Apple's iPhone 5 launch is the biggest in the company's history, but it's being chalked up as a "disappointment." Why?
Apple’s iPhone 5 is thinner, lighter, and packs a high-performance Apple-designed processor, a taller display, and 4G LTE connectivity. Unsurprisingly, it’s also racking up monstrous sales. After tallying 2 million pre-orders in 24 hours, Apple managed to sell 5 million iPhone 5′s in its first weekend of sales.
The figures represent Apple’s strongest iPhone launch to date. And yet the technology and financial press are painting these initial sales figures as a disappointment and a sign that the shine may be wearing off Apple’s stellar growth and profitability. How can selling more phones in its first weekend than ever before — and more phones in the first weekend than any of its competitors have dreamed — be a sign Apple is in trouble?
The launch numbers
Apple is well-known for reporting sales figures for its iPhone and iPad product lines during its financial results each quarter, along with sales figures from it’s iPod and Mac lines. Apple only calls out extraordinary sales milestones separately, such as when the iTunes App Store hits a sales milestone (like 25 billion) — and, before that, when the iTunes Music Store hit a major figure.
Since the launch of the iPhone 3G, Apple has devoted special announcements to iPhone sales — and the iPhone 5 was no exception. CEO Tim Cook announced that the company had sold 5 million iPhone 5s during the first weekend of sales in nine countries — internationally, that’s the broadest iPhone launch Apple has ever attempted.
How does that compare to previous iPhones? The iPhone 4S sold 4 million units during its first weekend, while back in 2010 the iPhone 4 sold 1.7 million units during its first weekend. Previously, the iPhone 3GS sold more than 1 million units its first weekend, and the iPhone 3G sold a million its first weekend before that.
What’s really remarkable about these first-weekend sales figures is the leap between the initial sales of the iPhone 4 and the iPhone 4S. The difference between selling 1.7 million units in an opening weekend and 4 million is 135 percent. In comparison, the opening weekends for the iPhone 3G and 3GS were relatively flat, and the iPhone 4 was 70 percent higher than the iPhone 3GS. In contrast, Apple’s 5 million-unit weekend for the iPhone 5 represents only a 25 percent increase over the iPhone 4.
Apple CEO Tim Cook essentially apologized for not having enough iPhone 5s for everyone who wanted one at launch, noting the company is working as quickly as it can to make more and stores continue to receive iPhone 5 shipments. Nonetheless, current iPhone 5 orders now carry shipping estimates in October as Apple tries to work through the backlog. The company will be facing more waves of launch demand as it brings the iPhone 5 to 22 more markets this week, and 100 additional countries by the end of the year.
The analyst numbers
Researchers working for market analysis firms had generally estimated first-weekend sales for the iPhone 5 at substantially higher levels. Many estimates were in the 6- to 6.5 million-unit range, with Piper Jaffray’s Gene Munster leading the pack with a range of 6 to 10 million units for the first weekend, characterizing 6 million units as a “worst-case scenario.”
Looking at the chart above, it’s easy to see where these analysts came up with their figures. If you take the iPhone 4 as an infection point and the iPhone 4S as representative of Apple’s market trend, then in a perfect linear universe, Apple’s iPhone 5 sales ought to have about 200 percent higher than the iPhone 4S, or about 12 million units sold during the first weekend. However, most analysts will admit there are many factors in play, including Apple’s ability to manufacture and source components for the new devices, as well as logistical hurdles getting the devices to retailers, carrier partners, and customers. So no analysts actually thought Apple would be able to sell 12 million iPhones the first weekend. That’s a feat that (to my knowledge) has never been achieved in the history of consumer electronics, let alone mobile phones. So analysts did some curve-fitting and came up with figures between 6 and 7 million units.
How Apple counts sales
So here’s the funny part: The analysts looking for between 6 and 7 million iPhone 5′s sold during the first weekend might not have been that far off. Apple differs from almost all of the technology and consumer electronics industry in that it only considers a unit to be “sold” when it’s in a customer’s hands.
Apple’s definition of “sold” seems pretty straightforward, but most of the rest of the electronics industry considers a unit “sold” when it leaves the factory. This is the source of the distinction between units sold and units shipped that have gotten many companies — including Samsung — into trouble over the years.
In business circles, units shipped from a factory are sometimes described as a product’s “sell-in” — units into the retail channel — where products in consumers’ hands represent “sell-out” — out of the retail channel. Both numbers are valuable in looking at a product’s success. For a new product, sell-in figures often represent retailers’ and partners’ confidence in a product. The more units they’re willing to commit to carrying up front, the more potential they think the product has. So sell-in can be an early indicator of a product’s potential success. Sell-in units also represent a bit of a risk to a manufacturer: In many industries, they have to agree to buy back any unsold inventory.
