November 1, 2018 / 9:36 PM / in 19 days

Breakingviews - Apple’s pricey strategy carries risk

The Apple logo is shown during an Apple launch event in the Brooklyn borough of New York, U.S., October 30, 2018. REUTERS/Shannon Stapleton

NEW YORK (Reuters Breakingviews) - Apple’s pricey strategy carries risk. Making its new iPhones more expensive helped boost the tech giant’s revenue 20 percent in the latest quarter. Now Tim Cook is applying the same formula to the company’s Macs, iPads and accessories. But a growth warning suggests even Apple fans may have sticker shock.

The $1 trillion company generates roughly 60 percent of its sales, and most of its profit, from the iPhone. While handset volume was flat in the latest quarter compared with the same period a year earlier, at 46.9 million, these yielded over $37 billion of revenue, thanks to a nearly 30 percent jump in the average sales price, to $793 per phone.

Apple’s customer loyalty, design, penchant for security, incremental improvements and customer privacy ensure that most people and companies replacing old iPhones have been willing to pay a higher price for a new one.

The company also continued to squeeze more dollars out of iPhone users. Services revenue shot up 17 percent to $10 billion as users bought more apps from Apple’s online store and storage, and used their phones for more payments. Perhaps $2 billion of this – the company doesn’t break out the figure – came from Alphabet’s Google in return for Apple making it the default search engine on iPhones, according to a recent Goldman Sachs estimate.

That leaves Apple’s other gadgets. Demand for Macs and iPads is mature. Other items such as watches and earphones are growing faster, but in total these businesses account for only about a quarter of revenue. So Apple is replicating its iPhone strategy and raising prices on new models it rolled out this week in time for the holiday quarter.

It’s not clear this formula will work, though. Apple warned that revenue in the current quarter, its busiest of the year, would be between $89 billion and $93 billion. The midpoint would represent growth of only about 3 percent, which would be a big step down from the previous quarter’s 17 percent pace. Its shares tumbled nearly 5 percent in after-hours trading.

For Cook and company, further growth may depend more on developing new gadgets than changing price tags.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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