From John Gruber’s On Apple’s $29 iPhone battery replacement program and its role on their earnings miss:
During Apple’s all-hands meeting January 3, Tim Cook said Apple replaced 11 million batteries under the $29 replacement program, and they’d have only anticipated about 1-2 million battery replacements normally. (The fact that Cook held this all-hands meeting was reported by Mark Gurman at Bloomberg, but the contents of the meeting haven’t leaked. Well, except for this nugget I’m sharing here.)
The battery replacement program ran all year long, so even if it was more popular than Apple originally expected, why wasn’t it accounted for in guidance issued on November 1 — 10 months after the program started? My guess: the effect of the battery replacement program on new iPhone sales wasn’t apparent until after the iPhone XR and XS models were available. A few million extra iPhone users happy with the performance of their old iPhones with new batteries — who would have otherwise upgraded to a new iPhone this year — put a ding in the bottom line.
My take: If you’re joining this batterygate sequel midstream, the leak from Cook’s hands-on came after some back-of-the-envelope miscalculations by Jean-Louis Gassée in this week’s Monday Note (Apple Q1 Numbers: Missing Explanations). Gassée spitballed that Apple might have replaced a few hundreds of thousands of batteries at a $50 discount in 2018, not enough to significantly affect Q1 2019 iPhone sales. Giving new life to an extra 9 or 10 million aging iPhones, on the other hand, could knock the wind out of the launch of three pricy new models.
Apple: damned if you do, damned if you don’t.
I wuz just gonna write that !!!
Looking forward to the 2019 super cycle then…
Look for it in 2020.
súper cycle of fresh new batteries?
How often have we heard from Apple that they want happy customers? That they love when a sale of one thing cannibalizes a sale of another Apple product…
How many of those 11 million users are happy that they saved hundreds of dollars, and are still using their iPhones?
How many are still buying apps and content / subsciptions?
How many hooked up an Apple Watch or Airpods?
How many will replace the battery next year, even with the tick up in price vs will update?
As DED has stated, Apple has found 1 billion + people of the planet that love their products, and love the ecosystem enough to stay in it. Some more will come, some will leave, and they are always welcome back.
Yes. Tim Cook reiterates this point all the time. Apple is a great for patient investors that understand, but horrible for people who react to headlines and short-term effects.
Many of the one billion happy Apple installed base love that Apple ‘just works’. They’ll upgrade slowly, or buy used iPhones which are great and fully supported. This may impact sales and more due to external global economic issues.
@ Aaron:
Be careful. There’s a difference between # of Apple devices in use and # of device users. I own 6.5 Apple devices, and so does my wife, including an iMac, an iPad, an iPhone, an Apple Watch, Airpods, half of our set of Homepods, and half of our Apple TV.
All the more reasons why I dont care about device sales. I want to know how many AppleIds there are and how much they spend on hardware and apps. I want to know how happy they are. Period.
Sure there’s extra datapoints within those items, ones that Apple likely analyzes. And Apple can keep those close to the vest so they can, a.) develop and refine new products and b.) make sure their users aren’t having problems. And if they are having issues, can Apple get to them quickly enough to resolve them so that it doesn’t effect the two critical stats.
Thats all that matters at the end of the day.
why wasn’t it accounted for in guidance issued on November 1 ?
Probably because the battery replacement program hadn’t impacted sales until November, if in fact that was the cause of iPhone weakness in that period.
My take is that if the performance of the iPhone 6 (how many had been acquired as refurbs or hand me downs) satisfied the user, that user was not a candidate for a new iPhone. Rather that user would have “upgraded” to a newer albeit used iPhone. And how many of those iPhones were dug out of the closet just because?
I don’t see the battery replacement program materially impacting iPhone sales. If the program was impacting we’d have seen it earlier than 10 months after the program started.
Besides 11 million out of an upgrade pool of 500 million is insignificant. Gassee’s “error” is irrelevant.
The 11 million is just one of several factors. Here is no particular order:
1) Trade war.
2) Apple just had 5 strong consecutive quarters of iPhone sales, cannibalizing future sales including Q1 FY19.
3) Economic uncertainty can depress upgrade sales of loyal customers who are not gadget geeks.
4) 11 Million is about 2% of annual sales.
5) A large number of inexpensive used iPhones have great cameras, including telephoto. These can be attractive to loyal, but budget constrained, Apple fans.
Alarming? No. But does set expectations.
Correction – 11M is 5% of annual sales, which may impact people who focus on short term trends.
Battery replacement is not going to be an issue in FY2020. What will be an issue is this year’s “expensive” iPhone X lineup will be $100 cheaper. The best selling iPhone Xwill start at $649, very much in line with original launch prices for the iPhone 6, 6S, 7, 7S, but with a much larger screen more powerful processor an much better camera.
The in FY2021 the Xr will be even less expensive, as well as the iPhone XS series of iPhones.
There won’t be enough used/refurbed iPhone X Series iPhones to satisfy demand from an aging customer base to satisfy demand. Sales of new will resume growth even though those “new” iPhones are one or two year old models.
