Everyone is preoccupied by the recent slowdown in iPhone sales. During the last two quarters, the revenues of this product dropped by 18.4 and 23.3 percent. After carefully analysing the iPhone carrier expansion strategy, one thing comes to mind: the easy growth is over.
What follows is the detail of my investigation over the last couple of weeks, which in no way has been easy. It has the following assumptions:
- Only 44 carriers are taken into account, being the largest in the most wealthiest countries in the world.
- Per a study by Wells Fargo, Apple has a total of 433 carriers worldwide as of December 2015. But most of those carriers are minor players in regions and countries with little purchasing power.
- With this 10 per cent we cover about 80-90 per cent of the total addressable market by the iPhone.
- All the subscriber data has been obtained from the last available figures of each carrier in 2015-2016. E.g. when a carrier is added in 2007, it does so with the most current subscriber base.
- These subscriber base figures are based on total mobile subscribers, i.e. feature phones and smartphones. Smartphone and 4G penetration greatly varies between countries and is not taken into account.
- The data analysed covers the 2007 to 2014 period, since in 2015 and 2016 no major players were added to the iPhone carriers lineup.
- iPhone revenue data is calendar based, rather than Apple’s fiscal year.
Let us have a look then at the iPhone carrier expansion strategy.
The iPhone Carrier Expansion Strategy Evolution
In the above table we find the evolution of the iPhone carrier expansion strategy pursued by Apple. It is obvious now that Apple targeted the largest and most advanced countries in the world first.
It is important to note that it did so with exclusive deals that allowed only one carrier to offer the iPhone per country. That is what happened in the first four: US, UK, Germany and France. Movistar in Spain agreed on these terms too, as did a few others.
But these exclusive deals were rapidly challenged by competing carriers in France, Germany and Spain. The lawsuits didn’t matter as Apple ended these deals shortly after. They had fulfilled their purpose: gaining the support of a carrier and its advertising dollars, making sure they will push the new iPhone as fast as possible and, simultaneously, allow Apple to grow its supply chain capacity.
Let us look into the subscriber base that each carrier adds to the iPhone addressable market:
Note: the negative growth in the Rest of Asia Pacific region makes further calculations easier to make. Apple changed the way it computes its financial reporting regions in 2012.
Grouping each carrier to its corresponding region results in the above graph. 2008 was a big year for the iPhone. The device added as much as 16 new carriers to the existing initial 4. That is, almost half of all the largest carriers joined the iPhone Club by 2008.
There are two large jumps in the iPhone’s addressable market. The first one and as we have already seen, is in 2008. The second one is in 2014, when China Mobile joined the iPhone Club. We will talk about this carrier later in the article.
But of course and as it turns out, not all countries are born equal (just like not all users are born equal). Having a large subscriber base doesn’t translate into iPhone sales. At least, in the immediate term.
How does the iPhone carrier expansion strategy materialised in sales over the years?
iPhone Sales and Carrier Expansion
The iPhone carrier expansion strategy had a clear goal for Apple: support the growth of its new business. The above graph shows us how little Apple earned with the iPhone in its early years. Not even $15 billion between 2007 and 2009.
But something happened in 2010 and 2011. In 2010, revenues doubled the amount generated in the three previous years (from $15 billion in 2007, 2008 and 2009 to $30 billion in 2010). In 2011, revenues doubled again, from $30 billion to $60 billion.
What was going on?
I believe there was several factors that explain this huge jump in iPhone revenues:
- The exclusive deals. These deals allowed Apple to create awareness of their new phone ensuring the support of several key carriers. They pushed the iPhone with promotions, data plans and subsidies. Making sure most consumers could afford one. And as we said, at the same time build its own supply chain capacity.
- The end of exclusive deals. As we discussed earlier, the first deals Apple signed with carriers were exclusive ones. But once those deals expired, other carriers from the same countries started to join the iPhone Club, adding to the existing subscriber base. This is the case of the UK, where EE and Vodafone in 2009 and 2010 joined the club. Bouygues Telecom and SFR were added in 2010 in France. Bell and Telus in 2009 in Canada. Vodafone and Orange in Spain in 2010. Vodafone and O2 in Germany in 2010 too. Verizon, Sprint and C Spire started selling the iPhone in 2011 in the US.
