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As yesterday’s surprise announcement of a significant holiday revenue shortfall made clear, Apple is in trouble — not the sort of “capital T” trouble facing soon-to-be-bankrupt companies, but the nuanced dysfunction of a company that has lost more than 30 percent of its value, over $300 billion, in the past two months. Today, Apple CEO Tim Cook will hold an all-hands meeting to discuss the situation with employees, following his publication of a lengthy letter to investors.
My concern is that Cook will downplay or ignore the critical issue that has become obvious to virtually everyone outside the company: Apple’s pricing. It is the common thread underlying Apple’s most serious problems, yet as any economist will gladly explain, it’s easy to fix — lowering prices makes more people buy what you’re selling.
It’s unclear whether Apple believes the laws of supply and demand don’t apply to its products or whether it thinks it can keep skirting those limitations by offering financing plans and milking existing customers until they’re dry. When Cook was asked about the iPhone X’s ultra-premium price tag, he suggested that consumers would accept the higher price as a small uptick in a monthly payment plan — a short-term answer to a longer-term problem.
Throughout 2018, Apple wasn’t afraid to push the envelope further. The company unrepentantly jacked up the prices of new iPhones, Apple Watches, iPad Pros, and Macs while killing off many of its more affordable entry-level models. It also released a new round of ridiculously overpriced accessories: Apple’s vinyl Smart Folio for the latest iPads sells for $79 to $99, compared with identical third-party versions sold for $15, while Smart Keyboard Folios with plasticky keyboards inside sell for $179 to $199.
These prices aren’t just insulting to the word “smart” — they’re unsustainable for a business that hopes to keep growing. There’s a finite and relatively small number of people who will pay two or four times the objectively reasonable price for a product. Even with that group as a “loyal” customer base, a company that keeps raising prices will reduce the frequency of their purchases, a problem that would be reflected in declining unit sales.
Apple apparently hoped to distract from this reality by stopping unit sale reporting as prices went up, telling investors to focus on its aggregate revenues instead of how many products it was selling. But that’s a patently unwise way to grow a business.
Cook’s letter primarily pinned the revenue shortfall on weakening sales in China, suggesting that “rising trade tensions” might be to blame. But he also noted a lower than expected rate of iPhone upgrades in “some developed markets” and hinted that a temporary low-cost iPhone battery replacement program had cut into new iPhone sales.
In my view, pricing is at the core of all of these issues. Should anyone be surprised that iPhone sales fell in a particularly price-sensitive country when Apple killed its lowest-cost iPhones and raised prices on its new models? (Hint: Apple has huge problems in India, too.) Is it really surprising that sales weren’t as strong as Apple expected elsewhere, despite last-minute trade-in promotions that didn’t actually reduce the new phones’ higher prices? Or that customers would keep using their old devices with new $29 batteries rather than spend $749 or more on the latest models?
Tim Cook has two choices at today’s hands-on meeting. He can keep finding alternative ways to placate Apple’s current customers and hope they don’t leave, or he can make the difficult choice to shave down Apple’s insane 38 percent profit margin to expand the company’s user base. The latter solution would position Apple for future growth across all of its markets, rather than just the wealthiest ones, while the former seems destined to slowly but surely reduce Apple’s footprint worldwide.
I’m not an investor in the company, but as a nearly lifelong user of Apple’s products, I’m hoping Cook will do the right thing. Apple is at its best when it’s making great products more widely available, and at its worst when it’s restricting them to people with deep pockets. The last year was particularly bad for Apple investors and consumers alike; a major change in Apple’s pricing strategy would make all the difference in 2019.
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