Ap­ple seller on the block as new £1,000 iphone looms

Ten years since Steve Jobs held up the first iphone, the tech gi­ant has upped the gad­getry, and price, for the lat­est $1,000 in­car­na­tion, writes James Tit­comb

The Sunday Telegraph - Money & Business - - Front Page - By Lucy Burton and James Tit­comb

BRI­TAIN’S big­gest Ap­ple re­seller has been put up for sale amid mount­ing con­cerns that con­sumers and busi­nesses are hold­ing on to smart­phones for longer.

Pri­vate eq­uity group Northedge Cap­i­tal is seek­ing a buyer for Jig­saw24, kick­ing off the process weeks af­ter Dixons Car­phone is­sued a profit warn­ing be­cause of a slow­down in the mo­bile market.

The Manch­ester-based pri­vate eq­uity house has hired Clear­wa­ter Cor­po­rate Fi­nance to ap­proach buy­ers for the busi­ness, whose clients in­clude Chan­nel 4, BBC Sport and News UK, sources have told The Sun­day Tele­graph.

Northedge, which spe­cialises in in­vest­ments across north­ern Eng­land, bought a ma­jor­ity stake in the Not­ting­ham-based group, which sells iphones, ipads and Macs to busi­nesses in the UK, in 2013 and has since seen it profit from the boom­ing pop­u­lar­ity of Ap­ple prod­ucts. The com­pany gen­er­ated a turnover of £125m in the year to May, up from about £60m in 2013, and now claims to be the largest re­seller of Ap­ple prod­ucts to busi­nesses in the UK with over 23,000 cus­tomers.

A deal is ex­pected to be an­nounced at the end of this year or early next.

Sources close to the process in­sisted the move was not linked to con­cerns that peo­ple had reached “peak phone” con­sump­tion and said the group wanted to exit at a time that left “plenty of run­way for the next peo­ple”.

Mean­while, Ap­ple is set to re­lease a new range of iphones this week, in­clud­ing a high-end model cost­ing more than £1,000. At an event at the com­pany’s new head­quar­ters on Tues­day, it is ex­pected to un­veil the rad­i­cal, new model fea­tur­ing a big­ger screen, glass de­sign and fa­cial recog­ni­tion. In­vestors hope the new iphone will prompt growth af­ter two years of flat sales.

In the sum­mer of 2013, it looked very pos­si­ble that Ap­ple’s best days were be­hind it. Two years ear­lier, Steve Jobs, its leg­endary founder, had died, throw­ing the com­pany’s rep­u­ta­tion for life-chang­ing in­no­va­tions into ques­tion. Sales of Ap­ple’s mir­a­cle prod­uct, the iphone, were not grow­ing as fast as they once had. Sales of phones made by Sam­sung, and run­ning Google’s ri­val An­droid op­er­at­ing sys­tem, topped the charts. The surg­ing share price that had ac­com­pa­nied Jobs’ string of hit prod­ucts, lead­ing Ap­ple to over­take Exxonmo­bil as the world’s most valu­able public com­pany, had gone into re­v­erse.

The prob­lem, pun­dits sum­marised, was that Tim Cook, Ap­ple’s new chief ex­ec­u­tive, was re­fus­ing to court the lower end of the market. The iphone was too ex­pen­sive for most con­sumers in Asia, con­ti­nen­tal Europe and South Amer­ica, the world’s boom­ing smart­phone mar­kets. The an­swer, so the the­ory went, was sim­ple: Ap­ple needed to in­tro­duce a cheap iphone aimed at emerg­ing mar­kets.

Cook com­plied, to an ex­tent. In Septem­ber 2013, for the first time, Ap­ple un­veiled two dif­fer­ent iphones, the ex­pected high-end model known as the 5s, and a cheaper ver­sion made of plas­tic and lack­ing some of the new fea­tures of its pricier si­b­ling. At $549 (£420), the iphone 5c was hardly cheap, but was Ap­ple’s most af­ford­able phone to date.

