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For Apple’s iPhone Sales, Size Matters
Despite softer-than-expected demand for iPhones, customers are willing to pay more for extras
By TRIPP MICKLE
Updated Jan. 29, 2017 1:26 p.m. ET
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At a generally gloomy time for sales of its flagship iPhone, Apple Inc. is finding a silver lining: Customers are willing to pay more for better features.
When it launched its iPhone 7 in September, Apple for the first time packed the more expensive “Plus” model with extra hardware not available in the standard model, in addition to a larger screen.
The iPhone 7 Plus, which starts at $769, comes with a dual-camera system that delivers better portrait photos and sophisticated zooming capabilities unavailable in the standard iPhone 7, which starts at $649. The 7 Plus also offers longer battery life and more random access memory, or RAM.
The strategy appears to be working. Cowen & Co. estimates the 7 Plus accounted for about 40% of the roughly 58.5 million total iPhone 7 devices it estimates Apple sold world-wide in Apple’s fiscal first quarter, which ended in December. That is a 17 percentage-point jump from the 23% who opted for its larger predecessor, the 6s Plus, in the same quarter the previous year.
That should lift the average selling price of iPhones to $693 for the December quarter from $691 a year ago, according to UBS. And the increase would help Apple report an expected 2% rise in revenue for the December quarter when it announces financial results on Tuesday—despite what analysts say was softer-than-expected overall demand for iPhones.
Overall, the iPhone 7 has struggled compared with predecessors, analysts say. Today’s consumers are holding on to phones longer, and the technological divide between iPhones and cheaper alternatives is narrowing. Competition is surging in China, where local rivals are chipping away at market share. Further complicating matters, the anticipated release of a 10th-anniversary iPhone later this year—which Apple is expected to load with new features—has led many consumers to postpone purchasing the current model.
Analysts estimate Apple sold about 78 million iPhones in the December quarter, a 4% increase from last year. That would mark the first time the company hasn’t delivered a double-digit increase in unit sales in the December quarter after launching a new model, as it does every other year. It increased unit sales 46% in 2014 with the iPhone 6 and 29% in 2012 with the iPhone 5.
Stagnating sales have heightened some analysts’ concerns about Apple’s future. The iPhone accounts for about three-fourths of the company’s gross profit, and a decline in iPhone unit sales last year triggered a 14% decline in annual profit. Apple missed its internal revenue targets for the first time in at least seven years in 2016, leading to Chief Executive Tim Cook’s first pay cut since he assumed leadership in 2011.
“The iPhone base wants a new, cooler iPhone,” said Tim Arcuri, an analyst with Cowen. “There’s a lot of pent-up demand for a product with newer, cooler features,” and he said the base-model iPhone 7 doesn’t deliver.
The relative success of the iPhone 7 Plus, however, underscored consumers’ appetite for new features. The combination of a fancier camera, increased RAM and water-resistant capabilities made it the most successful higher-priced phone Apple has sold, analysts say.
Mr. Arcuri estimates Apple sold 24 million iPhone 7 Plus devices, a 55% increase from the 15.5 million iPhone 6s Plus phones it sold during the same period last year. “They pulled that [pricing] lever like never before” with the 7 Plus, Mr. Arcuri said.
Preference for the iPhone 7 Plus was especially pronounced in China, where consumers for the first time opted to buy the larger, Plus-size iPhone over its smaller sibling, says Creative Strategies Inc., a market research firm. Among Chinese buyers, some 52% purchased the iPhone 7 Plus for the three months ended in Dec. 31, a sharp increase from the roughly 40% who bought its predecessor, the iPhone 6s Plus, in the same period in 2015, according to Creative Strategies.
That is encouraging, as total sales of the iPhone in China are estimated to have fallen 10% in the December quarter from a year earlier, according to UBS.
A similar shift took place in the U.S., Apple’s largest market, where the percentage of Plus models rose to 47% of unit sales in the quarter from about 35% in the year earlier period, according to Creative Strategies.
The trend is encouraging for Apple as the technological divide increasingly narrows between iPhones and less expensive smartphones.
Despite the availability of comparable, $300 phones, Creative Strategies analyst Ben Bajarin said, “The market is saying, ‘We still value what Apple is doing and value it enough to even spend more on it.’ ”
It also bodes well for Apple later this year as it makes pricing plans for its anniversary iPhone. Mr. Arcuri said it shows that there is “even more room” for Apple to increase prices on future devices.
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