Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Strange things are happening in the land of Apple. The company announces new products and the typical frenzy is more of a polite clap. These low expectations are the best thing that could happen to the company right now. The question is whether it squanders its breathing room. 

At Apple's annual product circus on Wednesday, the company managed to pull out surprises like the first Nintendo game for smartphones and cool-looking (but insanely expensive and impractical) wireless earbuds. The iPhone 7 is "the best iPhone that we have ever created," CEO Tim Cook said, as usual. The new Apple devices will no doubt be great, but as expected they weren't much of a departure from current models. 

Shira-growth-anomaly

Even "meh" new devices should be good enough to get Apple's sales growing again from the last year of falling sales, thanks in part to a mix of Apple oddities for the next year. The all-important quarter ending in December has an extra week this year, which will pad Apple's results from the new iPhone 7 line.  New versions of the Apple Watch unveiled Wednesday, an expected refresh of some aging Mac models, perhaps a surge of accessories sales thanks to Apple's controversial removal of its headphone jack and a new type of iPhone introduced in the spring (remember the iPhone SE?) all should give Apple a layup to post revenue growth in its 2017 fiscal year, which ends about 12 months from now. 

Those fiscal 2017 sales are expected to increase a modest (by Apple standards) 4 percent from the current year's figures, which are expected to be the first annual revenue decline in 15 years. Apple should revel in the easy-to-clear bar. It gives it cover to work on its next big thing -- an Apple car, the not-yet-a-blockbuster Apple Watch, maybe a long-promised big play in the television market, Apple Music or something else that could possibly join the iPhone at the center of Apple's universe. 

iPhone Stall
Apple for years had an incredible stretch of iPhone sales, but the easy growth is all but gone
Sources: Apple and Bernstein Research (for average of Wall Street estimates)
Note: Apple's fiscal year ends each September

But the gimme for growth in the next year is also a dangerous potential trap in Apple's longer-term narrative. The company is used to defying expectations that its best days are behind it. This was the narrative around Apple as recently as 2013, just before the debut of the larger screen iPhone 6 models that set off a huge sales surge. But it's tough to see Apple defying gravity yet again.

It's amazing to realize Apple's investors and its crazed fans are already looking ahead a year to the 2017 edition of the iPhone, which is expected to have some big changes including a new type of thin and bright screen and more screen real estate. Is it really reasonable to expect a big bang iPhone surge after 2017?

Rival smartphone makers are working on the same hardware developments on Apple's to-do list. And it's tough to be confident about demand given consumer smartphone trends. Apple's growth problem isn't only -- as Cook has argued -- a belatedly understood hangover from that blockbuster iPhone 6 release. Even smoothing out from the one-time growth hit, the pace of iPhone sales has been slowing markedly. 

Shifting to the Slow Lane
Smoothing out for the one-time surge of iPhone 6 sales, it's clear the device's pace of sales has shifted into a slower growth trajectory
Source: Bloomberg
Note: Quarters reflect Apple's fiscal year, which ends in September

Nothing on Apple's immediate horizon packs the same punch. There are only three ways for Apple to maintain the iPhone's past sales growth, and all of them are riddled with obstacles. 

One, Apple can hope for an industrywide wave of growth. But smartphone shipments worldwide are expected to increase less than 2 percent this year, according to research firm IDC, and they aren't expected to improve much from there.

Two, the company can try to rob market share from lower-priced Android devices that have grabbed most new sales in fast-growing markets such as India. That's tough. 

Three, Apple can get existing iPhone users to trade up early and often. This path is essential. Bernstein Research expects existing iPhone users will account for more than 80 percent of new iPhone unit sales in Apple's next two fiscal years. Here again, Apple is swimming against the current. People are waiting longer to replace existing smartphones of all stripes, and that may be a permanent shift. 

The risk for Apple is that smartphones become the next personal computers, which are essential but people don't buy new ones often. That slight change in behavior crushed PC makers such as Dell and Hewlett-Packard. Apple has advantages those companies never had, including incredible profit margins and products that people love rather than tolerate. The big danger is that the next year of growth masks the company's existential challenges and lulls us into believing that order has been restored in Apple land. It has not.

--With chart assistance from Rani Molla

Make Apple Great Again? Wait Until Next Year

 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. This happens about every five or six years, and the last time the extra week boosted Apple's revenue by about 7.7 percent, according to Bernstein Research. 

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net