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iPhone ASP decline shows Apple’s Services strategy at work

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Apple yesterday said the 40 million iPhones it sold in the June quarter brought in an average of $595 each, the lowest number and the largest year-over-year decline in average selling price in two years.

The drop in average selling price, or ASP, was largely credited to the introduction earlier this year of the lower-priced iPhone SE, which sells for $399 and up.

“The magnitude of the [ASP] drop is an indication that the iPhone SE … has been something of a hit,” wrote Jan Dawson, principal analyst at Jackdaw Research, in a post to the firm’s blog.

That success seemed to take Apple off guard. During the company’s earning call Tuesday, CEO Tim Cook said that demand for the model outstripped supply throughout the March-June stretch. Only after bringing on more manufacturing capacity was Apple able to reach supply-demand balance this month.

But the SE’s success came at a cost. Its lower price contributed to a 10% decline in iPhone ASP compared to the same quarter last year. The result: Apple posted a 15% reduction in iPhone unit sales for the June quarter, but a 23% drop in revenue.

The last time the iPhone ASP was under $600 was two years ago; since then, the launch of the larger and pricier iPhone 6 Plus and its follow-up, last year’s 6S Plus, pushed ASPs near $700, with the benefits rolling right onto the bottom line.

Cook made a point yesterday to push the positives of the SE’s entry into the iPhone portfolio, and as he did, characterized the strategy behind the lower-priced device.

“The addition of the iPhone SE to the iPhone lineup placed us in a better position to meet the needs of customers who love a 4-in. phone and toattract even more customers into our ecosystem,” Cook said [emphasis added], using many of the same words yesterday as he did three months ago. “I also really like what I’ve seen with the iPhone SE and the fact that it’s opening the door to customers that we weren’t reaching before.”

But Apple has demonstrated before, and again with the SE, that it’s willing to cut prices if it can see a return elsewhere, argued Ezra Gottheil, an analyst at Technology Business Research. “This is constantly Apple’s calculation: A less expensive model means they are going to cannibalize some of the purchases of the higher-priced models, but they are doing it to bring people into the ecosystem,” Gottheil said.

Apple’s not expanding the base just for bragging rights, but to drive the revenue category it calls “Services,” the catch-all that includes iTunes, the App Store, AppleCare, iCloud and Apple Pay.

“That’s always been the plan,” contended Gottheil, of the SE strategy.

Neither Cook or CFO Luca Maestri explicitly linked the SE to the expectation of larger services revenue, but they repeatedly turned to the phrase “iOS ecosystem” as a kind of shorthand or code.

“We believe that the iPhone SE is doing exactly what it was intended, which is we are seeing a higher rate of new-to-iPhone customers, which is obviously very important to us because we bring new people into the iOS ecosystem,” said Maestri yesterday during the earnings call’s Q&A.

For several quarters now, Cook has been touting the revenue success of Apple’s services, an attempt, analysts have waged, to redirect the narrativefrom the conversations about slumping iPhone sales.

The drumbeat continued yesterday, as Cook referred to the nearly $6 billion Services raked in during the June quarter, an increase of 19% from the same period in 2015. “Most of our … Services performance during the quarter was fueled by our active installed base of devices,” Cook said.

“They’re never going to be a low price device [seller],” said Gottheil, of the SE and Apple’s underlying strategic reasons for the device. But Apple is edging prices down, forced or not, to fuel the recurring revenue stream of services. But slow is the watchword, added Gottheil: “They’re doing it like someone getting into a cold lake on a very hot day.”

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