Apple takes $5bn bite out of forecasts as iPhone stumbles

The company has pointed to slowing economic growth in China, but consumers are proving increasingly reluctant to pay through the nose for modestly upgraded phones

Is Apple starting to show signs of rot?

CEO Tim Cook’s new year was anything but happy. He was forced to take a big bite out of the company’s forecasts.

Wall Street had been disappointed by the $89bn (£71bn) estimate he gave in November for the first three months of Apple’s financial year, which ended on 29 December. The market’s bears really slashed at the stock after he sent a letter to investors saying he expected the final tally to come in $5bn lower than that.

The iPhone has been showing disappointing sales. Cook sought to highlight economic issues in Greater China, where growth has been slowing, and other “emerging markets” in his explanation for that.

But he also admitted iPhone upgrades were not as strong as he’d hoped in some developed markets.

Apple’s problems go beyond the fact that the Chinese tiger isn’t roaring so loudly combined with the damaging trade war it is engaged in with Donald Trump’s America (which Apple is caught in the middle of).

Consumers are proving increasingly resistant to its pricing strategy.

Apple has achieved something extremely rare with the iPhone. Its price and margins make it a luxury product, with the top-end models going for well over $1,000 (£795). But it enjoys mass market sales.

With each new release the company has sought to test new price points, and each time the market has declared itself willing to pay up, even though upgrades started to obey the law of diminishing returns some time ago. With its latest release, Apple may have found that point at which its fans are saying “enough already”.

Cook referenced this in his statement, although it was overlaid with caveats and excuses. He talked of “consumers adapting to a world with fewer carrier subsidies, US dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements”.

That translates as: “We squeezed too hard.” So it will be fascinating to see how the company responds to this with its next release. Will Cook be willing to sacrifice some of the company’s margin in favour of encouraging the masses to sign up?

Someone working at its California campus is doubtless at work on an algorithm that will produce a magic number. If only consumers behaved like numbers.

Don’t cry for Cook. His Apple’s hardly rotting. The core is still strong. This could ultimately prove healthy. Businesses need the occasional wakeup call when they start to take their customers for granted. Apple’s been doing that. Ditto its investors.

They just need to wake up to the fact. They’re both going to have to learn to accept that a modestly upgraded iPhone no longer guarantees a massively upgraded return.