Apple’s Battery Replacement Program Could Cost It $10 Billion

Analyst note suggests 16 million Apple customers may opt for a replacement battery instead of a new iPhone in 2018

Source: Apple

Apple Inc. (NASDAQ:AAPL) has already begun offering $29 battery replacements to iPhone 6, 6s, 7 and SE owners, weeks ahead of schedule. (iPhone battery replacement is usually $79.) Apple is offering this discount to mitigate the public relations mess caused by deliberately slowing older iPhones with worn batteries. And analysts are already starting to put numbers on the potential for lost iPhone sales.

An estimate released yesterday predicts the damage to be in the range of 16 million iPhone sales, or roughly $10 billion in revenue.

Damage control was always going to be expensive, but this is worse than predicted. With the iPhone being the primary driver of AAPL stock — last quarter, iPhone sales accounted for 55% of the company’s revenue — the news is not good for Apple investors.

Apple iPhone Battery Replacement Program

Apple’s public relations mess had its roots in 2016, with complaints about the iPhone 6 battery. In early 2017, the company released a software fix for the issue.

When iOS 11 was released in Fall 2017, suspicion that the company deliberated slowed older iPhones — to boost iPhone X sales — only grew. At first, testing proved that the performance was not being throttled, but it missed a key factor: battery age.

Subsequent tests showed that iOS 11 throttled CPU speed on older iPhones when their batteries were not at maximum capacity. Once again, conspiracy theories about Apple boosting iPhone sales by annoying customers into upgrading flooded the web.

Apple came clean at this point, admitting that the iPhone 6 battery fix had been extended to other models with the release of iOS 11. Now the iPhone 6, iPhone 6 Plus, iPhone 6s, iPhone 6s Plus, iPhone 7, iPhone 7 Plus and iPhone SE are affected.

Apple argued that the move only affected the iPhones during maximum CPU drain, not typical use. Slower CPU speed prevented phones from shutting down or components from being damaged. And only phones with worn batteries were affected. In other words, Apple was trying to protect its users.

But the public wasn’t having that argument. By Christmas, the situation was spiraling into a PR catastrophe.

On December 28, Apple announced an iPhone battery replacement program. Owners of the affected iPhone models could have their battery replaced by Apple — restoring the smartphone to full performance — for $29 through 2018. That’s $50 less than the $79 the company normally charges.

The Implications for iPhone Sales

Obviously, eating $50 on every eligible iPhone battery replacement was going to cost Apple money. But analysts expect this money to be relatively small potatoes, and not a big concern for AAPL stock.

The real problem is the potential impact on iPhone sales.

Barclays Capital released an analyst note yesterday that predicts the cost will be 16 million iPhone sales in 2018. That’s 16 million current iPhone owners who will opt to replace their batteries rather than buy a new iPhone. Depending on model mix, Barclays estimates that represents roughly $10 billion in lost revenue.

The estimated $1.56 billion in revenue from battery replacement as iPhone owners (whether they would have upgraded or not) rush to take advantage of Apple’s offer would help offset the lost iPhone sales. Unfortunately, at $29 a pop instead of $79, it’s doubtful Apple is coming out ahead.

Bottom Line on Apple Stock

Apple’s total iPhone revenue for fiscal 2017 was $141.3 billion. AAPL stock hit record highs through the end of 2017 in anticipation of iPhone X sales driving an upgrade super cycle that would last into 2018, further boosting iPhone revenue.

Now, Apple is looking at the possibility of the iPhone battery replacement cutting into iPhone sales this year to the tune of $10 billion.

AAPL stock already took a recent hit on reports that iPhone X sales weren’t living up to expectations.

And then there’s the competition. Companies like Samsung and Alphabet Inc’s (NASDAQ:GOOGL) Google are likely to take swipes at Apple’s iPhone throttling move in an effort to sway more consumers to pick their smartphones.

In the long term, with the goal of keeping Apple customers for life, the iPhone battery replacement program was the right move on Apple’s part. But for 2018, it is likely to significantly impact iPhone sales, raining on that upgrade super cycle parade and cutting into expected AAPL stock gains.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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