Hey guys it’s Greg with Apple Explained.
And in this video we’re going to cover some
of the trouble Apple’s had with their iPhone
XR. Because the company expected it to be
one of the best selling iPhone models of all
time, but it’s become clear that isn’t
the case at all. And Apple has been moving
very aggressively to remedy the lack of demand.
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Now before the iPhone XR and XS was introduced
back in September, Apple was enjoying the
tremendous success of their iPhone X, which
helped catapult the company to a one trillion
dollar valuation in August 2018. But there
had been many criticisms of the iPhone X,
one of the biggest being its high price. Because
at one thousand dollars, it was the most expensive
iPhone ever sold, and many analysts believed
that would hinder sales of the model. But
Apple proved them wrong, selling more iPhones
in 2017 than the year before.
So when it came to the iPhone XS and XR, Apple
assumed they had a winning combination on
their hands. Especially since they were offering
a budget iPhone that featured an even larger
edge to edge display than the X. And it came
in colors! So why on earth would the affordable,
attractive, feature-filled iPhone XR not sell
like hotcakes? Well, there has to be at least
one reason, because to Apple’s surprise,
the XR didn’t perform as well as they’d
expected. And this has contributed to a host
of problems for the company. Like falling
stock prices, criticism from analysts, and
frustration from suppliers. So let’s take
this story one step at a time, and figure
out why the iPhone XR became one of the only
models to fall short of Apple’s expectations.
It all started on October 19th, 2018. The
day Apple began taking preorders for the iPhone
XR. You see, preorder day for any new iPhone
is always highly anticipated, with millions
of people across the globe eager to be the
first to submit their order on Apples website.
Because typically what happens is, within
hours, the iPhone’s shipping time begins
to slip as all the preorders come pouring
in. But that didn’t happen with the iPhone
XR. In fact, it took four days of preorders
before there were any shipping delays. And
one reason for this is that initial demand
for the XR wasn’t nearly as high as Apple
hoped. But there could’ve been another reason,
maybe Apple intentionally ordered more iPhones
than usual in order to prevent shipping delays
of as many preorders as possible. And while
this may be true, the events that would unfold
later on suggest otherwise.
Because just a few days after the XR went
on sale, Tim Cook moved marketing staff from
other projects to work on boosting sales of
the new iPhones. And an internal source called
this shift a “fire drill,” which certainly
suggests the iPhone XR was selling below Apple’s
expectations. And work of the newly assigned
marketing team became visible right away.
With Apple partnering with The Ellen Show
for the first time, giving away a free iPhone
XR to every audience member. But when it came
to their Black Friday promotion, Apple wasn’t
so generous. Only offering gift cards of up
to $50 if you bought an older generation Apple
device. But the company obviously felt much
more giving when it came to the iPhone XR.
Since they offered a discount of up to $300
upon trading in your existing iPhone. And
that’s something I want to talk about in
more detail. Because although Apple has had
an iPhone trade in program for years, they
never promoted it as aggressively as with
the XR. It’s the first thing listed on Apple’s
homepage and it’s even displayed on a sign
inside of Apple Stores across the country.
And this is very uncharacteristic of Apple,
who usually never runs any sales or promotions
on any of their products, and this is especially
true when it comes to the iPhone. Because
demand for the latest model is usually so
high that Apple is able to simply name their
price and never lower it until an updated
model takes its place. But that isn’t the
case this year. The fact that Apple is promoting
the iPhone XR at its potential trade-in price
of $450 really goes to show how desperate
they are to generate interest in the new model.
And to top it all off, Apple actually indirectly
lowered the price of the iPhone XR in Japan
through carrier subsidies. So Docomo customers
will effectively be saving $100 with a 24
month contract. And that’s a move we’ve
never seen before from Apple.
Now I can’t help but think that if the XR
had sold as well as Apple expected, we probably
wouldn’t be seeing it on the Ellen Show
or promoted at a trade-in price on temporary
signs at Apple Stores.
But it seems that all the marketing and promoting
didn’t have too much of an effect on iPhone
sales. Because two months after its release,
Apple cancelled a production boost they had
scheduled for the iPhone XR. You see, the
company had originally planned on increasing
the number of assembly lines for the XR before
the holiday season. But they actually did
the exact opposite. Decreasing their production
lines from 60 to 45. A 25% manufacturing drop
right before the holidays, which is definitely
saying something.
