Is the End Near for the Apple iPhone?

Alphabet recently became the largest company based on its market capitalization, squeezing out Apple for the number one spot of all-time successful companies. Perhaps the reason is that sales of the Apple iPhone disappointed analysts and stock pickers alike. Apple shipped only 74 million iPhones in the last quarter of 2015, causing the stock price of AAPL to reach a new low of $94 on February 4, 2016. This slide of nearly 28% from its peak suggests the roller coaster is running all the way down hill for Apple. Is the iPhone’s decade-long run coming to the end of its marathon? Is the end near for Apple Inc.,  itself? The numbers suggest otherwise.

Projected unit sales of the Apple iPhone
Figure 1(a). Bass model of projected unit sales of the Apple iPhone. The figure shows raw unit sales including upgrades from existing customers.*
Projected unit iPhone sales sold to new customers
Figure 1(b). Bass model of projected unit sales of the Apple iPhone. The figure shows unit sales sold to new customers, assuming 25% of sales are to first-time iPhone buyers.*

Forecasting the Future

How does a company like Apple know when its product has come to the end of its lifecycle? Clearly, when sales fall off, the product in question is either losing market share, or the market is becoming saturated. Even with burgeoning sales in China, the flattened unit sales curve of the iPhone suggests one or the other. Is the market saturated or is the iPhone losing out to competitors?

The Bass equation was designed to answer this question. It was invented by Frank Bass in 1969 and has become the most reliable predictor of high-tech product success and failure for more than 40 years.1 Gentry et al. showed the Bass model makes the best forecasts compared to its competitors.2 By fitting actual unit sales data to the Bass equation one can calculate three parameters: N, the eventual size of the market; p, the rate of early adopters; and q, the rate of copycats (people who buy a product based on what they hear from friends, advertisements, etc. ). What does the Bass equation say about the future of the iPhone?

The blue dots in Figure 1(a) shows iPhone unit sales in millions each quarter since Q3 of 2007, cumulative totals are shown as red squares, and the Bass equation that best fits the data appears as a black dashed line. Curve fitting produces N = 1.915B as the ultimate size of the iPhone market.

At the end of 2015, Apple had sold a grand total of 896M units. This suggests the iPhone has a long way to go before saturating the market. At the current rate of roughly 240M units per year, it will take the company another four years to reach 1.915B. But, most iPhones sold are replacements for two-year old smartphones.

Assuming only 25% of sales are to first-time buyers of the iPhone, Bass’s equation says the market reaches its peak at 575M units, see Figure 1(b). That is, cumulative total unit sales of $575M and a replacement cycle of twp years dictates sales of $288M per year—that is 240M replacements and 68M first-time buyers.

The numbers work out, but the implication for Apple is that their customer base levels off at 575M over the next few years.

Is the Future Android?

A lot of ink has been spent on telling us Apple’s closed garden strategy versus Google’s open source strategy cannot survive in a future where open-source software seems to be keeping pace with Moore’s Law while proprietary systems fade. According to Statista, Apple’s iOS market share has hovered around 15% since 2010, while Android has grown from 23% to 81%. Android has killed off most other mobile operating systems, but not the iOS. They may be the Toyota’s of high-tech, but Apple’s iOS seems to garner most of the cash. According to Tony Bradley, “Apple continues to make more money than all of the Android smartphone makers combined.” The future isn’t Android.

Is the Future the Next Big Thing?

Eventually all strong sales must come to an end. When it does, Apple will have to pivot. It is easy to assume Apple will jump from one technology to another to make iPhones better and better, but that may not be enough to stoke continued growth for the company. Apple’s pivot has to be toward even bigger markets than smart phones, because the Bass model predicts cumulative iPhone sales peak at about 1.9 billion units. But then, what is bigger than the demand for billions of smart phones? Apple ranked number five in the 2015 Fortune 100 listing by revenue with earnings of $183B. WalMart, ExxonMobile, Chevron, and Berkshire Hathaway made more money, but it is unlikely Apple will enter the retail grocery market or pump oil out of the ground. The next five revenue generators were General Motors ($155B), Phillips 66 ($149B), General Electric ($148B), Ford Motor ($144B), and CVS Health ($139B). GM and Ford earned nearly $300B combined. But Apple’s profits as a percentage of sales is 21%, while automobile manufacturers barely get by on 2% profit.

If the future of Apple is in making cars, then the Cupertino company will have to figure out a way to squeeze more profit out of bending iron and putting computers on wheels. Interestingly, Tesla earns 20% profit per Model S, making disruptive automobiles nearly as profitable as iPhones. The rise of the iPhone is safe for now, but in a few years Apple will have to come up with something new. Will it be a car or a fancier phone?

* Numerical data from Statista. Global Apple iPhone sales from 3rd quarter 2007 to 1st quarter 2016 (in million units).

1. Bass, F. A new product growth for model consumer durables. Management Science 15, 5 (1969), 215–227. doi:10.1287/mnsc.15.5.215.

2. Gentry, L., and R. Calantone. Forecasting Consumer Adoption of Technological Innovation: Choosing the Appropriate Diffusion Models for New Products and Services Before Launch. Faculty Research & Creative Works. Paper 662. 2007.