Apple Replaced 11 Million iPhone Batteries In 2018 Contributing To Stunning Earnings Shortfall

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Earlier this month, Apple issued its first revenue guidance revision in over a decade in part due to soft iPhone sales. Apple placed most of the blame on weakness in the great China area, which was compounded by the country's trade war with the United States.

But China isn't the only reason for the revenue shortfall. The wounds were also self-inflicted by way of Apple's battery replacement program that was announced in late 2017. To appease customers after it was discovered that the company had been throttling iPhone performance (due to underperforming and worn batteries) without properly informing users, it reduced the price of battery replacements for iPhones from $79 to $29. Needless to say, that prompted a lot of customers to take advantage of the offer. In fact, the number of people that opted for the reduced cost battery replacements was much greater than Apple had projected.

"While macroeconomic challenges in some markets were a key contributor to this trend, we believe there are other factors broadly impacting our iPhone performance, including consumers adapting to a world with fewer carrier subsidies, US dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements," said Apple CEO Tim Cook in an open letter to investors.

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According to a report from Daring Fireball's Jon Gruber, Apple had anticipated that 1 to 2 million batteries would be replaced in 2018 as customers took advantage of the program. Instead, roughly 11 million batteries were replaced. This figure was stated by Tim Cook during an "all-hands" meeting on January 3rd.

But how could Apple have missed by such a wide margin on its earnings with a program that had already been in place for months? Gruber gives this analysis:

My guess: the effect of the battery replacement program on new iPhone sales wasn’t apparent until after the iPhone XR and XS models were available. A few million extra iPhone users happy with the performance of their old iPhones with new batteries — who would have otherwise upgraded to a new iPhone this year — put a ding in the bottom line.

And that take on the situation does make sense. With a brand-new battery, iPhone customers that were previously seeing performance throttling now had a machine that was performing like it was fresh out of the box. And if you have a top-performing device that meets all of your day-to-day needs, why do you need to upgrade to a new smartphone? Customers that would have otherwise traded in their "slow" iPhone for a newer iPhone XS or iPhone XR instead decided to sit on the sidelines with their current device instead of forking over $799+ upfront, or spread out over a 24- to 36-month contract.

With that being said, even with Apple's downward revision of its earnings, the company is still forecasting revenue of staggering $84 billion for fiscal Q1 2019.