- Apple’s App Store downloads went into decline, possibly for the first time ever, according to research by Morgan Stanley.
- Apple recently stopped providing device unit sales data and asked people to focus on revenue success instead.
- Apple’s services division — App Store downloads, music, and iTunes — is a key revenue driver that the company hoped would offset declining handset sales.
- But App Store revenue growth is decelerating, too.
- Analysts are expressing doubts about the power of Apple’s mythic "installed base."
Downloads from Apple’s App Store declined for the first time in four years, and perhaps the first time ever, according to data collected by Morgan Stanley analyst Katy Huberty. "For the first time since at least 1Q15 (as far back as we have the data), the number of quarterly downloads declined, falling 5% Y/Y," she told clients in a recent research note seen by Business Insider.
The decline comes as sales of iPhone handsets are expected to decline by up to 20% in Apple’s fiscal Q1, according to Nomura analyst Jeffrey Kvaal and his team.
The pattern is potentially worrying for Apple, whose management has been hoping that declining device sales will be offset by an increase in sales from services, which includes the App Store.
Apple CEO Tim Cook told investors in November 2018 that he would stop providing unit sales data. The move was widely interpreted as an attempt to draw attention from the scale of the decline in iPhone sales. Newer iPhone models have come with ever-higher price tags in a market that has reached almost 100% saturation.
Instead, the company wants investors to look at the total revenues each division of the company generates. The theory is that even with new iPhone sales in decline, the total number of iPhones in use (the "installed base") will continue to rise. As long as Apple can sell those customers more video, music, iTunes downloads, and apps, Apple can continue to grow revenues.
A decline in app downloads doesn’t help that theory, however.
With downloads in decline, revenue growth is "decelerating"
Huberty remained upbeat in her note, because total services and app revenue are still growing at Apple. She rates AAPL "overweight". "Net revenue per download, a gauge of consumer spend per download, increased 21% Y/Y, an acceleration from 14% Y/Y growth in the December quarter," she told clients. "While the decline in downloads is something investors should monitor, it’s not necessarily indicative of consumer app usage trends, since App Store net revenue is correlated more so with spend per download (driven by in-app purchases) rather than the absolute level of downloads. And the acceleration in spend per download growth this quarter shows us that app engagement remains healthy."
But the rate of App Store revenue growth has gone into decline, Huberty’s note said. "According to data from Sensor Tower, estimated March quarter App Store net revenue was $3.7B, up 15% Y/Y, a 1 point deceleration from revised December quarter growth of 16% Y/Y." Huberty did not respond to a message requesting further comment.
What’s happening inside the "installed base" of 900 million iPhones?
The decline comes amid a debate between analysts over the power of Apple’s installed base. On his last quarterly earnings call, CFO Luca Maestri disclosed that there were now 900 million iPhones in active use, the most ever.
Previously, analysts such as Cowen’s Timothy Arcuri (now at UBS) believed that the installed base would create a "super cycle" of buyers for new iPhones. As the phones in use get older, more of those users would want to upgrade as newer models were released, they argued.
But the super cycle of buyers never arrived.
More recently, analysts such as Citi’s Jim Suva and Asiya Merchant, and Bernstein’s Toni Sacconaghi Jr., have argued that the installed base actually hurts new sales. Consumers hold onto their iPhones for as long as three or four years, and don’t feel the need to upgrade whenever a new model is launched. That hurts new device sales.
It may also hurt services sales, according to some. Bank of America Merrill Lynch analyst Wamsi Mohan and his team argued in November 2018 that the installed base doesn’t buy upgrades for a good reason. Less well-off people are price-conscious and can’t afford to continuously pay more for newer phones. That means they will spend less on apps, too, they said.
Former Deutsche Bank analyst Sherri Scribner argued in 2017 that the installed base had become so massive it was likely reaching a ceiling. This month, UBS’s Arcuri made a similar argument. At 900 million devices, the growth of the base is approaching zero percent, too, he told clients in a note seen by Business Insider.
HSBC downgrades Apple to "reduce"
They are not the only analysts who are cautious about Apple’s services strategy. The company recently launched an Apple TV+ service and a credit card — both items that could fall under the "services" category. In response, HSBC analyst Erwan Rambourg downgraded the stock to "reduce" on April 10.
"One fundamental question on services in our minds is ‘will they incentivize more consumers to become part of the Apple eco- system’. And our short answer is ‘no,’" he told clients, because "there are many alternatives to those with other providers whether it is in gaming (very crowded space), banking (emergence of online) or video on demand (Netflix and others)."
"All in, we remain far more cautious on services than some of the numbers in the street might suggest."
- Read more about the decline of the iPhone:
- We’re in the darkest hour of Apple’s ‘white-knuckle period,’ and some investors are loving it
- Apple will no longer report iPhone numbers after growth went to 0%
- The used phone market is cannibalizing new iPhone sales
- Apple’s ‘installed base’ of iPhones has stopped growing
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