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By: Mykola Golovko

After months of speculation, fuelled by an unusually high number of leaks, Apple Inc has lifted the curtain on the 2014 refresh of its iPhone line, as well as the highly-anticipated Apple Watch and the Apple Pay mobile payment platform. Apple Pay and its prospects are discussed in detail in a separate piece by Michelle Evans, Consumer Finance Senior Analyst. The refresh comes at a crucial time for the company as it is facing a difficult operating environment, with slowing growth in smartphones and tablets, along with intensifying competition. These factors are proving troublesome, even for some of Apple’s largest competitors, but with a strong portfolio of integrated products, backed by an enviable amount of brand equity, Apple Inc looks poised to remain successful, despite diminishing growth prospects in key categories.

iPhone

The iPhone is Apple’s most important product, accounting for over half of the company’s revenue in the third quarter of the 2014 financial year. Competitors like Samsung Corp and Sony Corp have also become increasingly dependent on smartphone revenues and have faced significant difficulties from slowing growth and intensifying competition within the category. Volume sales growth in the market is largely being driven by low-cost smartphones in emerging markets, where Apple cannot compete without cutting prices significantly. Therefore, it must remain competitive in high-end devices where a growing number of Chinese brands are hoping to make a mark and become competitive on a global scale. This has been detrimental to the fortunes of many established Android smartphone vendors, but Apple Inc has a popular proprietary OS, a strong suite of software and services, along with a highly desirable brand name that sets it apart from its competitors. Still, the market for premium smartphones has clearly shifted towards larger units, and Apple Inc has had to adjust accordingly.

The iPhone 6 and iPhone 6 Plus are significantly larger than their predecessors, and are on par with flagship models from the likes of Samsung, LG, HTC and others. While many competing Windows and Android devices sport higher resolution screens and better cameras, among other hardware, iPhones will remain popular, with strong replacement sales, and the availability of larger phones will drive migration from competing platforms. As a result, we expect global volume sales of iPhones to reach 166 million units in 2014, growing to 182 million in 2015.

Apple Watch

Growth in smartphones is crucial for Apple as its sales of tablets are expected to stagnate in 2014 and decline in 2015 , under pressure from Windows-based laptop-tablet hybrids. The Apple Watch is meant to alleviate the company’s dependence on smartphone and tablet revenue, but prospects in this category remain limited in the near term. The Apple Watch will not actually be available until 2015, and, even then, it is not likely to see the kind of growth the iPad saw in 2010. The main problem is that the product does not address the key problem facing autonomous wearable electronics: the user interface. Apple’s wearable uses a combination of a touchscreen, a crown and voice commands as primary modes of interaction; this falls short of an interface based on contextual awareness with limited direct user input. Without such an interface, autonomous wearable electronics will not become mainstream products, especially at the US$349 price point Apple made public during the event. Given the company’s strong brand and loyal customer base, sales will outperform those of rival devices. However, with total sales of autonomous wearable electronics expected to reach less than 16 million units in 2015, Apple Inc will remain largely reliant on iPhone revenue for the duration of 2015.

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