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Devices/smartphones

Apple's Planned Cover-Up Meets Backlash

Full disclosure is fine provided the numbers do not reveal some awkward truths. If they show you are jacking up prices to compensate for a slowdown in unit sales, even though your products are not getting much better, an easy move is to stop publishing them.

Which is exactly what iPhone Inc (or Apple, as it prefers to be called) has indicated it will do in its next financial report. In its recent fourth quarter (covering July to September), Apple Inc. (Nasdaq: AAPL) sold nearly 47 million iPhones, a number that was little different from unit sales a year earlier. But the average selling price (ASP) of an iPhone soared 28%, to about $793. Thanks to that increase, Apple's sales were up nearly a fifth year-on-year, to $62.9 billion, with net profit rising 32%, to $14.1 billion. Had the ASP remained static, revenues would have grown just 4%.

iPhone Average Selling Price ($)
Source: Apple. Notes: The ASP has been calculated by dividing product revenues by unit shipments for each quarter; the figures are at current exchange rates for each quarter.
Source: Apple. Notes: The ASP has been calculated by dividing product revenues by unit shipments for each quarter; the figures are at current exchange rates for each quarter.

This is not the kind of scrutiny the world's most overvalued company wants, and so it has decided to be far less transparent in future. Starting in the first quarter of 2019, it will no longer reveal its unit sales for the iPhone. To make this all seem like a more considered, strategic move, Apple will also stop publishing details of unit shipments for iPads and Macs, which have similarly become more expensive. But few people care as much about the details of these products: Together, they accounted for just 18% of company revenues in the recent quarter.

Apple has presented this shift as part of its grand plan to focus on services, but investors are not buying that story. In pre-market trading on the Nasdaq, the company's share price was down about 6.6% at the time this story was published. The focus on services is surely not in doubt. But Apple can probably manage that while it continues to publish unit figures, any sane investor must think.

The reaction of Timothy O'Shea, an equity analyst with Jefferies, was not untypical. "Apple will also stop disclosing unit sales for iPhone, Mac and iPad, fueling fears it has something to hide," he wrote in a research note. "The new model is selling fewer higher-priced devices, but with more companion items in the cart… and higher services attach rates."

If the reporting changes are a cover-up, the effort to focus less on gadgetry looks sensible. With the growing popularity of SIM-only deals, smartphone customers appear to have woken up and realized the latest handsets from Apple, Samsung Electronics Co. Ltd. (Korea: SEC) and every other top-end manufacturer are not a big improvement on last year's hardware. Once-excitable smartphone analysts now trudge between halls at Mobile World Congress grumbling about the lack of innovation. Samsung's answer is to develop a foldable device, it seems. Haven't we already had those with the clamshell phone?


For all the latest news from the wireless networking and services sector, check out our dedicated mobile content channel here on Light Reading.


Given the religious devotion it inspires in customers, Apple can demand exorbitant fees and still pull a massive crowd -- rather like an American TV evangelist. But this trick will be difficult to perform year after year, and especially if the smartphone eventually moves over to accommodate other types of device. Apple's own attempts to produce smartphone successors in the form of "wearables" have not been hugely successful. (See Apple's $1 Trillion Luxury Prison.)

But analysts are excited about the services business that sits on top of its devices empire. "Apple has now sold over 200 million iPhones [annually] for the last four years," said O'Shea, who maintains a buy rating on the stock. "To us, iPhone looks like a mature and stable business upon which Apple can now build a massive, higher-margin and higher-multiple services business."

That services business made nearly $10 billion in the recent quarter, with sales up 17% year-on-year. Apple is due to begin reporting gross margins for this business next year, which suggests it makes a decent profit. But continued growth here will be no cakewalk. The big beasts of Amazon.com Inc. (Nasdaq: AMZN) and Google (Nasdaq: GOOG) are chasing the same business, and their services work on products from any manufacturer, while Apple's are often restricted to its own goods. If Apple is to morph from a hardware into a services business, it may have to rethink some of its core principles. In the meantime, it can probably count on higher prices and loyal customers for earnings growth.

— Iain Morris, International Editor, Light Reading

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