Is Apple reaching the limits of the iPhone market?

Reported production cuts for the iPhone raise the question of whether consumers are still willing to pay a premium for the iPhone.

Apple cuts iPhone orders

In a Wall Street Journal story last week, reporters deduced that Apple's iPhone sales have fallen short of the company's forecast. The basis of this speculation is the city of Zengzhou, China's promise to pay more than $12 million in subsidies to minimize layoffs at Foxconn Technology Group, Apple's largest iPhone manufacturer.

There are a lot of factors that could contribute to Apple missing its iPhone forecast. The biggest one is that demand for iPhones may be saturated. How many people in the world want to pay the minimum U.S. purchase price of $650 for an entry-level iPhone, let alone as much as a 30% premium in international markets? There are limits to the luxury smartphone market, and Apple may be reaching them.

Limit 1: The number of people willing to spend more for the Apple brand

Apple dominates the smartphone market in only one country in the world, Japan, where Kantar World Panel reports a 50% market share. The popularity of the iPhone in the U.S. and the UK, at 34% and 40%, respectively, is misleading when IDC forecasts that iOS will remain at 14% to 15% of the worldwide market share.

The correlation of the relationship between income and iPhone sales is very high. According to IDC's forecast, poorer developing markets are buying smartphones faster than wealthy ones, and they are gravitating toward lower-priced Android phones.

Limit 2: Android's value proposition gets better and better

There was a time when iOS had a cleaner user interface that made it easier to onboard consumers. But when Android 4.4 was introduced two years ago, it reached parity with iOS. Except for the luxury Apple brand, Android phones now have all the features the iPhone has, with a couple of minor exceptions.

While the features are largely equal, Android phones cost a lot less. The Android Nexus 6P is an equivalent of the iPhone 6s Plus in components, camera, and build quality, but at $500, it costs one third less than the iPhone. Those who don't care about camera quality, processor speed, or screen pixel density can save a lot more.

The very solid Moto G, at $200, is the smartphone equivalent of the Honda Accord in relation to Apple's BMW. The Moto G screen has fewer pixels and the camera doesn't create as rich photos as that of the iPhone 6s, but the phone does everything that the iPhone does and most users not notice the difference.

Google doesn't benefit by degrading the performance of Android phones with new software updates, so the phones remain useful longer and can be built using less expensive hardware. Two years ago, Android was optimized to run efficiently on phones with smaller memory sizes and slower processors, letting phone makers build devices with a $100 purchase price, like the Android One. Meanwhile, some have speculated that Apple reported to slows down its phones just before it releases a new version.

Limit 3: Dramatic improvement in Android and iOS is rare

Operating systems, phone components, designs and construction used to build Android and iOS phones have improved dramatically in the last couple of years. First-tier phone makers can't help but build great phones. The increments of improvement between annual phone introductions are getting smaller.

This has created a problem for Apple. The company depends on its loyal base to upgrade, but smaller incremental improvements in each new model means less incentive for users to upgrade. The iPhone 6 and 6 Plus look almost identical to the iPhone 6s and 6s Plus. It is also difficult for humans to perceive a difference in the two phones' performance, even though they were introduced a year apart and the iPhone 6s is powered by a better and faster processor. 

Apple is a long way from a crisis, but its premium price, increased competition from Android, and the challenge of significantly improving the features and performance with each new model puts pressure on Apple to continue to perform like a $100 billion growth company.

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