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August 25, 2016

As iPhone sales fall and Android claws back market share, can Apple turn things around?

Analysis: Falling sales, technical issues and a tax crackdown - 2016 has been a perfect storm for Apple.

By Alexander Sword

2016 is becoming an increasingly rough year for Apple in many ways, as reports of a mysterious defect in the iPhone 6 circulate and co-founder Steve Wozniak makes his distaste for abandoning the headphone jack in the next model public.

Of course, these things are relative, and a bad year for one of the world’s most valuable companies would still be enviable for many other companies.

Yet as Android rival Samsung celebrates bumper sales of its latest Galaxy Note device in parallel with a slowdown in Apple’s sales, it is fair to ask whether Apple has lost its touch.

First, the market figures. Apple continued its downward trend with a decline of 7.7 percent in the second quarter of 2016. Apple sales declined in North America (its biggest market) as well as in Western Europe. However, it witnessed its worst sales decline in Greater China and mature Asia/Pacific regions, where sales declined 26 percent.

Many investors are getting out as iPhone sales decline. The hedge fund of George Soros cut its stake in Apple earlier this year, while Carl Icahn revealed in April 2016 that he had sold off his entire stake in Apple.

The company sold 40.4 million iPhones in its Q3 results, down 15 percent from a year earlier.

According to Gartner figures, Apple saw a sales decline of 7.7 percent in the second quarter of 2016. Alongside North America and Western Europe, it saw its worst sales decline in Greater China and mature Asia/Pacific regions, where sales fell 26 percent.

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Apple actually saw its share of worldwide smartphone sales fall from the second quarter of 2015 to the second quarter of 2016, from 14.6 percent to 12.9 percent. Meanwhile Samsung and Huawei saw their shares increase.

The figures show that while there has been a general slowdown in the smartphone market, with the Gartner figures suggesting aggregate sales contracted 0.5 percent in the quarter, other vendors seem to be finding ways of pushing up sales.

Gartner attributed Samsung’s success to its Galaxy A and Galaxy J series smartphones seeing strong sales in markets such as Japan, and a strong performance in emerging markets. Huawei and Oppo, who also increased their shares, benefitted from new premium devices.

The picture here is not a simple one: for example, a decline in a particular market or type of smartphone.

While it did poorly in China, Apple did well in markets such as Eurasia, Sub-Saharan Africa and Eastern Europe regions in the second quarter of 2016, which saw iPhone sales grow more than 95 percent year-on-year. The main category Apple competes in, premium smartphones, meanwhile recorded a 6.5 percent increase in the quarter.

The second problem facing Apple is a technical one. The Android operating system is narrowing Apple’s lead in a number of categories where Apple has traditionally dominated.

For example, Android devices have generally had a poor reputation for security. However, Android Nougat, the latest version of the operating system incorporates file-based encryption, which means that individual files and folders can be encrypted.

Nick McQuire, Vice President of Enterprise at CCS Insight, told CBR that these security updates get Android “close to on a par” with Apple.

It’s not just in security. The State of Mobile Device Performance and Health report, a quarterly review of smartphones by Blancco Technology Group, saw the failure rate for Apple devices double between Q1 and Q2 2016 to 58 percent.

In the same period, Android saw failure rates drop from 44 percent to 35 percent.

A petition calling on Apple to stop sending out unwanted updates that slow down its devices was circulated recently.

Apple’s reputation for high quality technology was damaged further as an apparent design flaw in iPhone 6 and 6 Plus devices leading to unresponsive touch-screens has made headlines.

And to top it all off, despite the intervention of the US Treasury Department, the Commission is preparing to rule on whether Ireland’s tax deals with Apple amounted to state aid, which may lead to it demanding as much as $19 billion from Apple in alleged unpaid taxes.

So what is Apple doing and what can it do to address these issues?

CEO Tim Cook has already announced plans to address the company’s performance in China with a new centre for R&D in the country.

It’s important to note that Apple is hardly lacking in the resources to turn things around or withstand a bit of sales turbulence.

Apple's cash pile sat at $231.5 billion in its latest earnings report, which could be used to finance more acquisitions or investments. For example, in May, Apple invested $1 billion in Chinese ride-sharing company Didi Chuxing.

As for the technical issues, Richard Stiennon, Chief Strategy Officer, Blancco Technology Group, suggests that many of the problems with iPhones have been due to Apple rolling out iOS updates, and says many of these problems could be avoided if releases were more occasional.

In terms of sales, it is also worth considering that Apple has not had a new flagship device for a while: since September 2015 counting the iPhone 6S or since September 2014 if discussing generations of iPhones.

There are rumours, reported in Nikkei Asian Review, that Apple will seek to revamp its product line with three new iPhone models in 2017.

The year will see the 10th anniversary of the iPhone, with the possibility that Apple will launch a device constituting a big step-change from previous models.

Apple could also try and further capitalise on its huge sales increase in Eurasia, Sub-Saharan Africa and Eastern Europe.

The point is, even though Apple is going through a rough patch, there is plenty in its pipeline to make for encouraging reading.

So perhaps we should simply take the word of former CEO John Sculley, who told CNBC that he expects Apple will "continue to have great performance for quite a few years ahead."

 

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