In recent years, the pace of growth in the iPhone installed base has slowed. Much of this slower growth is due to high smartphone penetration and Apple having already successfully targeted the premium end of the smartphone market. With that said, Apple is still bringing in approximately 20M to 30M new iPhone users per year. These users are prime candidates for moving deeper into the Apple ecosystem by purchasing other Apple devices and services. Strong growth trends seen with iCloud storage, Apple’s content distribution services, Apple Watch, AirPods, and even iPad / Mac are made possible by hundreds of millions of people moving beyond just an iPhone to own additional Apple services and devices.
iPhone Priorities
Looking ahead, Apple has three primary priorities, or goals, for the iPhone:
Push camera technology boundaries.
Increase the value found with iPhone ownership.
Increase the number of roles handled by the iPhone.
Cameras. When thinking about the iPhone feature that will lead the way over the next five to ten years, more powerful cameras are high on the list. For the past few years, camera improvements and upgrades have been positioned as the top feature found with new flagship iPhones. A similar trend has been found with every major smartphone manufacturer. This has led to a type of camera arms race as each company tries to convince consumers that they have the best camera.
The primary reason Apple and its peers are betting so big on cameras is that they are convinced consumers will find value in smarter “eyes" - cameras that increasingly move into 3D rendering and AR realms. Advances in computational photography are also leveraged to make it easier for people to take really great photos.
While a bet on the camera will turn out to be a good one for Apple, the move doesn’t lack risk. As Apple pushes camera technology forward, many existing iPhone users are content with the iPhone camera they already own. This will manifest itself in no discernible bump in iPhone upgrading simply due to camera upgrades and advancements.
Another factor behind betting big on iPhone camera technology is that the smartphone form factor remains conducive to bringing powerful cameras to the mass market. While a “selfie” camera may make sense on the wrist with Apple Watch, it is difficult to see the wrist as a good place for cameras used to capture memories. There is similar hesitation found with the idea of putting such powerful cameras on the face in the form of AR glasses. Therefore, it makes sense that the device held in our hands and stored in our pockets will likely contain the most powerful camera in our lives.
iPhone Value. A major development regarding the iPhone that continues to fly under the radar is the improving value proposition found with owing and using an iPhone. By improving iPhone durability and longevity, Apple ends up strengthening the iPhone’s value proposition via higher resale values. If a new iPhone can be recirculated to additional users, the gray market will be strengthened and consumers will find more attractive payment terms and options at time of purchase.
An increasing number of iPhone users think about iPhone pricing in terms of monthly payments rather than lump sum. Attractive trade-in offers and payment plans with built-in upgrades only serve to improve the iPhone’s value proposition.
iPhone Roles. Tim Cook kicked off Apple’s “Hi, Speed” product event earlier this month by referring to the iPhone as the product we use the most, every day. He went on to say that the iPhone has never been more indispensable than it is now.
It is in Apple’s best interest to have the iPhone take over an increasing number of roles once given to laptops and desktops in addition to handling entirely new roles. By increasing our dependency on iPhone today, Apple ends up being in a better position to sell various wearable form factors tomorrow. Wearables are designed to not only handle entirely new tasks, but also take over tasks given to the iPhone.
Peak iPhone?
In FY2015, Apple sold 231 million iPhones. There continues to be a debate regarding whether or not Apple experienced “peak iPhone,” never exceeding that 231 million unit sales total in a 12-month stretch.
As a general rule, one needs to approach “peak” sales claims very carefully with Apple products. It may be tempting to look at unit sales data and conclude that a lower sales trend won’t reverse. However, weaker sales may not be the result of a change in market fundamentals such as a permanently reduced addressable market or less capable product. Instead, lower sales may simply reflect a slowdown in upgrading.
Odds are increasing that Apple has not experienced peak iPhone. As shown in Exhibit 4, my FY2021 iPhone unit sales estimate stands at 240M units, 4% higher than Apple’s previous iPhone sales record. My estimate does not assume a mega upgrade cycle kicked off by 5G iPhones. With the iPhone installed base having surpassed a billion users and continuing to expand by 20M to 30M people each year, Apple is in a good position to grow iPhone unit sales as the iPhone upgrade cycle plateaus between four and five years. This is where iPhone’s strong resale value enters the picture with consumers embracing various upgrading plans and options made possible by a well-functioning gray market.
Exhibit 4: iPhone Unit Sales (TTM Basis) - Includes Above Avalon FY2021 Estimates