Foreign media: If Apple wants to take its services business seriously, it should cut iPhone prices

According to foreign media reports, the implicit or direct price cuts of the iPhone have eased the blow to Apple, but if it really wants to achieve transformation, it should go further.

Apple reported earnings for its fiscal third quarter ended June 29 after the market closed on Tuesday, showing that the company continues to be hurt as the smartphone market stops growing. Apple said iPhone revenue fell 12%, roughly in line with analysts' expectations, and total company revenue rose slightly by 1%. The company's forecast for the fiscal fourth quarter ending in September mostly suggested more of the same.

While other tech giants reported healthy revenue growth, Apple's growth was so minimal that it's unlikely to boost its stock much. Apple's stock price rose in after-hours trading on Tuesday, most likely because Apple's revenue forecast was not as bad as analysts feared.

To Apple's credit, it has been able to grow revenue from iPhone apps, AirPods headphones, the Apple Watch, and Google Pay. It's been helped tremendously by Apple continually releasing new versions of these non-iPhone products, as well as introducing entirely new ones.

However, while Apple's sales of non-iPhone products and services grew $12.6 billion year-over-year in the past nine months, that was not enough to offset a $19.1 billion drop in iPhone revenue. The combination of modest growth and rising expenses also pushed Apple's operating margin down to its lowest point in a decade.

There is a clear trend now that Apple's hardware growth is slowing down. According to a recent analysis by Bernstein Research, the compound annual growth rate of Apple's hardware business turned negative from 2015 to this year.

Apple stressed that the number of iPhones, iPads and Mac computers in use around the world continues to increase, including new buyers of Apple products and people who get second-hand devices. But if there is no big change in new iPhone sales, it will be difficult for this number of devices to continue to grow.

Therefore, achieving even modest revenue growth and keeping profit margins stable will require Apple to continually introduce new or updated additional products and market them in a convincing way to people who own iPhones and other Apple devices.

One way to kickstart this strategy is to slash the price of the iPhone and use those new devices to upsell people on Apple Music, iCloud data storage, video game subscriptions, and ancillary gadgets like the Apple Watch, which people who already have an iPhone tend to buy. Every time someone buys a new iPhone or dumps an old model that barely works, it's another opportunity for Apple to incentivize people to buy more stuff. It's crude, but it's exactly what Apple needs right now.

Apple has been experimenting with lower-priced iPhones, albeit privately and less noticeably. Last year, Apple released the iPhone XR at a lower starting price of $750 in the U.S., when it introduced new iPhones priced at $1,000 and up.

The iPhone XR has become the best-selling iPhone model in the U.S. to date, according to Consumer Intelligence Research Partners. In addition, Apple has begun offering generous deals to people who trade in older iPhones. Apple is also offering discounts in China to offset iPhone sales woes there and has effectively lowered iPhone prices in many other countries.

These price actions and the launch of the iPhone XR may well have prevented a worse iPhone slump this year. Taking a cue from the iPhone XR’s success, Apple may be more aggressive in cutting prices to accommodate going forward.

Google's smartphone sales are minuscule compared with Apple's, but the company said Pixel smartphone sales more than doubled year-over-year after it released a version of the device starting at $400. Apple can still sell a luxury iPhone to die-hard fans, but it should update that version less frequently and focus on more popular iPhones in the Pixel price range.

Apple's goal is not to chase market share, but to give people more reasons to give up their old phones. To be clear, even if the price of the iPhone is significantly reduced, it will not significantly increase the number of people who own Apple devices. Many new iPhones are purchased by people who already have iPhones, and people replacing iPhones purchased three years ago does not change the number of users of Apple devices in use.

But the newer models could make people more willing to buy more Apple products, sign up for AppleCare warranty plans and respond to purchases of new apps or Apple's growing collection of internet subscriptions and services.

We're still not sure about Apple's ability to truly become a "services" company rather than a hardware seller. Old habits die hard. Apple has tied Internet subscriptions like Apple Music and its upcoming Internet video service too closely to Apple devices, making them attractive to people who don't own Apple devices.

It's hard to imagine Apple succeeding with "Apple Prime" (a one-time payment for an iPhone and other Apple add-ons) until it can reshape its mindset.

One of Apple's late co-founder Steve Jobs' favorite sayings was that Apple was willing to cannibalize itself. If Apple wants to be more than just a hardware company, it might be time for Apple to stop trying to retain its hardware business.