A $50 discount for 11 M people is $550 M in lost profit. Using a net yearly income of ~$55 B, that’s 1% of profit that Apple had to eat. So yes, there was a minor impact there.
The other impact would be on sales of replacement iPhones. But how many folks who replaced their batteries would have otherwise bought a new iPhone? I’m guessing that the lion’s share of “repaired” iPhones were sold on at a higher price, said increased profit then being used to help finance a new iPhone, and perhaps a more expensive model.
Uh, no. The lost iPhone sales is represented by the Refenue from 9-10M iPhone sales.
It helped drop AAPL from $235 to $145, and I’m not happy about it.
Hopefully, lesson learned.
Why oh why am I finding myself in the position of quashing the permabulls on this site, when I am also a long term permabull? But, sorry— when the news emerged and was tossed about amongst enraged techies that Apple was throttling performance to preserve battery life, a more sensible response from the company would have been— “Sorry, we’ll do an immediate update to permit you to either throttle or not to throttle— using your phone’s current battery. Didn’t mean to upset anyone.” Then point out that even—even— Apple can’t reverse the laws of physics and squeeze more electrons out of a lithium molecule than it ultimately has to give, and that consequently all batteries do degrade with time. Offer a somewhat pricey replacement battery to those who want it, but call into question whether it wouldn’t make sense to just buy a newer phone instead— perhaps by upping the trade-in value of the older battery-degraded phones to sweeten the deal, then turn those repurchased phones around (with batteries installed at Apple’s cost) into the secondary market. Poof! Increased install base, managed.
If half of the 11 million battery purchasers had done the math and bought new phones instead, or even “new to them/ refurbished” phones, I suspect we would be rolling in dough. Poof! Sales decline gone, and AAPL would still be the market’s darling. Oh well, in my dreams…
Hindsight is such a wonderful thing.
I’m in agreement with you about Apple’s handling of the issue. That said there were over 50 class actions initiated within days of the judgement error. I think that may have caused Apple to over react with a solution in order to cut off the flow of bad news.
Still, the shortfall in iPhone sales was almost entirely in greater China, which to me says the battery upgrade program had little to do with Apple’s revenue miss.
What if Apple actually chose to respond to controversy and confusion by extending the duration that people could be delighted with their present phones? Throttle-gate was being tied to the idea of planned obsolescence and forcing users to upgrade as well, if I recall. It seems the battery replacement nipped that idea in the bud.
For all the heat Apple has taken, I think they’ve managed to amass a very large installed base including plenty of older phones. Now there are millions more of these older phones that are almost as good as new, running a spiffy modern OS and doing it with capable speed. Their happy users get to enjoy their phones for longer.
If I ran a company that was committed to delighting my customers, I might relish this idea. And if I did the math and figured these delighted customers would eventually spend billions on new phones, I might even think it was critical to make sure existing customers never had cause to doubt how fantastic their phones were.
What’s the final amount of deferred sales these past couple quarters? A few billion? Five billion? Whatever it is, I think it’s small potatoes if the vast majority of those who replaced their batteries make their next phone an iPhone.
Would people have defected over throttle-gate? Would it hurt the brand? If you were CEO would you want to take that chance?
And I should point out that a fall from an October high of 233.47 to a January low of 142, a near 40% loss in share value, will take an approximately 65% increase off the lows just to reach October highs. It may take a while… so I would suggest that even long term investors, not just traders, are suffering at this point.
Agree with Kathy. I think Apple over-corrected for the throttling issue by reducing the cost of battery replacements. And, it seems to me that Cook made battery-gate seem valid by bringing up the lost sales. He said too much IMO.
@ Dave @ Kathy:
Tim said that the battery replacements impacted last quarter’s results. That’s all. I don’t think he said it had a big impact. And yet that’s what’s got the focus. Not surprising, given the energy spent on trying to find something, anything, to ding Apple with. IMHO, you folks are giving into the meme.
Did Tim play into folks hands by bringing the subject up? It’s better to err on the side of too much information than not enough when you’re restating earnings. I’m giving him the benefit of the doubt.
Did Apple give back too much? Maybe, but again, it’s better to have happy customers long term.
Bottom line, this is all much ado about not much.
@ Kathy:
“And I should point out that a fall from an October high of 233.47 to a January low of 142, a near 40% loss in share value, will take an approximately 65% increase off the lows just to reach October highs.”
Counting from today, it needs to go up about 52.5%. Will it take a year from the bottom like it has the last two times this has happened? Maybe. But this was the sharpest drop I’ve ever seen, taking place inside of 3 months. It’s possible the reversal could also take place abnormally quickly. The selloff yesterday was clearly linked to bad news coming out of China. A lot of the potential rebound depends on the TTW (Trump Trade War), and any other black swans (or white swans, for that matter) we don’t presently know about. I.e., like the exchange rate, it’s out of Apple’s hands.
Right. I’m a permabull like you. And I share your skepticism. Apple is great. They also make mistakes and miss opportunities. But they know their values, ethically, and in terms of business model. The Cook, the master chef du cuisine, does a darn good job.
some traders are suffering.
some aren’t.
swing and a miss by gassée