The more I have reflected on what is happening right now in the consumer technology industry, in particular Apple’s position, the more a key observation hits me. Apple is in uncharted territory. I don’t mean because sales of iPhones are slowing or because their stock has a more skeptical sentiment around it than in years past. What I mean is Apple has never had a product like the iPhone that has reached such enormous scale, thus increasing their customer base to levels few thought Apple would ever reach.
Apple certainly had a mass market hit before the iPhone in the iPod. However, the iPod’s best year of sales was 2008 with 54.83 million units sold. The iPod helped Apple’s core customer base reach somewhere between 125-175 million users. The iPhone has taken the company to an entirely different level. Last year, Apple sold 231 million iPhones. The iPhone is the greatest hit Apple has ever had and their customer base grew from under 200 million users to now over 600 million. Apple has never had this many customers before. More importantly, they have never had this diverse a customer set. That is why they are in uncharted water.
I’ve pointed out how the iPhone has spanned the entire customer spectrum. It is owned all the way from early adopters to technology laggards. A rare few products can make such a claim. However for Apple, owning such large chunks of consumers across the spectrum is bringing new challenges by way of patterns of their customer’s behavior they have not seen before. Apple learns new things about their customers on a regular basis and has to plan and act accordingly. Nowhere is this better observed than with their customer refresh rates of new iPhones.
During their main growth period, Apple had been operating under a cycle of rather consistent upgrade patterns for iPhones. Depending on the specific country, the upgrade rate varied between 19 and 24 months. However, as Apple began to attract new customers, particularly those on the later end of the technology adoption spectrum, something interesting happened. Note this from Kantar Worldpanel on the US smartphone market on Apple’s launch of the iPhone SE:
The move should, first and foremost, appease Apple’s user base, 58% of which still owns an iPhone 5s or older. The average lifecycle on these iPhones is 27.5 months, longer than the overall smartphone market at 20.9 months, suggesting that up until now these iPhone owners have been hesitant to upgrade. This is either because they prefer a more compact iPhone, or because they are not interested in investing in the new models.
The key stat here is how iPhone 5s owners tend to hold onto their devices longer than the average. This is a new customer insight and, in this case, it is unique to a specific model of iPhone. There are significant portions of Apple’s installed base who do not behave like most other iPhone owners and this could prove quite challenging. Particularly as Apple looks to drive replacement rates within their installed base.
Prior to this last quarter, Tim Cook always gave us a statistic letting us know how much of the iPhone base had upgraded to an iPhone 6 or higher. For a few quarters this number grew steadily but now it is slowing. Apple has succeeded in getting most of their early adopters and early majority customers to upgrade to new devices but their laggard base is clinging to their older devices and seeing no need to upgrade.
I was at the Jazz Fest last Friday in New Orleans and did not miss an opportunity to make small talk with folks about their devices. At an event like Jazz Fest, we see a large representation of the mass market. I was surprised to see how many iPhone 5s are still in active use and even more surprised to interview so many consumers who see zero reason to get a new iPhone. Looking at some fresh research from our most recent US market smartphone study, 26% of current owners of a 5s or later have no plans to upgrade their smartphone in the next 12 months. While not entirely defined by the iPhone models they own, Apple has a sizeable user base that is likely to exhibit upgrade patterns the company has not encountered before.
The plus is these will remain loyal Apple customers and continue to spend money in Apple’s ecosystem. The negative is they will be unusually slow to buy new iPhones which, in turn, will have an impact on annual iPhone sales. In some ways, I’m not sure even Apple understands yet just how stubborn regular consumers are when it comes to replacing their stuff. And Apple has a lot of these regular consumers as their users and they may likely behave in unpredictable ways Apple can’t anticipate.
In this post from 2014, I made the case we should understand tech history is being made, not repeated. This is as true today as it was when I wrote it. For 25 years, we had a technology industry but only for the past 10 years have we had a true global scale consumer technology industry. This point continually goes underappreciated and misunderstood but it is central to acknowledge as we learn new things about consumers in this still young consumer technology market. These dynamics are new to Apple as they are to many companies competing for consumer dollars. At the end of the day, this diversity of global consumer behavior is what makes studying them fascinating and intellectually stimulating. But I sympathize with the companies for whom, I’m certain, these customers will drive crazy.
