The Exchange

Huge Sales of Apple’s ‘Boring’ New iPhones Stun Skeptics

The Exchange

Apple (AAPL) sold a record-breaking 9 million new iPhones over the weekend, smashing expectations of 5 million to 7 million with its launch of new models that some analysts had yawned over.

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Once again, it seems the skeptics missed the company’s ability to drive sales and capitalize on its industry-leading customer loyalty with just a few key improvements.

“Apple this weekend emphatically refuted the idea that it is a weakened brand,” says Ken Hyers, senior analyst at Strategy Analytics. “It’s clear that there still exists significant pent-up demand for new iPhones.”

The new 5S grabbed more than three-quarters of the opening weekend sales, according to data from Localytics. Sales of the 5C — basically last year’s model dressed up in colorful, plastic exteriors — were a bit less impressive.

Doubters had said the new iPhones, unveiled on September 10, lacked compelling fresh features in a market saturated with cheaper phones running Google’s (GOOG) Android software. But they missed the positives of Apple’s focus on making big improvements to key features that matter most to users. Also, they failed to note that Apple’s high customer satisfaction ratings have created a cycle of increasing sales from repeat buyers.

New features

The 5S includes a new fingerprint scanner that can unlock the phone and authorize purchase of apps and media from Apple’s iTunes store. The scanner eliminates the need to memorize a PIN code and unlocks the phone much more quickly. For the 50% of iPhone owners who never even set a PIN code, the scanner substantially improves the security of their phones. Reports emerged over the weekend of a way to fool the scanner, though the hack required a high-definition scan of the owner’s fingerprint.

One of Apple’s great strengths is “introducing products that incrementally address its customers' pain points,” says John Bright, an analyst at Avondale Partners.

The iPhone 5S’s new camera is also able to take pictures in low light and to snap a quick burst of pictures in a short time. The ability to take slow-motion video is another new feature. Many iPhone customers use the phone as their only camera; the iPhone ranks as the most popular camera on many photo websites. Largely as a result, sales of inexpensive point and shoot cameras are plunging.

Apple’s software improvements, including its new iOS 7 operating system for new and old iPhones, are also critical in keeping the iPhone ahead of the competition. Apple said 200 million existing iOS users have already updated to the latest version, which has a simpler and more colorful appearance. It also adds a free online music service called iTunes Radio, which could be a real threat to Pandora.

"Ecosystem loyalty"

"iOS 7 adoption is a sign of ecosystem 'stickiness,'" says ISI Group analyst Brian Marshall. "New features in iOS7 will help Apple retain ecosystem loyalty."

The software makes the experience of using the iPhone preferable to competing phones, an advantage that can be hard to quantify. Some analysts may have been misled by the history of the personal-computing market, where Apple’s Macintosh was eventually overtaken by cheaper, “good enough” Windows models, says Ben Thompson, author of the Stratechery blog. That market was dominated by corporate IT departments that cared little about the user experience, he says.

And Apple’s strong customer satisfaction levels cannot be discounted. A survey by the Yankee Group in April found that 91% of current U.S. iPhone owners planned to buy another iPhone. Only 76% of U.S. Android phone owners planned to remain with the brand. If these preferences hold true, Apple could overtake Android in the U.S. by 2015, according to the research firm’s projections.

To be sure, blockbuster sales the opening weekend are no guarantee the phone will be a long-term hit. Last year’s opening sales topped 5 million, helping send Apple’s stock to its all-time record level of $705.07. But sales and profit growth tailed off and the stock sunk below $400 earlier this year. Shares of Apple shot up 4% on Monday to $486 on the weekend sales figures — a nice bump for sure, but there are miles to go before the stock comes close to its 2012 highs.

And mediocre sales of the cheaper-priced 5C model show Apple still has no answer for the faster-growing low end of the smartphone market. The company, however, is betting it still has more customers to gain at the higher end before it needs to attack the low end.

After the blockbuster opening weekend, that’s looking like a pretty savvy bet.

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