Things did not go to plan and, by the com­pany’s stan­dards, the 5c was a flop. Just four months af­ter un­veil­ing the phone, Cook ad­mit­ted that its ten­ta­tive foray into bud­get de­vices was not go­ing as hoped. “It was the first time we’d ever run that par­tic­u­lar play, and de­mand per­cent­age turned out to be dif­fer­ent than we thought,” he said.

The fol­low­ing year, the ex­per­i­ment was not re­peated. The new models – the iphone 6 and 6 Plus – went the op­po­site way, be­com­ing big­ger and more ex­pen­sive. They trig­gered record sales and a spec­tac­u­lar share price re­vival. Shop­pers, it turns out, wanted bet­ter phones, not cheaper ones.

This week, Ap­ple is ex­pected to push that the­ory fur­ther than ever be­fore, re­leas­ing an iphone that breaks the $1,000 bar­rier. The “iphone 8”, as fans are spec­u­la­tively call­ing it – the name is one of the few things that Ap­ple has man­aged to keep se­cret – marks 10 years since the re­lease of the first iphone in 2007.

Ap­ple is not known for rid­ing on past glo­ries, but an an­niver­sary brings

cer­tain ex­pec­ta­tions, and since the ba­sic de­sign of the iphone has not changed in three years, fans are hop­ing for some­thing special.

To add to the sense that this year is a lit­tle dif­fer­ent, the event will be the first to be held at Ap­ple’s new $5bn head­quar­ters, a colos­sal dough­nut­shaped build­ing that opened its doors ear­lier this year, and will even­tu­ally hold 14,000 em­ploy­ees, as well as an un­der­ground au­di­to­rium, miles of run­ning tracks and acres of wood­land. Of the three new iphones that Cook is likely to re­lease, two – pos­si­bly called the 7s and 7s Plus – will fea­ture few rad­i­cal up­grades, largely mim­ick­ing de­signs of re­cent years. The third “8” model will be dif­fer­ent, hav­ing a big­ger and brighter dis­play that dom­i­nates the front of the phone, a 3D sen­sor that can scan the world around it to recog­nise faces, and a slick new glass de­sign.

There is no doubt that Ap­ple will sell tens of mil­lions of each de­vice, but the iphone 8 will be seen as a cru­cial test of the com­pany’s abil­ity to in­no­vate and its price, ru­moured to range from $999 to $1,199, will be a test of just how much its fans are will­ing to pay.

Ap­ple is hardly un­der the pres­sure it was in 2013. Its share price, driven by op­ti­mism about its boom­ing soft­ware di­vi­sion and the pos­si­bil­ity of tax re­form from Don­ald Trump, is at an all-time high, hav­ing risen by 40pc this year. Its market value sits at $830bn and some ex­pect it to be­come the first tril­lion-dol­lar com­pany in the fu­ture.

But the rapidly ex­pand­ing smart­phone market that once drove its growth has pe­tered out. Ac­cord­ing to re­search from Gart­ner, global sales grew 6.7pc in the sec­ond quar­ter of this year; in the same quar­ter four years ago it was 46.5pc. The growth that is left is in de­vices priced at un­der $200, half the price of the cheap­est iphone. In ma­ture mar­kets, con­sumers are hold­ing on to phones for longer. Seb James, the chief ex­ec­u­tive of Dixons Car­phone, re­cently said that peo­ple were hold­ing on to phones for 29 months, on aver­age, rather than the 24 they used to.

“It’s a broad over­ar­ch­ing trend in the in­dus­try,” says Ben Wood, an an­a­lyst at CCS In­sight. “Peo­ple are keep­ing their phones longer. Fif­teen years ago you had flip phones and can­dy­bar phones, there was a real im­per­a­tive to up­grade ev­ery 18 months be­cause things were mov­ing for­ward at tremen­dous pace. That in­no­va­tion has faded off.