My wife still uses an iPhone 4S. We’re just thinking about upgrading this summer. When the device is still working great and running the latest version of iOS, why buy a new device? Yes, yes, newer versions of iOS run a bit slower on older devices but we’re talking about a half second here, a second there. Oh the horror, my browser opens 0.8 seconds slower after upgrading! Whatever. Normal people just don’t care about that stuff, and the benefit is longer device life. We’re in a similar position with six iPad 2s purchased in 2011, just now thinking about upgrading. Our iMacs are also fairly old, from 2009, and there’s no need at all to upgrade. I had a 2 TB drive swapped into my wife’s iMac last year, easy like pie. I wonder, as Apple keeps improving devices and software, adding services, will buying cycles lengthen? Is there data on how buying cycles have changed, are they getting shorter, longer?
Lengthening. But that is a result of the larger late majority and laggards getting into the market. It’s like ARPU. It’s high when early adopters are the market then drops a the rest of the market gets on board. We expect hardware cycles to lenghthen with a good chunk of the market.
That’s what I would have guessed, a lengthening cycle. I would think the quality and life of Apple gear has to factor in, but are you saying that side of the equation isn’t having much impact on the buying cycle? My family could definitely be an outlier, the only reason we upgrade is when a thing stops working (stops doing the jobs we hired it to do), and Apple gear just keeps on chugging.
Reasons for upgrades are challenging to find these days. Particularly in the computer market, where I’ve found the lifespan of Macs hitting seven years on desktops. Heck I’ve got clients with a few PowerPC Macs still serving dutifully as servers. Fax Servers, File servers, VPN Servers, etc. In businesses, the average Mac user is no faster on a brand new iMac 5k than he/she was on an old white iMac from 2007/2008, and those old iMacs only get replaced when they completely die.
I see the same thing happening with the iPhone. I have always been an upgrade often sort of Apple user, but now the upgrades are so uninspiring I’m at the “Wake me for the iPhone 8s, if it’s not significantly different, wake me for the 9s” method of shopping.
Also, the foundation of my loyalty to Apple is the Mac, and I don’t see much happening there.
“I have always been an upgrade often sort of Apple user, but now the upgrades are so uninspiring”
To me, that is such an odd way to frame it. I’ve owned Apple gear since the original 1984 Mac, and that one lasted until 1994 (I still have it on my desk). I look to upgrade when the current device stops being good at the jobs I hired the device to do. I see it as a positive that I can use my Apple devices for such a long time. Why should we care whether an upgrade is inspiring or not? If a new device delivers a new job-to-be-done that provides value to you, then you should get that new device. If your current device is still serving you well, why buy a new one? Apple’s business will be just fine without everyone upgrading everything every two years.
I disagree on the Mac side of things. I see enough going on there to keep me happy. I suspect you want some specific feature on the Mac and Apple hasn’t delivered that yet, hence the perception, for you, that not much is happening on the Mac. But for me Apple’s Mac offerings serve me very well. Of course people have different needs and Apple may not be serving you well on the Mac side these days.
“the foundation of my loyalty to Apple is the Mac, and I don’t see much happening there.”
1, Because it’s taken Intel forever to roll out their next generation of processors. 2, Because most new macs these days are given an annual spec bump to new hardware rather than a full redesign. 3. Because all macs got a major update just a few years ago, and apple doesn’t think they merit more frequent major changes. 4, Because macs have gotten so small compared to the rest of Apple’s business that they’ve been relegated to the back burner of Apple publicity, something mentioned in press releases rather than given time on stage. 5, because macs tend to get updates around the time of WWDC, which is just around the corner.
Seeing the current macs are the height of form and function (mostly, obviously some things are irritating), why reinvent the wheel every year?
Who needs another disaster like the FCP “upgrade”?
I agree, but all their reasons you offer make the non-upgradability of existing Macs all that much more contemptable.
I’m curious as to how the AIO aspect of desktop Macs affects the Mac business. It makes upgrades much more profitable, but it also slows them down dramatically. My iBrother would have spent $1,000 for a new Mac several times (that’s about double what a similarly-specced PC costs, so I’m assuming Apple would be happy with that money), but he’s got to chip in an extra $1,500 because 27″, so he’s been delaying for years.
