Sub-Average Analysis: The iPhone X is not failing

by Uluroo — 9 May 2018

Apple had a great quarter, so you know what time it is: It’s time to find out what was wrong with its financial results.

Writing for The Register, Andrew Orlowski isn’t having any of this iPhone X success.

“Apple and the Notched One: It can’t hide the X-sized iPhone let-down”

For experienced Apple watchers, the arrival of John Gruber on the scene indicates Apple may have a problem. Perhaps a fire needs to be put out. Now where might that fire be?

"There's no other way to explain it than that iPhone X is a hit," Gruber proclaimed last night on his popular blog. Ah, the $999 phone with the very attractive Notch.

Are we seriously still hung up on the notch? You know what? Let’s ignore the annoying jab at the design iPhone X users have no problem with and get to the real unfounded complaint in the article.

CEO Tim Cook threw out the anecdote that the X was the best-selling iPhone throughout March, a tidbit sufficient to bring relief to anxious fanbois. The iPhone X is doing great and boosting Cupertino's numbers.

But look closer.

Again, we’ll ignore the disparaging commentary and say that yes, the iPhone X is doing great! Uluroo doesn’t see the need to “look closer” than the fact that the X was the bestselling smartphone in the world, but sure, let’s.

It was not the X driving up the ASP, before anyone gets too excited. Two other factors can also help account for the higher ASPs.

iPhones are more expensive than they used to be. Apple no longer ships a 16GB model, and has raised prices accordingly.

Okay, here are a few numbers for you. First of all, Apple’s iPhone lineup as a whole is not more expensive than it was a year ago. Four quarters ago, in the second quarter of 2017, the average price (not average selling price) of all iPhones in the lineup, factoring in storage tiers, was $695.67. The average selling price last year was $628.

Apple’s current iPhone lineup is actually cheaper than it was last year. This is due to the fact that Apple kept the iPhone 6s in stock as well as cheapening the iPhone SE. So this year, the average of all iPhone prices was $597.25. The average selling price went up by $100 to $728, even though the average price was $100 cheaper.

In spite of a cheaper overall lineup (and slower sales growth), Apple increased the ASP by the amount its lineup grew cheaper. That’s impressive. That also means that Apple sold a lot of units that were more expensive than $628. If you take into account the fact that the iPhone X was the best-selling phone in Apple’s lineup for the past two quarters, this makes even more sense.

And Orlowski has no response for this. He merely dismisses it as an “anecdote.” Why does he consider this analysis if he can’t tell the difference between data and anecdotes? What kind of technology coverage is it that can’t accept the facts?

We may also be seeing the Plus take a larger proportion of the mix. In China everyone wants a phablet-sized phone – the Plus is not an unusual sight on city streets, but the regular iPhone is a rarity. China is a growing market for Apple, with growth up 21 per cent.

Now Orlowski is ignoring the facts big-time. The iPhone X was the bestselling smartphone in China last quarter. Did Orlowski bother to look anything up before he posited the possibility that the iPhone 8 Plus was selling better? It took Uluroo about five seconds to find the statistic showing the X being the bestseller in China.

So, if you're attributing higher ASPs to The Notched One's supposed success, well, don't.

Every claim that Orlowski has made has been disprovable by facts. The iPhone X has been largely responsible for higher ASPs and for the enormous revenue growth Apple experienced.

To emphasise, the X is doing as well as can be expected of a $999 phone – a price point that stretches the top end of the market. Perhaps not as well as Apple hoped, though.

"Predictions of an iPhone 'super cycle' — a resurgence of iPhone handset sales this year sparked by the remodelled iPhone X model — are officially garbage. There is no super cycle, as almost everyone outside of Apple headquarters has come to acknowledge," wrote Bloomberg gadfly Shira Ovide yesterday. "This wasn't a share gain predicated on excitement. It was a gain of relief, fueled by lowered expectations."

In response to Ovide’s point, it’s important to note that Apple failing analyst expectations is not the same thing as Apple actually failing. Super cycle predictions were ridiculous in the first place if by “super cycle predictions” you mean predictions that the iPhone X, a $999 phone, would do better than being the bestselling phone in the world. And what does Ovide mean by “everyone outside of Apple headquarters”? When has Apple said anything about a super cycle? The important thing is that the X is making a boatload of cash even though the global smartphone market is slowing down. It’s not Apple’s fault for failing analysts’ ridiculous expectations; it’s analysts’ fault for expecting so much of a $999 device and calling it a flop even though it was the bestselling phone in the world. Analyst expectations should not be a company's standards.

There was one significant confirmation that Apple has misjudged demand for The Notched One, and unlike the Apple groupies, Cook addressed it head on. The earnings confirm that inventory levels are way higher than normal, and Apple has taken this seriously. As we suspected, inventories tell the real story. Now we see that they're up 164 per cent year on year, according to Wall Street analyst Bernstein.

Inventory is higher! Oh, no! Well, here’s the transcript of Apple’s quarterly earnings call, and oh look, CFO Luca Maestri made a comment about that:

Maestri: Our inventory level has gone up. It's just a temporary event. We have decided to make some purchasing decision, given current market conditions, and that should unwind over time.

So increasing component orders could have happened for any number of reasons. As Horace Dediu points out, it could have been a strategic move to buy out components and limit competitors’ inventory. Either way, there’s no way Apple actually expected to sell 50 million iPhone Xs or whatever the number was that analysts were saying. This wasn’t a misjudgment of demand; even if it were, it wouldn’t be as drastic as Orlowski makes it seem.

Orlowski almost seems to be deliberately ignoring the facts. He brings up the possibility that the rest of the iPhone lineup was responsible for the ASP growth, but he doesn’t care that the iPhone X sold better than those models. He claims that inventory tells the whole story when it’s more nuanced than he seems to want to realize. And he doesn’t want to note that the iPhone X was the bestselling smartphone in the world. Overall, Apple’s quarter was amazing. And that was largely due to the iPhone X, whether analysts like it or not.