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by Jason Snell & Dan Moren

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By Jason Snell

Apple’s financial results: Learning to sell the iPhone

Tim Cook loves satisfied customers.

There was a time—a very long time, in fact—when Apple didn’t need to make much of an attempt to actually sell iPhones. I don’t want to imply that the act of creating new iPhone models and new versions of iOS wasn’t an enormous task—it was. My point is, after the phones arrived on the scene, people really wanted them. And Apple just needed to make as many as it could and make them available in Apple retail stores and other locations, and they’d fly off the shelves.

That era ended last fall. And as Apple CEO Tim Cook and CFO Luca Maestri made clear on Tuesday’s conference call with analysts as a part of reporting the company’s latest quarterly results, Apple is now turning around iPhone sales by being more active when it comes to selling those iPhones to customers.

It’s my understanding that, starting last fall, every floor employee at Apple’s retail stores has had it emphasized to them that the goal is to boost iPhone sales. Even positions that would theoretically be bad fits for a focus on sales—people teaching Today at Apple classes, for example—are expected to show off the latest phone hardware in an attempt to get people interested in buying. If you take a photography course that roams the streets around the store for subject matter, you may be allowed to borrow a shiny new iPhone XR to shoot those pictures—all the better to tempt you with an upgrade.

What, employees at a retail store are expected to move product? It’s hardly earth-shattering stuff, but this is Apple. Apple didn’t need to pull those levers—until last fall, as iPhone sales started to dip. Now it’s pulling all the levers.

“Our retail and online stores continue to be a key point of innovation,” Cook said on Tuesday. “As we mentioned in January, we’ve been working on an initiative to make it simple to trade in a phone in our store, finance the purchase over time, and get help transferring data from the old phone to the new phone. As part of this initiative, we rolled out new trade-in and financing programs in the U.S., China, the UK, Spain, Italy, and Australia. The results have been striking. Across our stores, we had an all-time record response to our trade-in programs, and with more than four times the trade-in volume of our March quarter a year ago.”

Emphasizing the trading in of older models in order to get a discount on a new iPhone has worked around the world, including in China, where sales have really lagged. Apple is still experimenting with its approach in different markets, but the company is now motivated to learn, when it wasn’t before.

Or as Cook said: “Clearly what we’ve learned here—and it’s not a surprise, really—is that many, many people do want to trade in their current phone. From a customer or user point of view, the trade-in looks like a subsidy. And so it is a way to offset the device cost itself. And many people in literally every market that we’ve tried this in… want to take and pay for something on installments instead of all at once. And so, it’s a little different in each market in terms of what the elasticity is. But you can bet that we’re learning quickly on all of those.”

Apple’s also being aggressive in the prices that it offers to trade-in customers. “The incentives we’re offering, currently in our retail stores, a trade-in value that is more than sort of the ‘blue book’ [price] of the device if you will, for lack of a better description. And so we have topped those up to provide an extra benefit to the user,” Cook said, noting that iPhones of numerous generations are being traded in. Some people are replacing a two-year-old model, but some are replacing every year, and others are waiting three or four years. “It’s really all over the place,” Cook said.

In some markets, most particularly China, offering an installment plan that allows you to pay a monthly fee on your new iPhone rather than a lump sum has proven quite successful as well. As Cook put it on the analyst call, Apple is now learning about iPhone buying psychology in different markets, and changing its approach as it does.

“You can bet that we’re learning on each of these [approaches], finding the parts that the user likes the most. I think the key is, we’re trying to build something into the consumer mindset that it’s good for the environment and good for them to trade in their current device on a new device. And we do our best to getting the current device to someone else that can use that, or, in some cases if the product is at an end of life, we are recycling the parts in it to make sure that it can carry on in another form,” Cook said.

There was a time when Apple didn’t need to exert much effort to sell iPhones. Those times may be over, but it’s still got a lot of tricks up its sleeve. I’m not surprised to hear that, as Cook and Maestri both pointed out, iPhone sales are already turning around. The execs said that November and December were the worst months of the current iPhone dip, that March was the best of the bunch, and that the last couple of weeks of March were the best weeks of the entire quarter.

That’s why Apple projected a much smaller dip in revenue between its second and third financial quarters than usually happens. The company’s executives seem quite confident that their iPhone sales techniques are working and that the product’s downturn has been smoothed out or stopped.

A couple of other notes based on the results today:

Lots of talk about the growth in the App Store search advertising business. For those who don’t know, this is a business in which Apple takes money from its own app developers to provide prominent results when someone in the App Store searches on particular keywords. If you develop an iOS app and don’t buy your keywords out, your competitors will—and you’ll lose sales.

Tim Cook said that App Store search ads are “growing very, very fast… I think it was up around 70 percent over the previous year. We’re expanding into new geographies as well, and we still have more geographies out there that we think can move the dial further. So it is definitely a a business that is big and getting bigger.”

Just so we’re clear: This is a way for Apple to claw back more money from app developers by getting them to pay Apple to get more visibility in search (and to prevent their competitors from paying to jump over them in search results). I am not a big fan of this technique, but apparently it’s effective!

More than that, though: Since the people who buy search ads are app developers, who make money by selling apps in the App Store, this is essentially Services revenue that gets counted twice! First, people buy apps and Apple counts that revenue. Then, the app developers with whom Apple shares App Store revenue turn around and pay Apple some of their earnings in exchange for ads. I doubt this is a major mover in Apple’s rapidly growing services revenue line, but I have to admire the moxie of running those dollars through the Services revenue line twice.

Analyst Louis Miscioscia of Daiwa Capital Markets1 asked Cook about what services he expected to be the most successful in the short term and long term, the CEO expertly deflected that one. But he did talk a little bit about his vision for the future of Apple TV+:

“The TV+ product plays in a market where there’s a huge move from the cable bundle to over-the-top,” Cook said. (Over The Top is TV industry slang for getting channels via internet streaming rather than traditional cable or satellite. Tim’s practically a TV exec already.) “We think that most users are going to get multiple over-the-top products and we’re going to do our best to convince them that the Apple TV+ product should be one of them.”

Not to go too overboard with parsing specific words in Tim Cook statements, but I was struck by the phrase “one of them.” Apple is not trying to be the winner, to beat Netflix—and in fact, Cook is saying that he just thinks Apple TV+ can be part of a larger diet of streaming subscriptions. Maybe. I have some doubts that Apple’s current mid-tier streaming offering can compete in a world where streaming services from giants Disney, Warner Media, and NBCUniversal are battling it out with Netflix and Amazon, but for now Apple is in the game.

Finally, Services. What can I say? This is why Apple keeps talking about them and had a whole event about them. Services revenue made up 20 percent of Apple’s revenue this quarter, making it larger than the Mac and iPad put together. $11.5 billion dollars in one quarter. Consistent growth for years. It was the best quarter of all time for the App Store, Apple Music, Apple’s cloud services, and that App Store search ad business, and Apple says that AppleCare and Apple Pay set records for the second financial quarter.

If you’re sick of hearing about Apple’s services, you might want to sign up for a service that cures that, because it’s not going to stop. Right now when viewed from a distance, Apple’s a company with two primary businesses: the iPhone (50%) and services (20%). The iPad, Mac, and wearables each count for another 10 percent. They are individually enormous businesses—as Apple loves to say, each of them is basically a Fortune 200 company—but they are small compared to the scale of the iPhone and the services business.

  1. Hat tip to Mikah Sargent for finding him, because I couldn’t figure out what name they were saying on the call! 

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