iPhone Growth Has Hit Its Ceiling — and Apple Now Has to Learn Something New | Top 15 Annual Report

Apple has released its 2015 sales figures.

It has been almost two years since former Wall Street Journal reporter Yukari Iwatani Kane published Haunted Empire: Apple After Steve Jobs.

Unlike the moment the book first appeared, Tim Cook no longer has to argue that the company hasn't declined. The numbers say it for him.

This morning Apple reported its results for the last three months of 2015. Carried by the iPhone 6s line, Apple sold 74.77 million iPhones in those three months — almost exactly what it sold a year earlier, right after the iPhone 6 launched.

Revenue also reached an all-time high. Profit for the October–December quarter alone came to $18.4 billion — more than Google made in a full year.

The iPhone 6 was Apple's first big-screen phone, and it pulled in many users who had refused the iPhone because its screen was too small.

That the 6s matched those numbers shows that once a bigger screen drew users in, Apple could keep them.

Harder still: Apple did it without cutting prices the way Xiaomi or Samsung did.

Four years into the job, Cook has steadied the iPhone against the Android challenge it once faced — a challenge that came precisely from those bigger screens.

The iPhone Won't Be Replaced Yet

The iPhone's rivals have never been cheaper. For less than a quarter of the price you can buy an Android phone that does much the same things.

Yet the iPhone's lead has never been more secure. After the high-end players, Samsung and Sony, faltered, the Chinese brands that took their place — Huawei, Xiaomi — sell mostly at the low end. That suggests the users who once paid 4,000 or 5,000 yuan for an Android or a BlackBerry have largely switched to the iPhone.

According to data from the app-analytics firm App Annie, Apple's App Store had only half the downloads of Google's in 2015 but took in 75% more revenue — and the revenue gap had grown wider than the year before.

That split between downloads and revenue means a software company can build for the iPhone, serve fewer users, support fewer devices, and still earn more. So the iPhone is the first choice for third-party apps and services.

A smartphone is a more personal computer than the personal computer — it stays with you around the clock. Choosing the iPhone, with the leading brand, the leading design, and the best apps, costs only 3,000 or 4,000 yuan more, once. That is nothing next to the price gap between cars of different classes.

And because it never leaves your hand, a smartphone may be the last thing many people cut when they are trying to save money.

Clothes and bags can court different buyers through different designs. A phone maker has a much harder time doing the same.

Two people who once announced different identities through different clothes will likely carry the same phone. The difference is that one opens Airbnb to stay in someone's home while traveling, while the other reaches for the InterContinental or Starwood app to find a nearby hotel that fits their points plan. On a phone, individuality comes far more from the apps than from the small differences around the edge of a rectangular screen.

After Samsung stumbled, Android makers are now locked in a price war, and none of them can sell a phone well at iPhone prices. Among people willing to pay a premium for a phone, the iPhone today faces no rival product at all.

But the iPhone Has Hit Its Ceiling — and So Has Apple

The iPhone is unlikely to be displaced by Android. But it is also unlikely to keep selling more every quarter.

iPhone 6s sales have already fallen short of what Apple planned for earlier.

Before Apple's earnings, the main suppliers of iPhone 6s components — Qorvo, Dialog Semi, Cirrus, Avago, Skyworks — had all cut their revenue forecasts, most by more than ten percent below earlier estimates.

According to Gartner's latest report, global smartphone sales grew at their slowest pace in two years, under 5%. In China, the market driving the iPhone's growth, more than 90% of internet users are already on smartphones.

The next wave of new internet users will come mostly from less-developed regions. Smartphones will change their lives — but that, for the most part, won't be the iPhone's business.

As long as Apple won't sacrifice its margins for a cheaper iPhone, as long as the gap between rich and poor doesn't shift much, and as long as most people don't start replacing their phones every year, the iPhone's growth has run out.

As the iPhone makes up an ever-larger share of Apple's revenue, flat iPhone sales mean the whole company has hit a ceiling too.

Alongside today's figures, Apple gave its own revenue forecast for the first three months of 2016: $50 billion to $53 billion. In the first quarter of 2015, revenue was $58 billion. So Apple's overall revenue growth has run out as well.

On the earnings call after the report, Apple CFO Luca Maestri said the company was feeling a "very different" effect from the global economy. In China — the market that drove Apple's growth over the past two years — and Hong Kong in particular, Apple was seeing signs of "softness."

Finding the next market that, like the iPhone, could bring Apple far more revenue is what Cook spent 2015 trying to do.

In 2015, Every New Product Cook Launched Tried to Repeat the iPhone

2015 was Cook's busiest year for new products since he took over Apple. He launched three entirely new ones:

• April: Apple Watch went on sale, using Force Touch for the first time.
• October: Apple TV 4 went on sale, with a touch remote and the tvOS operating system.
• November: iPad Pro went on sale, running iOS 9.

