Underestimating the iPhone

As a whole, Apple is generally regularly underestimated as a company. However, with the iPhone making up such a large percentage of Apple’s revenue and many calling Apple an iPhone company, that underestimating extends to the iPhone. Apple’s and the iPhone’s growth significantly has to end, is the common narrative. Apparently, it is not sustainable in the minds of many.

Screen Shot 2015-10-27 at 4.35.40 PM

The smartphone market is a big one. The biggest market of any consumer tech product. It’s the only product almost every adult will own some day. Apple’s share of smartphone sales for the calendar Q3 2015 quarter was 14.5%. The dynamics of the global smartphone market are hard to read for many but have been clear to me for some time. As markets mature, consumers start becoming more refined in their needs, wants, and desires with a smartphone. This simple dynamic is what led Apple to have the highest number of consumers upgrade their smartphone to an iPhone from an Android phone. This dynamic, which is a result of both the maturing of markets like greater China and Eastern Europe, is an underappreciated one in terms of the iPhone’s upside. Another statistic I’ll share from our primary research is, while our data returned a 28% switching from Android to iPhone number, 26% of Samsung owners in our panel indicated intent to make the iPhone their next smartphone.

During yesterday’s earnings call, Tim Cook shed some interesting light on this new user question. The Android switching dynamic is certainly a new user addition to the Apple ecosystem. However, some interesting stats were shared about China as well.

– 50% of iPhone buyers in China buying a iPhone 6 and up are buying their first iPhones
– The number of first-time buyers was even higher than 50% for those who purchased an iPhone 5s

The key takeaway is that the new iPhones are driving new users to the customer base, especially in China, and the legacy models are playing a significant role as well in driving new customers. This later point on the 5s gives me an indication the iPhone 6 and 6 Plus, at now discounted rates, will continue to drive this dynamic of adding customers. Cementing again the theme of last year that the year before models are drivers for Apple in the lower-tier price points. Take this point and apply it to the iPhone 6 and 6 Plus. These phones are so well built and the SoC so well made, they can last quite a long time in the market. Next year at this time, the iPhone 6 and 6 Plus will still be in the market and discounted even more than they are right now. They will still be competitive in the overall market and even more attractive to first-time buyers/switchers by hitting lower price points. Meaning, Apple’s lineup is strengthened each year with last year’s and the year before model at addressing many different price points and, remarkably, still competing at those price points several years later with newer Android phones.

The vast majority of Android vendors are fighting the trends of the race to the bottom. Android is suffering from the “good enough” problem in many markets. This makes it hard for vendors to have cutting edge specs or genuine innovation, which is helping tip the market in Apple’s favor as global markets mature. A truly fascinating dynamic to understand.

With only 31% of the base upgraded, 69% of Apple’s global installed base is still ripe to upgrade. Based on my estimates, that breaks down to roughly 320-330 million consumers still needing to upgrading. How long this transition of the base will take is unclear but roughly 330 million consumers are ready for an upgrade.

Lastly about iPhones. China seems to keep stumping many Apple watchers. Interestingly, we are now starting to see seasonality for Apple in China in ways we did not before. Note my chart of Apple shipments in US and China.

Screen Shot 2015-10-27 at 6.10.11 PM (Forgive me for not revealing the Y-Axis as the hard data is for our institutional clients)

As you can see, Apple’s shipment line in China was steadily going up. Now, it has seasonal variance just like the US market has for some time. These dynamics are new, with no historical comparables to lean on. Even other Chinese OEMs who sell in China don’t have this same degree of seasonality. This means the two biggest quarters for iPhone growth will come from the Dec holiday quarter for many markets and the March Chinese New Year holiday quarter. These two quarters alone made up 42% of Apple’s fiscal year shipments of iPhones. I expect that percentage to rise as a part of Fiscal 2016 iPhone shipments.

China seasonality is helpful for the overall model and looking at similar big shopping quarters in other markets for Apple could help understand the growth signals as well.

