When Apple Inc. (NASDAQ:AAPL) released its earnings last quarter, the company missed analyst expectations on many fronts, including iPhone sales. The market brushed off the disappointment and blamed it on people holding off purchases to wait for the new iPhone. However, iPhone sales grew by 140% last year in the quarter before the 4S launch. The last quarter slowdown could be foreshadowing bigger issue to come for iPhone sales and mark a peak in the growth rate of the iPhone.
The graph below shows what has happened to the market share of the iPhone since Android devices entered the market. In the last quarter, Google's (NASDAQ:GOOG) Android gained smart phone market share at the expense of the iPhone. I believe that market share environment for iPads will play out in similar patterns, with Google gaining on Apple with cheaper products.
Attracting Incremental iPhone Buyers Will Be Difficult
I was very bullish on Apple in 2008 when it sold niche products that catered to high-income individuals. The original iPhone was years ahead of its competition, but technological progress tends to converge and Apple's advantages are no longer as obvious. Google's Android is now the market leader in the smart phone market and has significantly narrowed its technological gap with Apple.
In addition to the technological advantages, few people had Apple's iPhone in 2008 and sales to early adopters were enough to generate a high growth rate, but as the iPhone reaches critical mass, it will be harder for the company to attract more price-conscious customers. In fiscal 2010 and 2011, Apple sold over 110 million iPhones, which means almost 110 million people could be off the market for iPhone 5.
There are also more choices of non-Apple handsets available for consumers to choose from. With its affordable devices, Android has been gaining on Apple for years. For example, there have been reports on how the iPhone suffered a sales slump last quarter in China, which is the company's largest oversea market after the US. I believe the high growth rate period for the iPhone has come to an end and Apple will have a harder time growing its iPhone sales in the next few years.