Now I should mention that there were reports
claiming the cancellation of the iPhone XR
production boost was due to quality issues
with its Printed Circuit Board rather than
low demand, but this doesn’t explain why
Apple decreased assembly lines rather than
keeping production steady.
Now the news surrounding the iPhone XR’s
lackluster sales really took a toll on Apple’s
share price. But this wasn’t the only thing
that scared investors. Because on November
1st, Apple announced they’d stop reporting
units sales of all their products. Something
many experts believed was influenced by disappointing
sales of the iPhone XR. And as a result, Apple’s
share price experienced a sharp fall at the
beginning of November. And while it’s true
that the American economy as a whole began
declining around this time, the negative press
surrounding Apple only accelerated their trend
downward.
But the financial burden of slowing iPhone
sales extended to companies beyond Apple.
Because if you think about it, all of the
suppliers who provide the iPhone with different
components also suffered the consequences
of lower than expected sales. In fact, many
display and chip manufacturers complained
about their largest client cutting back on
orders, and after a second phase of order
reductions near the end of November, supplier
Largan Precision saw revenues decline, Printed
Circuit Board supplier Career Technology reportedly
laid off 110 workers to deal with order cuts
by Apple, Lumentum Holdings, the main supplier
of iPhones Face ID system, anticipated a $70m
revenue loss; while screen maker Japan Display
also lost revenue and reported lower than
expected demand for the new iPhone.
But probably the most telling sign of all
that Apple jumped the gun with the new iPhone
XR is when you consider its inventory health.
Now Tim Cook is known for being one of the
best inventory managers in the industry. In
fact, he was hired onto Apple back in 1998
because of his experience in “just-in-time”
manufacturing, and because of his expertise,
Apple has been very good at minimizing the
amount of money they have tied up in unsold
inventory. Because as you can imagine, it’s
not very profitable to have millions of unsold
iPhones sitting on apple store shelves across
the country. And typically the iPhone has
almost always had a healthy sell through rate,
with a backlog of about 1 to 2 days of inventory.
But supply of the iPhone XR is reportedly
already bloated to over three days of inventory.
So it makes sense that Apple is cutting manufacturing
for the model since demand is clearly lower
than initially estimated.
Now I should mention that this isn’t the
first time Apple has overestimated the sales
potential of a new iPhone model. Because back
in 2013 Apple made similar production cuts
to their iPhone 5c, and Tim Cook later admitted
that they had overstocked the model since
the sales ratio between the 5s and 5c was
much wider than expected.
So when you consider the low number of preorders,
production cuts, aggressive promotions, and
supplier layoffs, you begin to understand
why the iPhone XR has been such a problem
for Apple. There simply isn’t as much demand
as the company expected and now they’re
left to wonder why.
And I think there are a variety of factors
at play. First, the iPhone X already sold
extremely well just one year ago. And remember,
it was a $1,000 device. So I don’t think
many of those customers are looking to drop
another grand on a new iPhone with virtually
zero improvements. And that’s something
else to consider, I know many people who bought
a used iPhone X rather than a new iPhone XR.
Because you’re getting a higher quality
display, camera system, and design at a lower
price. So you could argue that the iPhone
X was the true budget iPhone of 2018. And
while Apple cut production of the iPhone XR,
they actually had to increase production of
the iPhone 8. Which was likely a more appealing
option for customers on a budget buying new,
since the 8 starts at just $600, 20% less
than the XR.
Now that’s not to say the iPhone XR isn’t
a good device. I think it’s the best budget
phone Apple has ever made. The problem is
that it’s hard to call it a budget phone
when it’s priced $100 more than the flagship
iPhone 7 released just two years ago. And
I think Apple understands this, their problem
is that the smartphone market is over saturated
and they need to raise prices in order to
combat slowing iPhone sales. After all, the
iPhone accounts for almost 60% of Apples total
revenue, with services coming in second at
around 16%. So it’s clear that Apple is
trying to keep the average selling price of
iPhones up as much as possible, I’m just
afraid the days of truly affordable budget
iPhones died back in September with the discontinued
iPhone SE.
So that is Apples iPhone XR problem, and if
you want to vote for the next video topic,
don’t forget to subscribe. Thanks for watching
and I’ll see you next time.