Exactly. My 2001 G4’s are still functional, but my late 2011 MacBook Pro was an a turkey. I swear the Cube was more responsive, although it’s not bad now with 16gb ram and the obligatory SSD. I can’t bring myself to sell my trusty 2008 MacBook Pro as that was such a reliable machine and runs such a wide range of OS’s. I only bought the late 2011 machine as the Retina models were such a closed system with puny storage and they stopped making the 17″. My next purchase is likely to be a mid range, pre Tube, MacPro and the delightful 5s is still delightful. The only reason I got a 6s is that I was offered one at 1/3 retail (new, but not stolen!), so would have been insane to pass up.
Ben, you emphasize that customers may be slow to upgrade but you don’t (unless I missed something) say much about WHY they are slow to upgrade. Do you know why?
I think the subtext can only be:
1- customers don’t care so much about features or performance. Brand and looks matter more ?
2- price is an issue
3- smartphone use is a lot less sophisticated than techies/nerds (and everyone on this site) assumes. The devices limitations (small screen, slow performance, small storage, most recent features missing ie Live Pics, TouchID before 5s, Force Touch…) don’t seem to faze users.
4- Smartphones are in need f a killer feature. Better cameras are it for some, but Pay, TouchID, Force Touch, faster,… aren’t it for the rest.
no one is upgrading because there isn’t a good reason to. Like so much in the tech industry, our devices are very mature. Yeah, yeah, yeah… better cameras… maybe some new fangled Wifi protocol that isn’t in use much yet.. but as the cell networks have such good wide spread coverage…. a mature system’… the current crop of devices work just fine and don’t really need replacing.
My phone is only 3G, and 4G isn’t even on my checklist for my next phone, trumped by such creature comforts as tap-to-wake, FM radio, SD slot, IR blaster… all very old features, yet sometimes missing.
They only need the iPhone for phone calls and text messages. No need to upgrade.
I’m always amazed and how little Regular People understand about tech.
There’s a sale going on in France right now: $12/mo for unlimited voice+texts + 5GB data + tethering, incl. voice but not texts to USA/Canada where some of my family members live. That’s about half the regular price, and probably justifies upgrading people on $4-$6/mo limited contracts.
I had to explain to 3 different people (out of 5 I’m pushing towards it) that Snapchat/Skype/Hangouts isn’t texts it’s data, so USA/Canada *is* included.
Is it a broken master record? There are jumps and screeches and count mistakes. Overall, a bad smell. “this diverse a customer set”. O’rly? Use of untrusted sources could compromise the wide area network credibility and reverting to using a home network of trusted users.
2 year upgrade cycles were built into cellular rates. Now they’re broken out for all to see. Smartphones are not a particularly attractive purchase at over $600 when you can buy a 60″ HDTV for the same amount. Lastly, many in this recent generation value recycling and avoid excess consumption. All trends that discourage keeping up with the latest. As another commenter said, most users hardly tax the capabilities of the 4s, so why upgrade?
But all of this is typical of a maturing product where the improvements are incremental.
I think that was me with the 4S comment. I did not say we hardly tax the capabilities of the device. My wife uses it as a computer in her pocket to manage the family. It gets a lot of use, we’re using pretty much the full capabilities of the device, but since it can still run iOS 9 just fine, there’s no need to upgrade yet. I’d frame the situation more along the lines of Apple making long lasting devices, so our buying cycle doesn’t need to be short. I think we’re around a 5 year cycle generally speaking (although our iMacs are seven years old now). We start to think about replacing the current Apple device at the 5 year mark or somewhere close to that.
But I take your point, I do think most normal users can easily get four years out of an Apple device. And as Apple moves more towards Services, that’s just fine.
The battery typically has about a 2-3 year life. I just replaced one in my iPhone 6 at a cost of $79.
“The battery typically has about a 2-3 year life.”
Actually that depends very much on usage patterns and how hot the battery gets. Usage: I have a 5 year old Iphone 4 that still delivers acceptable-to-me battery life. But then I use the phone very, very little.