“[With to­day’s smart­phones] we have a dom­i­nant form fac­tor of a rec­tan­gle, as big a screen as pos­si­ble and as big a bat­tery as pos­si­ble. The soft­ware [which runs on old de­vices as well as new] is now as im­por­tant as the hard­ware, so there’s less need to up­grade.”

The trend has been ev­i­dent in Ap­ple’s results. Last year, iphone sales fell for the first time in history, with own­ers less in­ter­ested in up­grad­ing to the 6s model re­leased in 2015. In re­cent months, af­ter the launch of the iphone 7 12 months ago, they have bounced back, but only slightly. In June, the com­pany was over­taken by Huawei, the Chi­nese gi­ant that has flooded ev­ery area of the market with af­ford­able and re­li­able hand­sets, to fall to third place by market share, ac­cord­ing to Coun­ter­point Re­search. While it is prob­a­bly a tem­po­rary blip, it was the first time that the du­op­oly en­joyed by Sam­sung and Ap­ple has been bro­ken in years. Faced with flat iphone sales, Ap­ple has tried to shift at­ten­tion to­wards growth in other prod­ucts, the “ecosys­tem” of soft­ware and gad­gets de­signed to work seam­lessly with the phone.

It has fo­cused ef­forts on mak­ing its ipad tablet fit for pro­fes­sion­als, pitch­ing it as a se­ri­ous PC re­place­ment. It has launched pe­riph­er­als like the Ap­ple Watch and Air­pod head­phones. Paid-for soft­ware like apps, cloud stor­age and the Ap­ple Mu­sic stream­ing ser­vice has been pushed to the fore at a com­pany whose her­itage is more steeped in hard­ware de­sign. Later this year it will re­lease the Home­pod, a wire­less speaker fea­tur­ing the Siri voice as­sis­tant, playing catch-up to ri­val de­vices from Ama­zon and Google.

The strat­egy has worked up to a point. Ap­ple is the world’s largest tablet maker, smart­watch maker and wire­less head­phones maker. Ap­ple Mu­sic has 27m sub­scribers, mak­ing it sec­ond only to Spo­tify. Rev­enue from its App Store grew 40pc last year.

“They are start­ing to ex­tract ad­di­tional rev­enue from users, even if they keep their phone for longer,” says Wood, who adds that com­ple­men­tary prod­ucts make the iphone the “Hotel Cal­i­for­nia of smart­phones – once you’re in it’s so hard to leave”.

Any of these busi­nesses, in iso­la­tion, would be enor­mous – Cook is fond of say­ing its soft­ware and ser­vices di­vi­sion alone gen­er­ates rev­enues equal to a For­tune 100 com­pany.

On stage this week, Ap­ple’s other di­vi­sions are likely to get just as much time as the main event. The com­pany is ex­pected to un­veil a new ver­sion of the Ap­ple Watch that can work with­out be­ing paired to the iphone, a fea­ture that many users have asked for and which ri­val smart­watches have claimed for some time.

A new ver­sion of the Ap­ple TV set-top box should also be un­veiled, a po­ten­tial cur­tain-raiser for Ap­ple’s as­sault on Hol­ly­wood. The com­pany is re­peat­edly tipped to be pre­par­ing a war chest that will see it com­pete with the likes of Net­flix and Ama­zon, and was last week re­ported to have joined the race for rights to the James Bond film fran­chise.

Ap­ple ex­ec­u­tives are likely to spend ex­tra time pro­mot­ing “ARKIT”, the com­pany’s new soft­ware al­low­ing de­vel­op­ers to cre­ate aug­mented re­al­ity apps in which vir­tual crea­tures and icons can in­ter­act with the real world via the iphone’s cam­era. Cook has barely con­tained his ex­cite­ment for AR, re­cently say­ing it makes him want to “yell out and scream”, and some believe the tech­nol­ogy could lead to a soft­ware boom sim­i­lar to the launch of the App Store in 2008.