A few other highlights:

  1. Mac: 5.7 million Macs is incredibly strong, given the PC environment we are witnessing. This is fueled both by enterprise sales as well as the back to school segment. Feedback we got from IT managers and CIOs was the Macbook was gaining traction in their workforce and we heard similar with students. I’m looking for a 6m+ Mac shipment quarter in Dec.
  2. Apple Watch: Based on math I feel is reasonable and logical and given several assumptions of products in the “other” category, I’m fairly confident Apple Watch sales were in the 3.5-4m range for the quarter. Up sequentially is a postive sign and feedback I’m getting from many retailers is positive for the direction of Apple Watch sales next quarter. Most importantly, though, Apple Watch owners love it.
  3. iPad: I’m not as worried about this category as others may be. Its decline is not concerning. I do believe iPad Pro will help but this product is not on as predictable of a refresh cycle as other products. I’m willing to bet we will have some surprise iPad sales quarters, but working these into forecasts will be very tough. So consider the iPad a sleeper with some surprising quarters ahead likely.
  4. Services: Perhaps one of the least appreciated parts of Apple’s model is the services business. This business had a record $5.1 billion quarter, up 10% YoY. This is positive because it means Apple is continuing to get their customers involved in their ecosystem. Upside here can continue to come from Apple Music, iCloud storage, an Apple TV subscription service (if it happens) and, of course, continued growth in App Store revenue. All of this points to stickiness and loyalty in the Apple ecosystem.

Things are looking positive for Dec for Apple in many vectors. The market dynamics we are seeing change in real-time in categories like PCs, and smartphones, are truly fascinating and again teach us new things about consumers in these segments. All of this makes historical comparables and “conventional wisdom” hard to base a complete model on. Luckily, we have our quarterly market research across 30 global markets and 25,000 consumers to lean on.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

16 thoughts on “Underestimating the iPhone”

  1. i find your conclusion about Android user switching to IPhone to be misleading giving that the majority of those user are from China where Google is absent and the IPhone was not available not too long ago therefore it make sense for those user to come from Android in china,

    that being said how can you explain the fact that the IPhone share of the US and some European market are down or stagnate where Google is present.

    1. I’m not quite sure where you got your market share data, but the following source gives an explanation for the US, and contradicting evidence for Europe (the data shows iPhone share increase in some European countries).


      Having said that, I do agree that the Android switcher figure may be inflated due to China, and that similar figures for other countries would be welcome.

      Another point is that given Android’s huge market share and iPhones relatively tiny share, the 30% switchers are only 4% of the total smartphone market. The effect to total Android unit sales is not hugely significant, and given that the market as a whole is still growing in double digits, new Android users will compensate for the ones that switched to iPhone.

      Hopefully my argument shows that market share isn’t really the issue here. The issue is whether there is still room for iPhone to grow, which requires it to lure away Android users with high disposable income. Ben’s article simply shows that this is the case.

      1. i wasn’t talking about market share rather the growth rate of the IPhone for the last two quarter tht was down compare to last year in the US and many european country

    2. The number of upgraders coming from China is over 50% according to Kantar. Parts of Europe like Germany are also up with Apple.

      iPhone share is absolutely not down in the US. Quite the contrary. iPhone installed base is now about to be over 50% and growing. Carriers are tripping over themselves fighting for iPhone customers. Apple’s quarterly average of post paid smartphone sales is near 60% and Samsung, who just missed earnings and cites very weak premium smartphone demand, is getting left to hang in the US and many other markets.

      Markets like India and other emerging markets, and even some of the few European markets you mention are not large iPhone markets to begin with. But, even if starting from a small base, iPhone sales have grown steadily in every market they compete in.

      1. how is it that the only place where they’re killing it right now is in China, where Google supported Android Phone is completely absent,

        according to multiple reports, during the last two quarter the growth rate of the iPhone have stagnated or even down in the United States and several rich european countries, which tell us that the IPhone is not as dominant as you pretended outside of China where Good version of Google supported android Smartphone is available

        1. iPhone growth has slowed but its not stagnant. Everyone’s growth has slowed but many are negative.

          US is saturated, India isn’t even a market, iPhone still has growth ahead but its not 20-30%. Maybe only a handful of Chinese OEMs have double digit growth prospects. And as was pointed your completely missing my point. iPhone still has growth ahead, the year won’t be flat, that is my point. And I promise you even if Google was in China Apple would still be killing it. Where Google is or is not is entirely irrelevant to the analysis. The mindset of consumers and their priorities when it comes to purchase preference is what matters.

