Apple looks to turn device loyalty into service loyalty in bid to turnaround first ever revenue decline

With both iPhone sales and revenues falling in the second quarter, Apple is hoping a renewed focus on services such as mobile payments, apps and music streaming can cover the shortfall.

Apple’s new music service gives it another direction relationship with customers

Apple saw iPhone sales fall for the first time ever in the three months ending 26 March, causing it to post its first revenue decline in 13 years. The 51.2 million iPhones sold in the quarter was 16% lower than a year ago and in stark contrast to the 40% increase in Q2 2015.

While CEO Tim Cook, speaking on an analyst call following the results, said the tech giant is still seeing a high level of customers switching from Android to Apple, he admitted current customers are failing to find a reason to upgrade. Figures from Kantar show that the iPhone has a 95% loyalty rate in the US, but there was little reason for users to upgrade to the iPhone 6S, with upgrade rates considerably lower for the iPhone 6 the year before.

Neil Saunders, CEO of Columino believes the decrease in sales comes down to Apple “not innovating enough on the product front to drive sales”.

“The problem is that new product is seen by many consumers as being good, but not quite good enough to justify upgrading.”

Neil Saunders, CEO, Conlumino

“One of the ‘party tricks’ of the late Steve [Jobs] that made audiences gasp and consumers ache with desire for the latest Apple innovation. As competent and passionate as current management is, it is this spirit which Apple is now lacking and desperately needs to get back.”

The focus on services

Instead, it is Apple’s service business that flourished last quarter, with revenues jumping 20% to $6bn. In particular, Apple Music has demonstrated success, adding one million new subscribers in both January and February. The company has promoted the music streaming app with an ad featuring Taylor Swift. It generated 10 million views on YouTube within the first four days of its release, with the views currently standing at more than 16 million.

“We feel really great about the early success of Apple’s first subscription business, and our music revenue has now hit an inflection point after many quarters of decline,” explained Cook.

Services are now Apple’s second biggest revenue-generating category, boosted by Apple Pay which Cook said is attracting 1 million new users a week. He added that Apple is making acquisitions to boost its ‘services roadmap’.

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