Apple’s iPhone Subtraction Demands Some Addition

(Bloomberg Opinion) -- If you see any Apple Inc. employees today, give them a sympathetic pat on the back. It has been a rocky stretch for the company, at least in the hearts of investors. 

After five almost uninterrupted years as the world’s most valuable public company, Apple this week lost its crown to its old nemesis, Microsoft Corp., thanks to a 25 percent slump in Apple’s stock price since an early October peak.

Apple’s iPhone Subtraction Demands Some Addition

Anxiety about economic weakness in some parts of the world and a deepening U.S.-China trade skirmish have weighed on Apple shares. So did a decision earlier this month to stop disclosing how many iPhones, Mac computers and iPads it sells. That news — coupled with reports about soft production of new iPhones — has convinced investors that iPhone sales are heading south for good and that Apple is trying to hide its problems. 

Those fears are understandable. As smartphone shipments slow or decline across the industry, Apple just barely sold more iPhones in its fiscal year ended in September than it did the previous year. It hasn’t helped that Apple doesn’t discuss those industry trends and now seems to be trying to run from reality.

A justification for ending the disclosures came from Luca Maestri, Apple’s chief financial officer, who told analysts that the number of devices sold no longer represents an accurate picture of the company’s performance. In the last three years, Maestri said on a conference call, “there’s no correlation” in any given quarter between device unit sales and Apple’s revenue, net income or stock price. Permit me a rebuttal in the form of a chart:

Apple’s iPhone Subtraction Demands Some Addition

That is quite a tight correlation. (The operating profit relationship is similar.) And how could there not be a tight correlation? Sales of iPhones generate about two-thirds of Apple’s annual revenue and most likely an even larger share of its gross profit. 

Yes, the coupling has loosened a bit recently. The chart below shows the rate of revenue growth of iPhone unit sales compared with Apple’s total revenue growth rate, and it illustrates how Apple’s revenue growth shot up in the latest fiscal year even as iPhone unit sales barely budged because of the higher-priced iPhone X and its successor. To me, that makes it even more relevant to know the number of devices Apple sells.

Apple’s iPhone Subtraction Demands Some Addition
No matter the rationale, if Apple stops disclosing how many iPhones and other computing devices it sells each quarter, it needs to add information that would help outsiders understand its strategy. You can see what Apple is trying to do to offset a stagnant smartphone market. More than 1.3 billion iPhones, Macs and iPads are in use around the world, and that built-in audience of Apple lovers is a huge financial opportunity.

That’s the real genius of ancillary products like the Apple Watch, HomePod, AirPods, Apple Music and other Apple digital offerings. Those products and services are either unavailable or effectively pointless to people who don't already have an iPhone or another Apple gadget. But for people who do, those add-ons are useful, and they help Apple generate more revenue and customer loyalty even if it can’t persuade everyone to buy a new device every couple of years.

It is a sound strategy, but Apple needs to prove both that this is the company’s aim and show investors that it’s working. I — like the tech writer Ben Thompson — am talking about Apple offering a metric like ARPU, or average revenue per user, which companies such as Comcast Corp. and Facebook Inc. give to show their ability to increase revenue from their existing customer bases. This is what Apple is trying to do with its add-on hardware, software and services. At a minimum, Apple needs to regularly disclose the number of its devices in active use worldwide — a metric the company discloses only on occasion. 

Apple shouldn’t tell investors to stop fixating on the number of new gadgets it sells without arming them with fresh data to think different about the company. That means Apple needs to stop trumpeting the popularity of its iPhone models, as it did as recently as Wednesday, and start talking about the value it provides to loyalists and the company’s coffers by keeping people happy, entertained and spending more in Apple’s ecosystem. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.

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