          1. what’s the pourcentage of Android switcher to IPhone in the US market?

            i think you underestimate the value of Google brand in a country such as China, where the Android ecosystem is very fragmented and unreliable,

            Why isn’t the IPhone killing it in India which has a huge install base of middle income user that can afford the IPhone the same way it does in China

          2. Ah! Now I understand your argument. Regarding India, I think it would be worthwhile to re-read the following article.


            The conclusion in the article is that the affordability (price relative to income, lack of subsidies, etc.) of the iPhone is the main reason why sales are still very small. The availability of Google’s services is not mentioned.

            Of course, while Google services may be a factor, that does not seem to be the consensus explanation.

            As mentioned in the article, now that the iPhone 6/6 plus will now be available at discounted prices and the iPhone 4s will likely be discontinued, Indian users will be able to enjoy the iPhone experience at lower costs and acceptable performance. If affordability was truly the reason for low sales, then we should see an uptick this year.

            This year’s sales should give you the answer you’re looking for.

          3. The dynamics in India aren’t that much different than in China when it come to prices relative to income, and subsidies, even though the potential of the two markets are not be equal, which is why I tiends to look at the growth rates instead of market share when it come to the IPhone perfomance in China versu India vs Android High End phone or mid range phone

            Also the majority of new functionality that make Android very attractive for to users are all Google’s based, whether is Google Now, Now on Tap, Google Photo, including the Play Store then it is clear that the availability of Google services or lack there of will have a huge impact otherwise the number of switcher from Android to the IPhone, and the growth rate in the United States would be higher.

          4. I understand your logic, but I strongly feel that the information that we have is insufficient to do inductive reasoning with any level of confidence.

            I agree that there are similarities between India and China, but we don’t know if the similarities are enough to assume that the dynamics will be the same. I agree that Google’s features are attractive, but we don’t know if the Chinese are very unsatisfied with what they can get from the local companies. I also haven’t heard of sufficient evidence that people switching to the iPhone in the US miss Google services to a significant extent. It would be great if we could get some data on these issues, but right now, there is so much that we don’t know.

            Lacking this information, I am withholding my conclusion until the time when iPhone 6/6 plus drops to a price that is affordable in India. In my opinion, 2017 is the year to watch because the iPhone 6 should drop to current iPhone 4s/5 levels. If iPhone sales still do not take off in 2017, then the affordability hypothesis loses credibility. Until then, I tentatively support the consensus view.

          5. About India:

            India //does not allow// Apple to build its Apple Retail stores. Perhaps this is an important fact. Tough to do empirical analysis with //no// data points for comparison.

            But, it’s important to note that Apple retail in other markets leads and creates strength in brand identity, power, and visibility. The Genius Bar is genius in ways other than the genius geeks who fix things. And the power of inspiring design is on full display within each flagship store.

            Apple doesn’t have these powerful stores in India and it //may// make a big difference.

          6. As I’ve written before Indian consumers have a very different mindset than that of the US and China. India is compromised of much more pragmatic shoppers. They don’t want cheap but they do want value. Luxury products has never done well in India because of this. India will remain a very tough market for Apple at leat in my mind.

            iPhone switching to Android in US is less than 5%. And that is being generous. Intent to repurchase for iPhone is well above 90% and carriers tell me the reality is even higher.

            I think you greatly overestimate the value of the Google brand in the global economy for things other than search.

          7. Many data indicated that unlike in Europe and China the Samsung current High End Galaxy line have done pretty well in the US market, while at the same time the number of Android switcher to the iPhone during the last two quarter was the lowest ever in the same US market, I think many of you has let the out performance of Apple in China blind you from their low performance in key saturated market such as the US and Europe.

            I think you greatly overestimate Apple performance and strength which right now depend a lot on the Chinese market where their top competitor is absent.

          8. I’m afraid all my data contradicts your position. So it’s hard to debate with you when you have a very particular bias and no data to back up the larger points. To my article today you also misunderstand the basis of competition changes between Android and iOS. Apple owns the high end Google does not. Very different playing fields between the two.

            And to be clear I’m not saying Apple is going to sell to every human on the planet, quite the contrary. Just that their growth is not over, even if its slowing, the evidence is clear there still have new customers to win.

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