Apple's Tim Cook confirmed Wednesday that the latest
iPhones, his flagship product, are not selling up to expectations.
The news exposes his toughest challenge since taking over as
chief executive officer from the legendary Steve Jobs: how to take the company
forward when it’s top product has lost luster with consumers.
Cook has dealt with a series of controversies during his
more than seven years in the role, ranging from the company’s failed Google
Maps replacement launch and the need to oust the head of iPhone software in
2012, to concerns over labour and tax practices.
He has calmly navigated the politics of President Donald
Trump’s administration, and so far has avoided tariffs on the company’s key
devices as the US-China trade war widens.
Now comes the disclosure in a letter to investors that Apple
sold fewer than anticipated new iPhones, and would cut its holiday quarter
sales outlook by as much as $9bn.
Cook plans to address Apple staff about the situation on
Thursday at an all-hands meeting where he will take questions from workers,
according to a person familiar with the matter.
"This is probably one of the hardest things Tim Cook
has had to do as CEO, putting out that letter today," said Michael
Gartenberg, a former Apple marketing executive who has followed the company for
decades.
Daniel Ives, an analyst at Wedbush Securities, said "this
is going to be the most defining moment of Cook’s career."
When he succeeded co-founder Jobs in 2011, Cook was well
regarded for his supply chain mastery. He’s leaned on lieutenants like design
chief Jony Ive and marketing head Phil Schiller to dream up new devices.
He’s also benefited largely from the success of the iPhone.
It generates about two-thirds of the company’s sales, but it produces much more
revenue when accounting for services like Apple Music and attached devices like
the AirPods and Apple Watch.
The stock price has gained 194% since Cook took the top job,
share buybacks have been strong, and annual revenue has more than doubled.
The iPhone’s average sales price, revenue and unit sales
have increased. That has allowed investors and analysts to mostly ignore the
lack of new ground-breaking products like the iPhone across the Cook era and
his delegation of product development to his staff.
The disclosure of lower-than-anticipated iPhone sales due to
an economic slowdown in China and fewer upgrades to new models by existing
users calls into question Apple’s strategy of being so reliant on the device.
The company’s shares fell as much as 8.5% in extended
trading. Apple’s US and Asia suppliers also declined.
"It’s a two-fold challenge: they need to prove that
this is a blip, not a trend," Gartenberg said. "We’ll see a lot of
efforts from Apple from marketing and PR to show that. For Tim, the other part
is: How does Apple juice iPhone sales?"
Gartenberg said Apple may try to highlight its other
products and reduce the attention on the iPhone "since the next major
model isn’t expected until September. We’ll see Apple try to position the
iPhone as more affordable."
Wedbush’s Ives said Cook has two choices: "Cut prices
and figure out China and realise recent iPhone pricing was a mistake or they
can have a sense of hubris and continue the current strategy." He expects
Cook will steer Apple toward the former.
Apple needs to look beyond its core product. Smartphone
sales have stagnated and are virtually unchanged worldwide the past two years.
Under Cook, Apple has launched a few new types of products,
including AirPods and Apple Watch. Both, however, are glued to the iPhone.
The company has talked about its services business as a
significant new source of revenue – Cook said sales increased to $10.8bn in
the holiday quarter – but those are best used on an iPhone. Wholly new
categories like self-driving car technology and augmented reality glasses still
appear years away, while a major new iPhone for fifth-generation networks isn’t
expected until 2020.
For now, it appears Apple’s iPhone sales problem is
China-focused. According to analyst Shannon Cross of Cross Research, as long as
the problem doesn’t spread to other regions, Cook can weather the storm.
"It’s going to rely on understanding the supply chains,
how to make sure costs are efficient and effective," which are Cook’s
strengths, Cross said.
Cook could also use this as an opportunity to reassess the
company’s reluctance to make industry-shattering acquisitions. His biggest deal
to date was for Beats Electronics and Beats Music, which sold for a combined $3bn
in 2014.
For several years, analysts and investors have predicted
that Apple could use its giant cash holdings to quickly break into new
categories. Over the years, takeovers of Tesla and Netflix have been investor dreams.
"I’ve always been very clear," Cook said in an
interview Wednesday with CNBC. "We look at many, many companies including
very large companies. We’ve elected so far not to do those because we haven’t
found one that we said, 'wow, that’s a nice intersection of Apple.' But I’d
never rule it out."