Apple's Lessons Learned from Lower iPhone Demand

Summary

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Episode Overview

Podcast: WSJ Your Money Briefing
Title: Apple's Lessons Learned from Lower iPhone Demand
Date: November 21, 2018
Host: J.R. Whalen
Guest: Justin LeHart, "Heard on the Street" columnist, Wall Street Journal

This episode delves into Apple’s surprising move to cut production of its newest iPhones due to weaker-than-expected demand. The conversation explores the broader implications for Apple, its competitors, and American businesses coping with rising costs and evolving consumer expectations. The episode distills key lessons about pricing, market pressures, and why even industry giants like Apple aren’t immune to shifts in consumer sentiment and global economics.

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Key Discussion Points & Insights

1. Apple’s iPhone Demand Problem (00:20–02:34)

• Immediate Context: Apple has been forced to reduce production of its latest iPhones due to weak demand—a striking moment for a company long considered untouchable.
• Insight: Higher prices for Apple’s new iPhones compared to 2016 models appear to have deterred some buyers, suggesting a limit to consumer willingness to pay a premium.
• Justin LeHart’s Take:

  "It is sort of an object lesson in what happens when you raise prices. And it's a lesson for Apple, but really it's a lesson for everybody right now." (01:54)

2. Consumer Behavior and Competition (02:34–03:02)

• Phone Longevity: With new models pricier and existing ones still working well, many consumers don’t feel urgency to upgrade.
• Consumer Wisdom:

  "If their phone is working well, why rush out and spend the money? ... Joanna Stern said, if you have an iPhone X, no reason to rush out and buy one of the newer ones because your iPhone X is fine." – J.R. Whalen (02:45)

3. Broader Business Pressures: Rising Costs (03:02–03:53)

• Across-the-Board Cost Increases: Labor, transportation, and tariffs are squeezing company profit margins. Apple’s challenge is a symptom of these wider economic trends.
• Not Just Apple: Other companies in retail (e.g., Walmart, Target, Kohl’s) are dealing with similar pressures and choosing either to absorb higher costs or risk turning away price-sensitive customers.

4. Lessons for Other Companies (03:35–04:54)

• Apple’s Brand Loyalty vs. Commodity Goods:

  "It is harder to switch away from an iPhone than it is to switch your brand of T shirt... Once you're sort of in the Apple-verse, right. You're going to. It's harder to wrent [rent] yourself out of it..." – Justin LeHart (03:53)

• Cost Absorption: Many retailers prefer to eat the higher costs rather than raise prices, leading to shrinking margins.
• Market Reality: Even leading brands face the trade-off between maintaining profits and keeping customers.

5. The Investor’s Dilemma (04:54–05:28)

• Stock Market Effect: Both lower sales volume and reduced profit margins harm shareholder returns.
• Market Performance: Apple shares and many retailer stocks have dropped notably since quarterly results.
• LeHart’s Summary:

  "Either way, you miss out as an investor. Right. Lower sales or thinner profit margins? Neither are good." (05:21)

6. Inflation Expectations and Consumer Psychology (05:28–06:06)

• Low Inflation Expectations Persist:

  "Consumer expectations for inflation are extremely low, really as low as they've ever been as long as people have measured them." – Justin LeHart (05:37)

• Pricing Power Is Limited: Consumers accustomed to little inflation are particularly wary of price hikes and can be quick to walk away.

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Notable Quotes & Memorable Moments

• "It is sort of an object lesson in what happens when you raise prices. And it's a lesson for Apple, but really it's a lesson for everybody right now."
  – Justin LeHart (01:54)

• "If their phone is working well, why rush out and spend the money?... If you have an iPhone X, no reason to rush out and buy one of the newer ones because your iPhone X is fine."
  – J.R. Whalen referring to Joanna Stern (02:45)

• "Once you're sort of in the Apple-verse, right. It's harder to wrent [wean] yourself out of it, right?"
  – Justin LeHart (03:53)

• "Either way, you miss out as an investor. Right. Lower sales or thinner profit margins? Neither are good."
  – Justin LeHart (05:21)

• "Consumer expectations for inflation are extremely low...if you try to charge them more, they're going to think that you're ripping them off and they're just going to turn away."
  – Justin LeHart (05:37)

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Timestamps for Important Segments

• 00:20 – Introduction: Apple cuts iPhone production, market news
• 01:52 – Justin LeHart discusses the pricing problem and competitive pressures
• 02:45 – Consumers slow to upgrade, quoting Joanna Stern
• 03:02 – Discussion on rising business costs and their impact
• 03:53 – The unique Apple ecosystem and lessons for other companies
• 04:54 – Investor impact: stock moves and profit pressures
• 05:28 – Inflation expectations and pricing power

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Episode Takeaways

• Apple’s iPhone production cut is less a crisis and more a teachable moment about limits on pricing power, even for powerful brands.
• Other companies can’t assume they’re immune if they face similar cost and market pressures.
• The combination of rising costs and wary consumers puts all businesses in a bind—especially when inflation expectations remain subdued.
• For investors, both higher costs and lower sales create the risk of diminished returns, making the stakes high as economic conditions shift.