None of these busi­nesses, how­ever, com­pare to the mon­ster that is the iphone. In the first six months of this year, the iphone brought in $58bn in rev­enue, six in ev­ery 10 of the dol­lars Ap­ple made. A mar­ginal lift in iphone sales would have a greater im­pact than rev­enue from the Ap­ple Watch dou­bling.

What, then, to do about the iphone? Ap­ple has pointed to in­creas­ing num­bers of peo­ple switch­ing from ri­val man­u­fac­tur­ers, but the ma­jor­ity of con­sumers have set­tled on a favourite sys­tem. Well-re­ceived new de­vices from Sam­sung and Google, which be­gan sell­ing its own phones last year, may also have stemmed a tide of switch­ers.

Some an­a­lysts are ex­pect­ing the pent-up de­mand for the new iphone to trig­ger a “su­per-cy­cle” of up­grades, in which con­sumers that have waited two, three or more years for a new phone even­tu­ally pull the trig­ger.

An­a­lysts at Credit Suisse believe iphone sales will rise from 229m this year to 250m next, and 270m the year af­ter. Oth­ers are scep­ti­cal that so many mil­lions are an­tic­i­pat­ing the new de­vices quite so ea­gerly: the truth be­ing that most peo­ple are not so tuned in to the tech­nol­ogy in­dus­try’s news cy­cle as to base their up­grade plans on the ca­dence of Ap­ple’s roadmap.

So, in­stead, the com­pany’s best bet may be to sim­ply in­crease prices. Its cus­tomers are fa­mously loyal and since the pro­lif­er­a­tion of soft­ware and pe­riph­er­als that ac­com­pany the iphone has made it more dif­fi­cult than ever to switch, they may be will­ing to pay more for their next de­vice.

An­a­lysts at UBS believe that Ap­ple may have scope to raise the aver­age price of the iphone by as much as $115 with­out hav­ing too much of an ef­fect on sales, some­thing that the com­pany is unique in be­ing able to do. With Ap­ple charg­ing $969 for the most ex­pen­sive model of last year’s iphone 7, the high-end iphone 8 could eas­ily pass the $1,000 mark. Prices in the UK, which in­clude VAT, would break the £1,000 bar­rier.

En­ter­ing four dig­its – ter­ri­tory that has to date only been crossed by lux­ury phone mak­ers – could spark a con­sumer back­lash, es­pe­cially among those who have al­ways grum­bled about the “Ap­ple tax”, a per­ceived premium that crit­ics say owes more to the brand name than per­for­mance. But Ap­ple has man­aged to steadily raise prices in re­cent years, even while its in­no­va­tive streak has slowed down.

In the fi­nal three months of last year, the aver­age sell­ing price of an iphone was $694.57, an all-time high. Two years ear­lier it was $687.30, and two years be­fore that it was $641.50.

UBS ex­pects a much more sig­nif­i­cant in­crease in fu­ture, fore­cast­ing a $50 leap in aver­age sell­ing prices this year alone, and mak­ing the iphone ac­count for an even greater pro­por­tion of total sales.

In the 10 years since Steve Jobs held up the orig­i­nal iphone, Ap­ple has tried a lot of new tricks. But as the com­pany ush­ers in the era of the $1,000 smart­phone, its most fa­mous prod­uct is as cru­cial as ever.

‘Ap­ple is not known for rid­ing on past glo­ries, but an an­niver­sary brings cer­tain ex­pec­ta­tions’

‘A new Ap­ple TV set-top box should also be un­veiled, a cur­tain-raiser for Ap­ple’s as­sault on Hol­ly­wood’

Tim Cook, the Ap­ple CEO. Top, the com­pany’s new head­quar­ters in Cu­per­tino, Cal­i­for­nia, de­signed by Nor­man Foster

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