000-and-up price tag. At least in the US, the iphone 8 should far out­sell its si­b­ling.

In a re­cent Mor­gan Stan­ley sur­vey, 34% of re­spon­dents in the US who said they planned to pur­chase a new iphone said they would opt for the iphone X. (A ma­jor­ity of re­spon­dents in China—ar­guably the most im­por­tant growth mar­ket for Ap­ple right now—said they planned to buy the iphone X model.)

AT&T’S dis­clo­sure also isn’t great news for Sam­sung, which started sell­ing a new phone in the third quar­ter, too. But in the US, Ap­ple’s big­gest com­pe­ti­tion isn’t Sam­sung or other smart­phone com­pa­nies. The num­ber one ri­val is Ap­ple it­self. The com­pany sells the vast ma­jor­ity of new iphones to peo­ple who al­ready own one. And for many of th­ese peo­ple, the al­ter­na­tive to bring­ing home a shiny new iphone is hold­ing onto their ex­ist­ing phones—duct-taped, shat­tered screens and all—for a bit longer.

If Ap­ple and Sam­sung aren’t per­suad­ing peo­ple to ditch their old phones right now, then their sales might not go up as quickly as in­vestors ex­pect. Ap­ple will re­lease its own third-quar­ter fi­nan­cial in­for­ma­tion soon, giv­ing in­vestors a bet­ter, although still in­com­plete, pic­ture of iphone de­mand. No mat­ter the sales num­bers for the next few months, the real test will be in the March and June quar­ters, when Ap­ple pre­sum­ably will have a larger sup­ply of iphone X de­vices to sell.

Still, the iphone 8 mat­ters, and in­vestors are wise not to shrug off signs of soft­ness.

BLOOMBERG GADFLY

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