Apple TV 4 and iPad Pro each extend an existing Apple product line, yet each breaks completely from what came before. Apple TV 4 brought an App Store to Apple's set-top box for the first time, and its remote was redesigned for apps and games.

iPad Pro was the first iPad with a screen as large as a laptop's. Apple stopped talking about a device between a computer and a phone and called it instead "Apple's clearest expression of our vision of the future of personal computing."

Apple Watch is essentially Cook's iPhone. At the Flint Center, where the Mac was unveiled 30 years earlier, Cook described Apple Watch as a combination of three things — just as Steve Jobs introduced the original iPhone.

Apple did not invent the smartphone. Before the iPhone, the phone was already everywhere; even the smartphone had been pushed to market by Nokia, BlackBerry, and Microsoft from around 2000.

But the iPhone was the first smartphone good enough for everyone — a glass screen you touched with a finger, plus an App Store. The iPhone, and Android shortly after, finally remade the whole phone market.

Now Cook wants to do the same again. Apple Watch, Apple TV 4, and iPad Pro all set out to remake existing products — the watch, the set-top box, the personal computer — through new ways of interacting and an App Store.

Repeating the iPhone Will Require Apple to Learn Something Different

In the last days of 2015, the piece on Apple in the American tech blog Gizmodo's year-in-review ran under the headline Everything Apple Introduced This Year Kinda Sucked.

Read against the financials, the new products do look about that good. Apple Watch sales are lumped in with headphones, accessories, and Apple TV, so the well-known independent Apple analyst Asymco estimated from the reported numbers that Apple sold about 5.5 million watches.

The verdict in this QDaily piece from six months ago still holds: by the standard of Apple's market position today, the first-generation Apple Watch has not sold well enough. Months after launch, you rarely saw it on the streets of Hong Kong or Japan, or even at CES, the largest tech show in the United States. China may be the only market where it has done well.

As for iPad Pro, the product that holds the iPad's future, its sales can't be strong either.

By the figures Apple released today, the iPad sold 16.1 million units in the last three months of 2015, down 25% from a year earlier.

Apple did not break out iPad Pro on its own. But its share can't be high — the cheapest iPad Pro costs $799, while the average iPad sold for just $468, only about ten percent more than a year ago.

The iPad has sold fewer and fewer units over the past two years.

Before the iPhone, a smartphone was just a phone with more features and the ability to install apps. The iPhone was different.

Soon after the iPhone shipped in 2007, BlackBerry founder Mike Lazaridis took one apart and said: "They put a Mac in it."

The iPhone was a personal computer shrunk to the size of a phone. To make it usable, Apple brought in the App Store and a multi-touch way of interacting suited to a small screen.

Apple's problem now is that "reinventing" the watch, the television, or the personal computer demands far more than what it has done so far — bolting a touchscreen and an App Store onto a watch and a TV remote.

Take the watch. Glancing at your wrist sounds lovely, but Apple Watch isn't smart enough to guarantee that you see what you want when you raise your arm. And tapping the screen means using both hands — less convenient than a phone. In the end, nearly half of all Apple Watch users have poked the face with their nose.

Once Apple TV is plugged into a 40- or 50-inch television, the feature that matters most is no longer installing games or the TV-shopping apps Apple demoed — it is watching video. After all, most people buy a television to watch TV and films. But Apple's content-bundle plan, after six years of on-and-off talks, has slipped again — and that is just the US market; every market means a fresh round of rights to secure.

Even iPad Pro, the closest of the three to a smartphone in how you control it, has not gone smoothly, because the App Store's original model of cheap or free downloads can't accommodate the professional software it needs to win over.

Every new product Cook wants to remake requires Apple to learn a new skill:

• Apple Watch has to be smart enough to judge what the user wants right now and cut tapping the screen to a minimum — through a better Siri, or by predicting the information you need on its own. That takes a breakthrough in artificial intelligence, which is something Google is better at.
• Apple TV needs a monthly TV subscription bundle, plus original shows and third-party rights, to own the living room. That takes sharper negotiating and content-making, where Netflix and Amazon are ahead of Apple.
• iPad Pro needs an ecosystem built for professional developers — support for more software business models, and an end to cutting developers off from their users. Microsoft has always done this better.

And that is before the Apple car now under way. Whether Apple can break through beyond the iPhone in 2016 comes down to whether, under Cook, it can learn something new.

The Top 15 includes: Apple, Google, Baidu, Alibaba, Tencent, Amazon, Disney, McDonald's, Starbucks, Nike, Xiaomi, IKEA, Uniqlo, Wanda, and Vanke. This list will change as these companies, their markets, and the trends around them change. We will follow them — and their rivals and partners.

For why we set up the Top 15 reporting project, click here.