The mighty Apple (AAPL) has greatly reaped benefits from its epic innovation –iPhone. Smartphones have been around us in various forms since early 2000. But, right from its introduction in 2007, till the present day Apple has made millions by revolutionizing the smartphone experience, the latest and the greatest contribution being made by the iPhone 5S.
What iPhone means to Apple
Its known to all that iPhone is Apple’s flagship product that contributes massively to the company’s top-line. The following chart summarizes the device’s contribution from 2007 till 2013.
While, at product inception in 2007, the iPhone accounted for only a meager 0.5% of Apple’s total revenue, today it generates 53.4% of the total revenue, and going forward its contribution to the total revenue of the company is expected to surge further. According to Pacific Crest analyst Andy Hargreaves, iPhone is going to account for as much as 68% of the company’s gross profit in yet to complete fiscal year 2014.
All this clearly signifies how important the gadget is for the company. But, is that all that it signifies? Well, no. It also signifies how vulnerable the mighty Apple is because of its absolute dependence on this one single gadget.
The changing market situation
Apple is dependent on the iPhone. So what? Isn’t this the way usually companies function; revenue and profits being driven by its flagship offering? The answer is an obvious Yes. But, this doesn’t diminish the fact that such dependence calls for a huge amount of risk also. The problem for Apple is not just its dependence, but that coupled with the changing dynamics of the smartphone space.
Several industry experts and analysts are concerned about the diminishing growth momentum of the spartphone market and its impact on the players of the space, particularly the big ones such as Apple. Though the market was valued at a whooping $338 billion last year, it is growing at a slower rate and is being characterized by gradual price drop which makes making money all the more difficult. According to a recent study conducted by IDC, while worldwide smartphone sales increased by 39% over 2012, the expected market growth for this year is at only 19%, 8% for 2017 and just 6% for 2018.
Another huge concern for Apple is that the developed markets are more or less saturated and whatever growth is taking place is because of the relatively under-developed nations. The consumers in these markets are highly price-sensitive and the cost to own an iPhone stands as a barrier. The company has already launched the iPhone 5C keeping the requirements of these markets, still the price is too high in comparison to other Google (GOOG) Android powered products or Microsoft (MSFT) Windows Phone handsets.
A point of relief
In all this the only point of relief for Apple is the expectation of replacement sales. A study conducted by Pacific Crest Securities reveal that Apple can expect 69% of iPhone sales to be accounted by repeat buyers looking at replacing their old iPhones with the latest one. The figure further expands in 2015 at 80%.
Though there are concerns about Apple’s dependence on the iPhone, it can be expected that the company might just be able to reap the benefits from the gadget for another good number of years thanks to the ongoing research and development activities. The company is working to bring in best of the class features in its devices, such as the iOS 8 update, the health focused apps and the much awaited iWatch. All these additions are very likely to provide a boost to the iPhone sales and keep the company’s top-line safe.