- The mainstream iPhone. These newly added iPhone carriers amounted to about 400 million subscribers. More importantly, they were eager to get an iPhone since it started to become a mainstream product. The iPhone 3GS and iPhone 4 were the devices that truly put Apple’s phone in the map for the general public.
The first years were all about getting the iPhone in as many key carriers as possible and letting the regular consumer get acquainted with it.
iPhone Expansion Plans by Region
In order to fully grasp the huge effort of Apple to expand its iPhone reach, it is very useful to look into the expansion by region. The following graphs are shown in a more or less chronological order:
Americas expansion was quite quick, with the addition of AT&T at the very beginning and several carriers from South America in the following years. Verizon entered the iPhone Club in 2011, as did Sprint and C Spire. T-Mobile did so in 2013.
Europe was the fastest market to ramp-up. As soon as 2010, all major European carriers were on board of the iPhone train.
Japan is one of the major markets of the iPhone. Evolution was slow but steady, adding SoftBank in 2008, a u in 2011 and finally DoCoMo in 2013, one of the most important carriers of the globe.
These two graphs better show the change in financial reporting made by Apple in 2012. The amount of potential iPhone customers brought by China Mobile in 2014 is simply unprecedented. More than 840 million subscribers.
Peak iPhone Carrier Expansion
It is obvious that the iPhone growth tale could not go on forever. Apple barely added new carriers from 2011 to 2013, with the notable exception of DoCoMo in Japan and T-Mobile in the US, both in 2013.
When people started doubting the iPhone story, Apple stroke a deal with the world’s largest carrier: China Mobile, a behemoth with more than 840 million subscribers. This added a sizeable amount of potential iPhone customers to Apple’s addressable market. And that immediately showed in the iPhone revenues of 2014.
After that deal was done, though, the iPhone carrier expansion strategy peaked. No major carriers remained in the world to continue fueling the growth. Only the smaller ones, but those are a drop in the ocean.
Many have turned to India in hopes of regaining the lost impetus of recent quarters. But it is still in its infancy when it comes to GDP per capita and 4G networks and won’t be a major player in the near term.
That is why we are entering a new normal in the iPhone growth story.
A New Normal in the iPhone Growth Story
The iPhone carrier expansion strategy is pretty much done. It is time for Apple to figure out a new strategy to foster iPhone growth. There are several ways for Apple to continue growing as soon as the iPhone 6 and iPhone 6 Plus super cycle is over:
- Android switchers. Tim Cook has been reporting that Android is losing users to iOS faster than ever. There is reason to believe this trend will continue in the future as more and more people buy their first smartphone. And there is no mystery here, because as soon as you realise how much value you put in it, your needs are harder to satisfy. The iPhone is constantly viewed by consumers and competitors alike as the most desired and capable smartphone. That is why consumers are jumping ship from Android to the iPhone. This is what Google’s strategy shift has to face with its new Pixel phones.
- The iPhone Upgrade Program. Apple announced this new leasing program to ensure that the best iPhone clients stayed within their reach. This effectively turns the iPhone into a service, where its users get a new iPhone every year or two, depending on their needs.
- iPhone cycles. Over the course of the years, Apple has been adding different kinds of users. Early adopters upgrade their phones every year, regular consumers every two or three years and the so called laggards once every four or five. As a consequence, upgrade cycles have lengthened slightly, from 20-24 months to 26-28 months. Apple’s job is to try and foster the upgrades through two strategies: vertically, creating compelling new phones every year; horizontally, with products that build on top of the iPhone like the Apple Watch, AirPods, iMessage and AR/VR (in the future).
Apple is in the smartphone business for the long run, not for the shortsighted quarter vision of Wall Street. The iPhone carrier expansion strategy may be exhausted, but it is by no means the end of the iPhone growth.
At the same time, as the iPhone approaches PC and Mac like upgrade cycles in the future, Apple is already willing to make the ultimate sacrifice: the cannibalisation of the iPhone. By the time the iPhone becomes less relevant, Apple may have another set of products ready to pick up the baton.