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Transcript

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[J.R. Whalen]

With your money briefing. I'm J.R. whelan at the Wall Street Journal in New York. Where does Apple go from here after being forced to cut production of its newest line of iPhones? And what can the rest of corporate America learn from that? We'll explain in a moment. First, these money and market stories you should know. With jitters running through Wall street almost on a daily basis, don't take your eye off of cash as a wise investment. That's the word from Goldman Sachs. The big bank issued a prediction for 2019 that the stock market is likely to turn in single digit returns and says that cash will be on par with stocks as a worthy asset for the first time in several years. You might not want to look at cryptocurrencies as an investment either. A sell off that began in mid November continued into the days leading up to Thanksgiving. Nearly all the top 100 cryptocurrencies have been hit by a selling spree, most notably bitcoin, which fell about 8% on Tuesday to about $4,200. How bad has it been for bitcoin? It's off about 75% from its all time high of $19,800 last last December. What if they threw an iPhone party and nobody came? It's not quite that bad for Apple, but the tech giant is seeing weak enough demand for its new iPhones. It's been forced to cut production. Heard on the street columnist Justin LeHart is here with lessons. Apple should learn from this experience. So Justin, demand for iPhones is down. Is the apocalypse upon us?

[Justin LeHart]

I guess so. No, no. But it is sort of an object lesson in what happens when you raise prices. And it's a lesson for Apple, but really it's a lesson for everybody right now. So the prices of the new batches of iPhones are up relative to 2016. And that seems to. That may have been one of the sticking points that people are having. There are other things going on. There's increased competition because smartphones, more commodity like there's just the amount of choice that people have now. But it does seem that at least one element of this was the higher price.

[J.R. Whalen]

The prices came up significantly with this new batch of phones.

[Justin LeHart]

Right. And that leads people to think, you know, should I switch? Should I, should I just hang on to my phone that I have right now?

[J.R. Whalen]

See, that's the thing Is that if their phone is working well, why rush out and spend the money? And I think that the consumers are becoming wiser to this. Our own Wall Street Journal technology columnist Joanna Stearn said, if you have an iPhone X, no reason to rush out and buy one of the newer ones because your iPhone X is fine.

[Justin LeHart]

But this is, this is important, and not just for Apple right now. Because what we're seeing right now is we're seeing a lot of cost pressures that companies are facing. So we have rising labor cost pressures. Transportation costs are up a lot. That's also kind of a labor story because it's hard for truckers and such to. To find drivers and they have to pay them more. Right. And we're also going to see, we are seeing tariff costs, and those could go up significantly next year. So companies have to figure out what to do.

[J.R. Whalen]

And you write in your column that other companies should really take a lesson from this, because Apple oftentimes is seen as the crown jewel. It's untouchable. It is just whatever it touches is gold. But this stumbling block that it is seeing, other companies can see real challenges, real hurdles along the way that they have to adjust to, Right?

[Justin LeHart]

I mean, think about it. It is, right? It is harder to switch away from an iPhone than it is to switch your brand of T shirt, your brand of toothpaste cereal, that kind of thing. Those things are easily substitutable, Right. Once you're sort of in the Apple verse, right. You're going to. It's harder to rent yourself out of it, Right? So this is important for a lot of companies. And what we're seeing is that the flip side is if you're a company, you eat the cost. And that seems to be what we're seeing from a lot of other companies. So Walmart, when they reported last week, they said that they were investing in price, which is their euphemism for cutting prices. We also saw more recently, Target saw their margins down. Kohl's saw margin down. A bunch of retailers that recently report reported, and that was a lot of it was about these higher costs and not passing those costs on. So they don't want to do it.

[J.R. Whalen]

And whether it's companies dealing with higher labor costs or higher material costs or transportation costs, it's the shareholders that are really feeling the impact here.

[Justin LeHart]

Exactly. So we've seen, you know, we've been having a very tough time in the market. Right. Apple shares are down significantly since they reported results last month or last week. Sorry, early November. Early November. You know, and we've also seen some retailers really taking down the chin. This is the problem, right? Either way, you miss out as an investor. Right. Lower sales or thinner profit margins? Neither are good.

[J.R. Whalen]

And then it's also the economic world we live in. Consumers have gotten cozy with weak inflation, and that puts a lot of pressure on these companies to keep their prices in check.

[Justin LeHart]

Right. The expectations, consumer expectations for inflation are extremely low, really as low as they've ever been as long as people have measured them. And that expectation component, economists think it's really important that it actually helps guide future inflation. And it's just because people are so used to having only so much inflation that if you try to charge them more, they're going to think that you're ripping them off and they're just going to turn away.

[J.R. Whalen]

Justin lehart, columnist with Hurt on the street here at the Wall Street Journal. Thanks for being with us.

[Justin LeHart]

Thank you.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

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