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Apple's iPhone Growth Opportunities

My mantra: "Never underestimate Apple."

Right after Apple released its record-breaking iPhone sales number for the last quarter, Wall Street analysts were wringing their hands over the future growth of the iPhone. They reasoned that Apple can’t continue to break sales records continually, and some even suggested that iPhone sales have peaked.

I am as pragmatic as the next guy when it comes to forecasting iPhone growth, but our research continues to show that Apple will still have a serious upside in iPhone growth with the iPhone 6 models well through this year, and very likely into next year, too.

After the first of the year, and well before Apple’s calendar Q4 earnings report, we predicted that Apple sold 72.5 million iPhones in that quarter, even though the highest Wall Street estimate was around 69 million. Apple sold 74 million during the holiday quarter. Our predictions for iPhone sales for the first calendar-year quarter was 61 million, even though the highest Wall Street estimate was 58.5 million. Apple sold 61.2 million last quarter.

Our bullishness on these predictions come from following Apple for three decades, and my own personal mantra that says never underestimate Apple’s ability to surprise. Also, we have very good ties to the supply chain and, if you have followed our iPhone predictions for each quarter over the last few years, you will find our iPhones predictions are pretty consistent with what Apple actually ships.

There are three key reasons I am still optimistic about iPhone growth over this period and well into 2017-2018. The first lies in the fact Apple execs have stated that less than 20 percent of iPhone users have upgraded to the iPhone 6. Part of that is related to smartphone upgrade cycles that take place every two years, especially in the U.S. However, Apple is adding millions of new users to the iPhone fold each quarter and, given their rich app and services ecosystem, the iPhone will continue to be of great interest to people all over the world.

There is another key issue that bodes well for Apple. It is now selling more iPhones in China than in the U.S. and, by 2017, China will could be the most profitable region for Apple smartphone sales as well as iPads, Macs and Apple Watches. In China there is a rising middle class that loves Apple. Apple products are status symbols in the country, and this demographic will drive sales of Apple products sky high in the next few years.

There is a very good book about the Chinese middle class that is a must-read if you want to grasp the growth potential of Apple in China. It is called “China’s Super Consumers,” by Savio Chan and Michael Zakkour. The book looks at one billion new consumers in China, and especially the buying habits of the rising middle class. More importantly, the authors describe how Apple has gone after this market, and why they are poised for even more success in the country going forward. It is too myopic to judge Apple’s iPhone sales through a U.S.-only prism. Apple is an international company, and much of its future growth will come from international markets that are barely tapped by Apple at this time.

The second reason is due to what Apple calls “switchers.” During the recent analysts call, Apple CEO Tim Cook stated, at least five times, that demand for iPhones by those switching from other smartphone platforms are very strong. This is not a trivial fact. Our own research shows that Apple is luring millions of Android smartphone users over to the iPhone and iOS, and we have no reason to believe this will not continue for the near future. Many Android smartphone buyers opted for Android phones because of their larger screens, and that was a strong driver for Samsung and others who made phones with five-inch or 5.5-inch screens.

However, our research showed that if Apple had iPhones with larger screens, 40 percent of them would have preferred buying an iPhone over an Android smartphone. Consequently, pent-up demand by switchers has been key to Apple’s iPhone growth. As Android users move out of their two-year contracts, more and more of them will migrate to the iPhone platform. I see switchers continuing to help drive strong iPhone sales at least through early 2016.

The third reason goes under my “never underestimate Apple” mantra. It is crazy to think Apple will not continue to innovate around the iPhone. Just making a larger-screen iPhone is nice, but that was not innovation. What was innovative is the power of their new mobile processors, great screens, dual-authentication security and an evolving ecosystem that makes the iPhone a great smartphone.

I realize Wall Street analysts have short-term views on purpose, and have a hard time with long-range views. However, as an industry analyst, I’d say it is imperative that we look beyond each quarter and look at the things Apple might do to make the iPhone even better, which translates into strong iPhone sales. I believe Apple will continue to evolve the current iPhone design through 2015, and the new iPhone they deliver later this fall will have a faster processor, better camera, higher security and some new and innovative touch features, such as the tap-and-gesture engine that is on the Apple Watch today.

However, I believe the next major advance in iPhone design that will drive huge refresh rates will come with the iPhone 8 that should debut in the fall of 2016. While this is pure speculation on my part, I can see how an iPhone 8 could be where Apple introduces things like an iris scan for enhanced security, and a 3-D camera that uses lasers so you can point it at anything and get its dimensions. It could even be used to take a picture of something to be printed out on a 3-D printer.

I recently wrote about an Apple patent regarding this 3-D camera, and I believe we could see this in the iPhone 8. Apple has also patented a smart pen and, while it seems targeted at the iPad, it could be used on a new iPhone with special sensors built in to give even more functionality to their smartphone.

Who knows what other tech innovations are in Apple’s labs today that could make an iPhone 8 even more compelling than a larger-screen iPhone that has driven Apple’s iPhones sales into record numbers since it was launched last September? I also think Apple is not done with wearables connected to the iPhone. Tim Cook says there are things in the labs nobody has even written about, and I would not be surprised if they have another wearable up their sleeves tied to the iPhone by late 2017.

In the short term, Apple could hit a snag or two with iPhone growth, since breaking sales records consistently each quarter is difficult. However, to think Apple has hit saturation in iPhone demand is premature. And given its ability to innovate and with an international audience, it represents strong iPhone growth potential. Apple never rests on its laurels, and you can bet it will not stand still when it comes to making the iPhone even better and driving greater demand in the future.

Tim Bajarin is the president of Creative Strategies Inc. He is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Bajarin has been with Creative Strategies since 1981, and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba and numerous others. Reach him @Bajarin.

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