Hitting for the cycle: why Apple should move its product launches
Apple’s earnings for their last financial quarter came out on Tuesday. I reviewed them here (and talked about the iPad specifically here) but wanted to address something more long term in my column on Tech.pinions this week. The issue I’d like to talk about is the cyclical nature of Apple’s operating and financial performance and the massive focus on the fourth quarter of the calendar year (Apple’s first quarter) as the driver of the year. (Note: throughout this piece I’m going to refer to calendar quarters rather than Apple’s fiscal quarters, as I find this requires much less mental gymnastics for readers).
Apple’s results are heavily affected by the sales of its hardware products, which in turn have a huge spike in the fourth and to a lesser extent third quarter of each calendar year – as shown in this chart of historical revenues.
As you can see, ever since about 2003, the fourth quarter has been significantly bigger than any other quarter. The second biggest quarter however, has varied between the third (for much of the 2000s) and the first (for the last three years). The second quarter (which Apple reported this week) is now regularly the smallest. In the past, the spike in the fourth quarter was always driven by “holiday sales” – i.e. Christmas in much of the world and to a lesser extent the Thanksgiving holiday and associated “Black Friday” sales day in the US. This is true for all consumer electronics companies and Apple is no exception.
However, what’s changed in the last few years is Apple’s timing for its major product launches for the iPhone and iPad. The chart below shows how the dates have moved steadily to the right on the calendar, with the iPhone starting in June and July and shifting to October and then September, and the iPad starting in March and April and shifting to November.
Although product launches for the iPhone are technically in the third quarter, they’re so close to the fourth quarter the vast majority of early sales are pushed into that quarter. It means the fourth quarter becomes even bigger than it already is.
So why is that a problem? Well, there are several issues with it.
Firstly, it exacerbates the problem of supply constraints. Because Apple insists on absolute secrecy, and because it now announces new devices just 10-20 days before they launch, it has to ramp up manufacturing extremely quickly and it can’t meet demand. In late 2012, it was unable to meet demand for the iPhone and iPad until the first quarter of the following year. In 2013, it took almost the whole quarter to get demand and supply in balance. This means Apple is leaving money on the table for much of these quarters and, in some cases, customers may go elsewhere if they’re unable to buy the product they want, especially in the holiday season.
Secondly, it creates this huge spike in fourth quarter sales, followed by a steady drop in sales for the rest of the year. There is what I call a trained Osborne effect here, as Apple has trained devotees of its products to expect a fall launch and then an annual revision. If you care at all about having the latest and greatest device, you won’t buy an iPhone or iPad in the second quarter because you know a new one is just around the corner. That’s why sales don’t just fall from the fourth quarter to the first, but also fall from the first to the second. Apple is unwittingly creating an Osborne effect without even announcing anything, just because the pattern has become so clear. Apple therefore doesn’t just create a huge spike in the fourth quarter, it actually depresses sales in the rest of the year.
What Apple should do – stagger launches
There are short term and long term solutions to this problem. Start with the short term, some of which Apple is already doing:
- Create a product that appeals to those who don’t care about having the latest and greatest device, and sell it in the lull quarters. Apple has done this with the iPhone 5C, which was heavily marketed at least in Europe and North America in Q2, and which likely drove high sales, driving down ASPs in the process. The 5C was launched at the same time as the 5S, but its most useful effect has been to fill some of the gap in 5S sales later in the year. For this reason, it might well make sense for Apple to keep the 5C concept around.
- Continue to hold launches late in the quarter. Every iPhone launch but one (the 3G) has taken place in the last two weeks of a quarter (originally the second, and now the third). This spreads the spike effect a little by putting the massive launch weekend in the previous quarter. If Apple was holding iPhone launch events two weeks later, the third quarter would likely be the smallest by far, so this helps to mitigate that effect. But it isn’t yet doing this for the iPad, and it might make sense to do so.
However, the longer term solution is to move at least some product launches to other quarters, preferably in the first half of the year. This would create two annual spikes – one around the holiday season and one around the product launch. By staggering iPhone and iPad launches so they no longer spike around the same time of year, Apple could spread the effects even further throughout the calendar.
But all that is far easier said than done. Apple has moved product windows twice — once when the iPhone 4s arrived later than expected in 2011, and once when it accelerated the iPad development cycle to release the iPad 4 just eight months after the iPad 3. Those are the only two ways to move the product launch windows: produce one faster than the usual twelve month cycle, or leave a longer pause between launches. Neither is easy to do. Pre-empting or delaying the iPhone launch cycle, so tied to two year handset upgrade programs in many markets, would cause significant disruption and break the cycle for many users, possibly damaging sales. It’s arguably easier for Apple to disrupt the iPad launch schedule, since that’s less tied to a particular upgrade cycle, and it has done it once before. It’s also a category that evolves less dramatically from one iteration to the next and which has just seen big upgrades in both sizes. However, the new device upgrade plans available from US carriers and some others around the world may allow Apple more latitude than it has had in the past because customers are less tied to a two year cycle.
Another possibility is Apple staggers the launches for different versions of a product, e.g. launching several iPhones at different times during the year. The iPhone 5S might get an update on schedule in September of this year, perhaps with one larger screen size, while a device with an even larger screen or even the 5C successor might come in the spring. The iPad Air and iPad mini launches could also be split throughout the year, with one coming in the spring and one in the fall. Moving an iPhone launch to the spring would also upset Samsung’s rhythm, which currently pitches its flagship Galaxy S launches as far away in the calendar as possible, with the smaller Note launch much closer to the launch of new iPhones.
A change of this magnitude would be difficult and perhaps even painful in the short term, as it might either delay sales or create a smaller upgrade cycle for one year. But at the moment, Apple is both leaving money on the table by under-supplying demand in the fourth quarter and creating a massive lull in sales in the spring and summer. Both could be solved by moving at least some product launches back to other times of the year, and ideally late in the first quarter. Both overall sales and the stock market would be well served by a move away from fall product launches.