Heat: my first Ipad spent a bunch of time in the summer sunlight on the back porch, where, being black, it heated up quite dramatically. The battery was noticeably degraded after just 3 months. Since then I have kept them inside and not let them get hot, and the batteries on the ones I’ve owned longest delivered the same amount of charge for the entire time I owned them (2+ years).
I’m amazed by the battery life of my Apple devices. Usually the only thing that taxes them are the high incidence of runaway processes that have nothing to do with whatever I’m trying to work on, or poor cellular reception.
Yeah, I am starting to think that the huge variability in reported battery durability one hears about is due to whether or not the device was stored in a car with the windows rolled up on a hot summer day, rather than poor quality control on the part of the manufacturer.
I’ve never heard that about 2 to 3 years of life. I’ve got 8 iOS devices around me that say otherwise (all four years old or older), and we use all our devices quite a lot.
Just as a data point, Samsung, one of the major OEM battery suppliers, states in their data sheet for LiIon batteries that the battery will have 80% of its capacity after 300 full charging cycles. After two years of use and about 600 cycles (mostly full cycles), my battery was at 68%.
I wonder then, does iOS simply manage power better? I don’t notice any problems with battery life in our four year old iOS devices. Maybe if the device lasts longer on a single charge that means it takes longer to go through cycles and longer device life overall?
Is your device with the 68% battery still usable? Perhaps this is a situation where you can prove the battery is technically degraded but for most users it isn’t that noticeable. In that case, does it matter much? This reminds me of the outcry about iOS 9 not working on older iPhones and iPads, and by ‘not working’ the nerds and geeks meant Safari launches a half second slower, or such and such app launches one second slower. While I’m sure that’s the end of the world for many nerds, I can assure you normal people don’t even notice.
If a three or four year old battery still gets the device through the day, does it matter what the company who makes and sells batteries says about battery life? Especially considering that anyone selling batteries has a financial interest in making that buying cycle shorter.
The 4s was a very good phone. Was. The A5 is well past its prime in supporting the required security upgrades of browsers etc. I used the 4 till 2013 and didn’t go past iOS 5 and it still became excruciating. I’m still using the A6x equiped ipad 4 and it’s functional, but a less relaxed device is desirable.
I’m surprised you feel the recent generation is concerned about excess consumption. They seem so self obsessed and unconcerned with anything but their stupid faces.
Here’s one more data point. I still own the iPhone 4s. I didn’t upgrade to the 5 because along with a non-negligible fraction of iPhone users, I didn’t want to go from a 3.5 inch display to 4 inches. We weren’t fooled by Apple’s adverts trying to persuade us that one-handed operation was almost the same. “Almost” never used to be a word in Apple’s marketing vocabulary.
After all these years it’s clear they’re not returning to 3.5 inch displays. So I’ll give in to the Procrustian logic and upgrade to the iPhone SE. Size matters, but sometimes, you have to settle.
My iPhone 4s sits in a shelf. I crave speed so I upgrade. I read on my iPhone so bigger is better. My hands are large enough to use it single handed.
My eyes get worse by the month, so the perfect 5s was getting challenging, even with glasses. The 6s+ though, actually all the 6’s, seem to be a user unfriendly upgrade to me as I use the sleep/wake button to turn it on and sleep it, but constantly press a volume button as well, cancelling my intended action. Never had that problem with any others, but I still love the speed and space on my 6s+, as well as optical stabilisation for my less steady hands. Actually, being so light, they’re hard to hold still, unlike SLRs.
With flattening of processor speed upgrades, the replacement cycle for PCs has slowed much to the detriment of Intel which is dependent on hardware sales.
With the slowing of replacement phones, Apple has the advantage in that these users are still paying Apple for services. And this customer base keeps growing. This is why Apple services makes more money than Facebook or Amazon and is close to Google in revenue.
When everyone has your phone, services is where Apple has no competition among its smartphone rivals.
@ben@benbajarin:disqus Many analysis keep on pointing to Services as an area of future growth for Apple, my question to you is what are those Services that you keep on referring to that you think will growth year after year with great margin of profit, because from what I can see nearly 90% of Revenue from the Services category come from the App Store which is not even considered to be a great standalone business.
I could similarly then argue ads is not a good business given the services revenue from iTunes is nearly as much as Facebook makes each quarter from ads.
