It appears that “batterygate” ended up costing Apple (NASDAQ:AAPL) far more than the company was expecting. The public bashing AAPL took after admitting to throttling iPhone performance was one thing. But the solution to the PR mess — the $29 iPhone battery replacement program — ended up being incredibly costly. Leaked info from an Apple all-hands meeting says that 11 million iPhone batteries were replaced under the program. And that may have cost AAPL billions of dollars in lost iPhone sales, contributing in a big way to the revenue downgrade that recently pummeled Apple stock.
At the start of January, Apple CEO Tim Cook held an all-hands company meeting. The company had just released a letter to investors warning of its “biggest miss in years” due to lower than expected iPhone sales, and as a result Apple stock was tanking.
In the letter, Cook had noted that the iPhone battery program was a factor, referencing “some customers taking advantage of significantly reduced pricing for iPhone battery replacements.”
It turns out that he was downplaying the significance that program had.
Daring Fireball got ahold of leaked information from the meeting, claiming Tim Cook told employees 11 million customers had taken advantage of the program. In comparison, the company was accustomed to replacing in the ballpark of 1-2 million iPhone batteries per year.
The Revenue Hit of 11 Million “Significantly Reduced” iPhone Battery Replacements
Making the cheap replacement batteries available had a cost for AAPL. For the 1-2 million batteries it would typically replace in a year, the company gave up $50 a pop in revenue by selling them for $29 instead of $79. But that’s a drop in the bucket for a company like Apple.
The real hit wasn’t apparent until the new iPhones — the iPhone XS, iPhone XS Max and iPhone XR — launched in the fall. At that point, some 9-10 million Apple customers who may have purchased a new iPhone, instead enjoyed the renewed performance of their old device. With an average selling price (ASP) of $793 last quarter, that means those cheap iPhone battery replacements could have cost AAPL nearly $8 billion in lost revenue due to forgone iPhone sales.
That is remarkably close to the $10 billion that some analysts were predicting the iPhone battery replacement program could end up costing Apple last January, when it was first announced.
Obviously, not everyone who replaced their battery would have bought a new iPhone this year. However, based on Apple’s revenue warning, the program ultimately had an overall cost that was much higher than the company had anticipated. And it was a cost that hit AAPL stock investors, albeit nearly a year after the program was first announced.
Apple paid a big price for batterygate, although the size of the bill is just now being realized.
The admission it was throttling iPhone performance cost the company public trust, even if the reason was for performance and reliability. There was lingering suspicion the company’s real motive was to encourage the sale of new iPhones. It lost money on millions of cheap iPhone battery replacements. And ultimately it may have lost billions of dollars in iPhone sales last year.
So where’s the silver lining?
For one thing, the battery replacement program wound down at the end of the year, so the bath the company took on cheap batteries is over. Also, the customers who bought those cheap batteries remain customers. They didn’t switch to rival Android smartphones. They will continue contributing to AAPL Services revenue, and there’s a good chance that eventually they’ll upgrade to a new iPhone — the new battery just delays that decision. Expensive as it was, it appears that batterygate didn’t cost Apple quite as much as rival Samsung ended up paying for it’s exploding Galaxy Note 7 mess.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.