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Apple is banking on secondary sales to fuel its enormous services market.
Despite record iPhone sales in 2015, Apple CEO Tim Cook anticipates a slowdown in the upgrade cycle. He said as much during an earnings call, as reported in an article by The Motley Fuel's Sam Mattera, who questioned why Apple doesn't release a lower-priced phone to compete with mid-market Android smartphones.
Cook's response, in a nutshell: Plenty of iPhones are already available at lower price points. They're the used iPhones sold on the secondary market.
Since Apple receives no compensation when used iPhones are sold, why would the company ignore an opportunity to sell lower-priced iPhones to those who can't afford its flagship models? As it turns out, Apple doesn't need to sell iPhones to everyone to profit mightily.
Your used iPhone is someone else's new iPhone
People with lower incomes and those in emerging markets can't afford or justify the expense of a flagship iPhone. This has created a booming secondary market in which used iPhones are sold as their original owners upgrade. Your used iPhone, therefore, is someone else's new iPhone - and Apple seems to be just fine with that.
Cook's comments are telling: "The iPhone that has been sold to someone else hits the price point that we're not currently hitting today, largely, which could help further fuel the services revenue which we did quite well on last quarter… We do like the fact that [early upgrade programs create] a market for… iPhones at a different price point… [that used iPhone is probably a] better product than [what the] customer may be currently buying, which would further help from an ecosystem point of view and that's not to be underestimated."
In short, the more iPhones that are out there, the better for Apple - even if Apple's not getting a cut of secondary sales.
However, it's not just about permeating the culture and influencing future purchases; used iPhones lead to direct Apple profits via services like App Store, Apple Pay, and iTunes.
The rise of mobile services
Collectively, Apple's services - including App Store apps, Apple Pay, iTunes, and iCloud - earned revenues of $20 billion in 2015. At 30 cents on the dollar, that means Apple profited just over $6 billion from its services last year.
Six billion dollars might not seem much compared to the $32 billion Apple likely profited from iPhone sales in 2015 (assuming iPhones account for 60 percent of total profit), but it's nothing to sneeze at, either. Consider this: that equals what Netflix earned in total revenues last year while profiting just over $122 million.
In addition, some estimates peg iPad sales to account for just ten percent of Apple's profits; if that's the case, the company actually makes more from its services (around 11 percent of profits) than it does from iPad sales. Moreover, iPads represent another device that can be resold on the secondary market and contribute to the growth of Apple's ecosystem and services sales. This doesn't even take into account the nine million registered Apple developers, each paying $99 per year for the privilege to total $891 million in annual profits.
There's no doubt Apple's services offering is an enormous enterprise in and of itself, valued by some analysts at more than $150 billion and growing: In 2013, app and other service sales accounted for $10 billion in revenue. In 2014, that number leaped to $15 billion. In 2015, to $20 billion.
It's probably safe to say Apple isn't going to ignore a product that's growing at a pace of $5 billion per year.
Why Apple wants you to sell your iPhone
When you sell your iPhone, you're probably going to upgrade to the latest model; but as we've demonstrated, that's not the only revenue driver. Someone else is going to get your old iPhone, and they're going to use Apple's services. This is especially true given people devote 85 percent of their mobile time to apps.
In March 2015, Apple announced it had sold more than 700 million iPhones. Add in the 123 million iPhones sold in Q3 and Q4, and we can estimate around 825 million iPhones have been sold to-date.
Apple says 40 percent of people who owned an iPhone the day before the iPhone 6 was launched have upgraded to a later model. Though it's difficult to determine an exact figure, that means hundreds of millions of iPhones have been resold to second and even third users via trade-in programs, buyback vendors, the private market, and buyback comparison services like Flipsy.
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These are users who buy apps and make in-app purchases, buy iTunes songs, use Apple Pay, and purchase iCloud storage, thereby accounting for billions of dollars in annual service-related profits - all without having purchased their iPhones from Apple.
When it comes to used iPhones, Apple might not profit from the initial hardware sales; but the company also doesn't have to invest in research and development, manufacturing, or additional marketing to put its products in the hands of hundreds of millions of users.
As iPhones come closer to packing in every feature anyone could ever want, Cook's forecast for a slower upgrade cycle makes it critical for Apple to cultivate additional revenue streams. Growing its service revenues is one way to do it, and Apple doesn't even have to develop a distribution strategy. You'll do it for them.
New VS Used iPhone Prices (via Flipsy.com)
- iPhone 6s New $649 | Used $547
- iPhone 6 New $549 | Used $395
- iPhone 5s New $450 | Used $194