Services include cloud storage, payments, all subscriptions including Apple care (which is growing and has high intent to purchase), Music, anything new like TV or video service, etc..
common Ben you know better
Unlike selling mobile App, Advertising is huge market that is even larger than the hardware one itself, and a recurring revenue stream, the more a user use the services the more money you make, the reason Facebook and Google are so valuable is due to the enormous growth potential, including in particular the High profit margin that the advertising market offers
What are the profit margin from the $5 billion revenue from Apple services?
The App Store is complementary business that follow the same trend as the hardware it support, the vast majority of users who buy Apps do so only after buying a Smartphone for the first time, so to expect the App Store to keep growing in double digits while providing high profit margin when hardware sell is declining will be like expecting Microsoft to continue making big money from developer selling window App.
Big revenue doesn’t necessarily mean big opportunity or great business, it is the market and the margin of profit from that said revenue that make all the difference
“What are the profit margin from the $5 billion revenue from Apple services?”
Recent reports put margins on Services between 40 and 60 percent, so a lot higher than many people had assumed. I think a lot of us (myself included) assumed services were always around break even. But it makes sense if you think about it, Apple has a lot of services beyond app purchases, and those have very high margins, and they’re growing. In 2015 Apple’s Services business was actually slightly larger than Facebook, and it had similar operating margins.
I built a model based on reasonable projections on the size of the subscription economy for services vs. ads. It’s lucrative let’s just say :). Particularly the ones Apple is likely to get into from Pay TV, etc..
Lots of upside here to integrate services more deeply into software and hardware designs for Apple.
Exactly. Apple delivers value within the user experience. Services add more value and enhance the experience (my teenagers love Apple Music). And of course we have to keep in mind that Apple dominates a market segment that should be a great fit for paid services.
Apple Music/Beats needs to be broken out of iTunes/Music.app. It is destroying the music experience for those of us who don’t want Apple Music/Beats.
(I only included /Beats to make it clear what I am referencing.)
Joe
Could be you’re in old man “Get off my lawn you kids” territory. To each his own of course, but I think a lot of people actually like Apple Music. I dig it, so easy to use, and the family membership is great.
What is your specific problem with Apple Music? Why is it destroying your music experience?
“Could be you’re in old man “Get off my lawn you kids” territory.”
So what?
Adding Apple Music to the iPhone music app has made the UI a complete mess for things like simply playing your own music (and not the tracks you deleted years ago). There is nothing simple about playing music you want to hear on an Apple device any more.
Joe
I haven’t had the same experience, I don’t find it to be a complete mess, and I find the discovery part of Apple Music has enhanced my music experience. And as I’ve said before, all my kids love it. Of course that doesn’t mean Apple Music is working well for you. If there are aspects you don’t like there are a number of alternatives. It is also obvious that Apple Music and the Music app are going to improve. Could be much of what you don’t like will be solved for you in a year, maybe less.
Coincidentally:
http://daringfireball.net/2016/05/apple_music_coherence
Joe
Yep, I just saw that. Maybe they will break it out as its own app. Personally I don’t mind iTunes at all, I like the convenience of everything in one app and I really don’t find it hard to use. But obviously some people really don’t like how iTunes works. Same goes for Apple Music. I would vote for keeping everything in the Music app, again for me it’s the convenience.
That’s an interesting issue though: how do app sales behave over time ? I know that my purchases started after an intiial delay, when I started to to see the value of Pro versions for a few key apps (Belote, RSS, Music, Launcher, keyboard…), and are now down again because there just isn’t that many apps to run on a phone, bar the occasional game. I even have a backlog of games and tools I got on sale just in case.
I’d expect most people to follow the same pattern: buy some stuff after an initial cautious phase, but then taper off except maybe games ? With no way to sell updates, isn’t the app market bound to flatten or even decrease even faster than devices ?
I’m still on my iPhone 5 and iOS 6. I am of those few who think that iOS has lost some of its soul since the advent of version 7. I still can not appreciate the bareness of the 7/8/9 version, their lack of … I do not know , this attention to detail and aesthetics that characterized the version 6. When iOS 7 was unveiled , my first impression was that it was nothing short of a test version, simply intended to demonstrate the new features and that Apple was going to put on a more elegant interface …
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