During Apple's (AAPL, Financial) fiscal third quarter earnings call, executives made some statements which pointed out that investors should focus on the mass market for a huge chunk of Apple's future cash flow in the coming years.
“Overall, we added millions of first-time smartphone buyers in the June quarter," CEO Tim Cook said, "and switchers accounted for the highest percentage of quarterly iPhone sales we've ever measured. In absolute terms, our year-to-date iPhone sales to switchers are the greatest we've seen in any nine-month period, and our active installed base of iPhones is up strong double-digits year over year.”
Apple did not state explicitly if it was the new iPhone SE that contributed the most to new customer acquisition. However, Apple did say its average selling price for the iPhone for the quarter was $595, which is significantly down from about $700 a couple of quarters ago due to the launch of the iPhone SE. This suggests that iPhone SE sales were significant.
So we can safely say the iPhone SE could be responsible for the winning of new customers.
Here is how this speaks to a new focus on the mass market.
First, according to a number of research firms, smartphone sales in the developed markets have peaked, with CCS Insight predicting that smartphone sales in Western Europe and North America would drop after 2017.
Apple exemplifies this trend, having reported consecutive quarters of decline in iPhone sales.
If sales of smartphones are peaking, then phone makers- including Apple - have to start poaching customers from their rivals.
With the iPhone sales to switchers ratio for the first nine months of Apple's fiscal year being the highest in any given first nine fiscal months for Apple, we can safely say Apple is already poaching its competitors' customers, which the iPhone SE has helped to do.
One thing to note, however, is that the iPhone SE's biggest edge compared to other versions of the iPhone is its lower price - a mass-market kind of phone. So with a lower-priced phone helping Apple to acquire new customers, chances are Apple will follow through with that strategy.
Apple has failed to replicate its success with high-end phones in developed countries in the emerging markets, where most of the growth in the smartphone market lurks. Therefore, Apple had to come up with a new mass market player type of strategy to grow revenues from iPhones in these regions- or at least keep growth anywhere near historical levels.
Perhaps that is why it has developed a financing program to make it easier for just about anybody to buy its phones. This could even mean mobile phone loans for individuals with bad credit. For those new to the term bad credit, it does not necessarily mean that it is improper to issue debt to a person with that kind of credit score, it just means that the risk is higher, hence a higher interest rate on the amount being loaned.
Do not get me wrong. I do not believe it is a bad thing to incorporate a mass-market strategy. On the contrary, I believe it is great.
One thing is for sure, this is a largely untapped market for Apple. While the smartphone market was growing at a double-digit rate, Apple was busy amassing the high-end market to itself. Obviously, not every consumer who wanted an iPhone could afford one. That demand is still there because there is hardly any other phone maker who can boast of Apple's premium design.
So now that the market is approaching its peak, Apple can reduce the rate at which its phone sales decline by satisfying the unaddressed demand with products like the iPhone SE - to be conservative.
Chances are, this strategy will actually help Apple reverse the decline in iPhone sales and see a few more years of growth.
The mass-market strategy will help grow Services revenue faster.
When I say Services, I am referring to App Store revenue for the most part.
It is not rocket science. If Apple can use the mass-market strategy to increase its user base, which will invariably increase the usage of App Store, revenues from this segment will increase significantly. This could take Apple's Services segment well above the Fortune 100 level that the company is targeting for next year.
Obviously, this segment is already huge. And it will become even bigger, given that one-third or about $13.3 billion of the $40 billion that Apple developers have reaped since App Store was launched was generated over just the past year alone.
The real juice of the potential growth here would be in the incremental, high-margin revenue. According to Credit Suisse analyst, Kulbinder Garcha, Apple's services gross profit has risen from about $3.2 in 2010 to about $14.5 billion.
New customer acquisition through a mass-market strategy will see the margin from this segment go even higher, as new customer additions will most likely not require a bigger investment in services like App Store than the one that has already been made.
Conclusion
Apple has not said anything about how the mass-market strategy could augment the company's services revenue in the emerging markets, but the fact that Tim Cook is focusing on "Services" and markets like India and Brazil is a huge pointer. Because let's face it, if you want to get the most out of your service offerings, you have to make it available to as many consumers as possible.
Disclosure: I have no position in any stock mentioned in this article.
Start a free 7-day trial of Premium Membership to GuruFocus.
