By Stephen Nellis
(Reuters) – By delivering solid financial results that beat Wall Street’s expectations for both revenues and profits on Thursday, Apple Inc’s CEO Tim Cook put to rest concerns that the company’s flagship device, the iPhone X, wouldn’t be ready in time for the holiday shopping season.
But beneath the headline revenue and profit figures, Cook also seemed to have solved two of Apple’s longest-standing problems: its heavy reliance on the latest flagship iPhone to buoy its profits, and its lack of affordable offerings to help budget-minded buyers see the benefits of joining Apple’s ecosystem of hardware and software.
And all Cook had to do was stop Apple’s unusual Steve Jobs-era policy of ruthlessly killing off old products when better ones came along.
To see the effect of the Cook Doctrine, look no further than Apple’s current, unprecedented line-up of five different iPhones. The flagship iPhone X, priced at $999, has drawn most of the media attention for the holiday shopping season.
But far from the limelight is the humble iPhone SE – essentially an updated iPhone 5, which came out five years ago. It retails for only $349 and appears to have played a major role in Apple doubling its revenue in India, an important emerging market.
Cook told investors on a conference call discussing Thursday’s financial results that “a majority” of the iPhone SEs the company sold in India were also manufactured there, a critical component of Apple’s negotiations with the Indian government for market access.
There’s good reason to believe former Apple CEO Jobs would never have kept a product like the SE around. Jobs co-founded Apple and oversaw its dramatic rise in the late 1970s and early 1980s, including the introduction of the Macintosh in 1984. But he was pushed out of the company in a conflict with then-CEO John Sculley over the company’s direction in 1985.
Over the next decade, Apple lost its dominant position in the personal computer market as devices powered by Microsoft Corp’s Windows gained market share. In an attempt to regain market share, Apple expanded its product line up but found little success. After Apple purchased Jobs’ company and rehired him as CEO in 1997, he famously pared down the company’s product line to just a handful of offerings where he believed Apple could offer the best.
And even after the company regained its financial footing in the early 2000s, Jobs had no compunction about killing an old product for something better. The iPod Mini, a svelte version of what was then Apple’s flagship gadget, lasted just a year and a half. Jobs killed that product and replaced it with the iPad Nano, which was even smaller.
That approach left Apple with a small product line-up that was profitable but pricey. Analysts nagged the company about when it would offer lower-priced products, and it made a few stabs. The iPad Mini, released in 2013, temporarily boosted iPad sales, but the plastic-backed iPhone 5C was viewed by analysts as a flop.
But the Cook Doctrine of letting older models linger and drop in price appears to be working. Apple hit analyst expectations by shipping 46.6 million iPhones in its fiscal fourth quarter, though with lower average selling prices.
That doesn’t mean Apple is leaving profit on the table. On the contrary, more phones – whatever the price – help boost the services business, which includes Apple Music and the App Store. Services brought in $8.5 billion in revenue in the quarter compared with analyst estimates of $7.5 billion, though that included a favorable $640 million adjustment.
More phones also helps boost sales of emerging Apple products such as the Watch, the Airpod wireless headphones and Beats headphones. Executives said sales of those products now rival the size of a “Fortune 400” company, implying they’ll reach sales of about $6.7 billion over the next year.
The bet Cook seems to be making is that if Apple lowers the price of entry for getting a taste of its flagship iOS operating system, its customers will want to spend more money in Apple’s ecosystem, even if they do not spring for its most expensive devices. So far, that bet is paying off.
Graphic – iPhone comparison: http://fingfx.thomsonreuters.com/gfx/rngs/APPLE-IPHONE/010050SQ1TP/index.html
Graphic – Apple vs the S&P 500 since the first iPhone: http://fingfx.thomsonreuters.com/gfx/rngs/APPLE-STOCKS/010051J53FP/index.html
Graphic – Apple earnings: http://fingfx.thomsonreuters.com/gfx/rngs/1/1419/2253/index.html
(Reporting by Stephen Nellis; Editing by Jonathan Weber and Christopher Cushing)