Of course, sell-out is the better arbiter of a product’s sales success, especially when combined with product returns. That figure loosely represents how many consumers bought the product and actually kept it.
Ideally, the ratio of a product’s sell-in to sell-out should one one to one. Companies want to sell as many units of a product as they can make, have no unsold products sitting in retailers’ inventories, and (of course) have no products returned due to defects or customer dissatisfaction. A product with a sell-in disproportionate to its sell-out — like, say, the Logitech Revue — can represent a significant misstep.
In Apple’s case, nearly every analyst forecasting iPhone 5 sales was forecasting sell-in figures — including online orders that have not yet been fulfilled. Conversely, Apple’s reported figure of 5 million iPhone 5′s sold represents a sell-out figure: Devices that are actually in customers’ hands.
Although Apple admits demand for the iPhone 5 exceeded the initial supply of the device, more iPhone 5′s have left the factory than Apple considers sold. Apple indicates retailers will continue to receive shipments “regularly” and the company is gearing up to launch the iPhone 5 in 22 more markets this week. Apple has made far more than 5 million iPhone 5′s — although we don’t know how many more. But the company is only counting 5 million as “sold” on the first weekend.
Demand is still unknown
What do these figure mean for the launch of the iPhone 5?
At a basic level, just as with the iPhone 4 and iPhone 4S, Apple was essentially able to sell every iPhone 5 it had available on launch day. On some levels, this is an almost ideal situation: there’s no inventory sitting around waiting to be sold, and Apple generates revenue from every product it builds very quickly. With the launch of the iPhone 5, those initial sales will do nice things for the company’s bottom line. Apple’s current fiscal quarter ends on September 30, and all those 5 million iPhone 5′s — and all the iPhone 5′s it sells between now and the end of the month — will go directly into the company’s next financial results.
On the other hand, it does mean Apple is failing to meet demand for the iPhone 5 — and business common-sense is that frustrated customers will take their business elsewhere. It’s possible that some customers who want an iPhone 5 are simply unwilling to jump through hoops — like immediately jumping on online ordering or waiting in line outside an Apple Store — to get one quickly, so they’re opting for devices like the Samsung Galaxy S III because, frankly, they’re really easy to get.
What would Apple have to do to meet initial demand for a new iPhone? Nobody knows. Apple has radically increased its capacity to build and deliver new iPhones to customers — nobody does mobile phone launches that compare in scale to the iPhone 5 launch. And yet Apple was still unable to meet initial demand. The true market demand for new iPhone is still unknown: it might be just a smidgen larger than what Apple can handle…or it might be double the current demand. That means Apple still has room to grow its iPhone business — and there’s still no ceiling in sight.
Leaving money on the table
The market’s disappointment with Apple selling a mere 5 million iPhone 5′s during its first weekend boils down to two factors.
First, it represents only a 25 percent increase over first-weekend sales of the iPhone 4S, which strongly suggests Apple is reaching the peak of how many iPhones it can sell at launch. That’s not because consumers don’t want more iPhones, but because Apple isn’t currently able to deliver them the first weekend. Despite Apple’s famous logistical and supply-chain efficiency, the company may be starting to hit the limits of what’s possible with a mobile-device launch. That, in turn, will constrain the revenue Apple can generate with a new device launch — and investors hate any restraint on revenue, since it means lower short-term gains. Apple may pull a rabbit out of its hat, but it’s possible most of the gains Cook and company can wring from the iPhone supply and manufacturing process were realized between the iPhone 4 and 4S.
Second, investors are upset that failing to meet initial demand for the iPhone 5 — or any iPhone, for that matter — means Apple is leaving money on the table. Consumers are literally camping out overnight with money in their pockets to set hands on Apple’s latest and greatest, and Apple is not able to meet that demand. Although the iPhone generates massive profits for Apple, investors see that it could be making even more money for Apple — and hence, more money for them. So, in a way, they feel ripped off.
What’s next?
Apple is going to stick to its guns: The company will continue to report on the number of units sold (not shipped), and in October will report substantial revenues boosted by the launch of the iPhone 5. Apple’s forecast for the final quarter of the calendar year will be a little conservative, but given the end-of-year holidays, Apple can be expected to post record sales numbers in January.
In the meantime, Apple is almost certainly looking at ways to have a huge supply of new products on hand when it announces a new device — like the rumored iPad mini.
Source : http://www.digitaltrends.com/mobile/when-selling-five-million-iphone-5s-is-not-enough/
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