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Tim Cook Needs Better Ideas Than This for Apple

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Tim Cook Needs Better Ideas Than This for Apple

Toward the end of Apple's stunning disclosure about its worse-than-expected sales, the company's boss suggests a tactic it will use to counter surprisingly meek demand for its smartphones. I hope Apple has better ideas than this.

In a letter to stockholders, Chief Executive Officer Tim Cook said that Apple couldn't change global economic conditions that are hurting sales but that it would do more to control what it can. The single specific initiative Cook mentioned was making it simpler to trade in an older model iPhone at Apple's stores, finance the purchase over time and get help transferring apps and other data.

Apple already offers a program in the US to spread out the cost of an iPhone purchase, as do many mobile phone companies. That's critical because, in the US at least, the vast majority of smartphones are sold by mobile phone companies rather than by Apple or other handset makers.

Existing initiatives haven't altered the smartphone market reality. Smartphone users in the US and many other established markets are holding on to their gadgets longer than they used to - more than three years on average in the US, up from about two years in 2014, according to mobile industry consultant Chetan Sharma. That's a big reason global smartphone sales were estimated to have fallen slightly in 2018, as they did the previous year.

It's a pity that in trying to justify Apple's financial disappointment Cook didn't offer stunned investors any better solutions than the tactics the company and its partners are already trying. After Wednesday's announcement, investors should be forcing Apple's management to show them under the hood of its business in China and the rest of the world. Until now, they have been too content with executives' pablum and bromides. The time for pablum and bromides should end now.

I must say another word about the chief culprit Apple cited for its surprising 5 percent quarterly revenue decline: China. Cook said Apple was surprised by a sharper slowdown in economic growth in China, which he said had hurt demand for iPhones, iPads and Macs. He also said the tussle over US-China trade policies is unsettling Chinese consumers.

That explanation deserves more attention. Cook's letter hinted at data showing smartphone sales in China have been falling for 18 months. He didn't mention that Apple has fairly steadily lost smartphone market share in that country to local rivals such as Huawei and Oppo, which generally charge far less for their phones than Apple does.

The falling smartphone market and lost market share haven't shown up in Apple's financial results - at least until Cook's revenue warning - in part because Apple increased prices for many of its devices and enough people in China and other countries were willing to pay what Apple was asking. There was a natural limit, however, to Apple's growth potential in a saturated smartphone market in a country with a slowing economy and other anxieties.

China, in short, is becoming like many other countries when it comes to smartphone buying trends: There is less natural growth left as fewer people are buying their first smartphones. And people are holding on to their old devices for longer before splurging on new ones, which weighs on new smartphone sales.

This appears to be a permanent shift in the country that accounts for one-third of global smartphone sales. But Apple never, ever was candid with investors about the potential for its business in China to hit a wall. Cook has consistently flubbed opportunities to give investors an honest account of what has been happening with Apple's business in China - and beyond, but that's a topic for another column.

When Apple sales started falling in China in 2016, Apple executives gave every excuse in the book, including slower economic growth in the country. Sound familiar? Some of those excuses were valid then. Others weren't. Apple belatedly acknowledged it was caught off guard by a hangover effect following blockbuster sales of the 2014 iPhone 6 model in China and elsewhere in the world. In interviews over the years, Cook sought to accentuate the positive about business in China, notably by saying one or more iPhones were the most popular smartphones in China. Cook's comments papered over the reality that Apple not long ago was the top-selling smartphone maker in China and slipped to fifth in the second quarter of 2018.

The company deserves credit for showing strong growth in China despite declining smartphone demand there, economic strains and declining market share. But that didn't mean everything was trouble free, as Cook repeatedly suggested. Economic hiccups in China were obvious, but Apple never suggested they would affect the company. As recently as November, executives said Apple's business was going strong in China, even amid signs at the time that slower economic growth was hurting Chinese sales of some consumer items such as cars. Cook had also expressed confidence that the US and China would resolve their trade disputes amicably.

Changes in smartphone buying trends in China, and Apple's falling market share there, were obvious, but Apple brushed off any concerns or ignored reality. Cook suggested in his investor letter that what happened to Apple was a temporary blow from unforeseen economic weakness in China. That isn't entirely true. Apple's failures to be honest about what could go wrong are coming back to haunt the company and its investors. 

© 2019 Bloomberg LP

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