Analysis: Why Apple's 'Batterygate' controversy won't be repeated

It was December 2017 and Apple’s recently released iPhone X was delighting a small cohort of owners with its upgraded technology and blazing performance. At the same time, a different cohort of iPhone owners was dismayed by the slowing performance of their older models. The culprit, it turned out, was Apple: It had sent a software update that slowed the performance of older iPhones as their batteries aged, and failed to notify their users. Late last week, the company reached a class-action settlement that could pay as much as $500 million to iPhone owners to resolve what was nicknamed “Batterygate.”

Apple admits no wrongdoing and has long held that that episode was a misunderstanding. Many consumer advocates thought otherwise, going so far as to suggest that Apple was trying to nudge consumers into buying new iPhones. Whatever the truth, it’s unlikely that Apple will ever again install a secret, performance-reducing feature in a product. But it’s not the multimillion-dollar lawsuit that will keep them from doing it. Instead, Apple’s growing business selling used iPhone gives the company a powerful financial incentive to promote and defend the handset’s durability.

                                                                                                                                                                                                                       

The scratches and dings that inevitably accrue to an iPhone have long been a concern to owners. But so long as carriers subsidized the phones (in the U.S.), and owners could look forward to an upgrade every year or two, Apple could focus its marketing on new features, not phone hardiness. In the mid-2010s, all of that changed. Carriers began ending phone subsidies, forcing owners to face the true cost of their devices for the first time. What was once a $200 phone became a $750 phone. Meanwhile, smartphone innovation began to level off, further reducing reasons to upgrade. In 2019, a survey of 3,650 U.S. mobile-phone owners found that one-quarter held onto their previous device for at least three years, an 18% increase over 2017.

No company feels that shift more keenly than Apple: It hasn’t seen big year-over-year gains in iPhone unit sales since 2015. To make up for the lost revenue, Apple has been raising prices (further reducing incentives to upgrade) and growing other lines of business, including “services,” a catch-all category that includes AppleCare+, the company’s extended warranty program, plus Apple Music, iCloud storage and more. That iPhone has roughly 1 billion active users gives Apple plenty of potential customers to whom it can sell services. But growing that user base, especially in developed countries, becomes incrementally more difficult as iPhone prices rise and innovation fails to excite new customers. So, in 2016, Apple began selling used, refurbished iPhones on its U.S. website. For customers who can’t — or won’t — pay full price for a new phone, those handsets are a discounted route into the Apple ecosystem that comes, literally, with an Apple warranty.

Apple doesn’t break out how many used iPhones it sells. But one very big clue to the importance of the business can be found on the company’s U.S. website. The first question that a prospective iPhone customer receives after hitting “BUY” is “Do you have an iPhone to trade in?” Apple currently buys back iPhone X handsets for a trade-in value up to $320, and sells them for up to $699. There are few other lines of business in which Apple can so easily double its money. Unsurprisingly, Chief Executive Officer Tim Cook recently told an earnings call that “the secondary market is very key” and that the company is actively trying to ramp it up. Apple isn’t alone: In 2019, 206.7 million used phones were shipped globally, up 17.6% over 2018. By comparison, new phone shipments declined 2.3% in 2019, a third straight year of falling sales.

Succeeding in that growing market requires a product that’s worth selling and reselling. To Apple’s credit, the quality of the iPhone’s build and Apple’s willingness to provide software updates to older phones (the latest version of the iOS operating system supports the five-year-old iPhone 6S) ensure that the iPhone retains its value in the secondhand market better than Android handsets of a similar generation.

                                                                                                                                                                                                                       

The infamous “Batterygate” update was very much in this spirit of maintaining the iPhone’s reputation for reliability. Apple insists that the software was designed to ensure that older iPhones didn’t suffer other performance problems as they aged. The problem is that Apple didn’t bother to divulge the update. Once iPhone owners found out, they were rightfully outraged that Apple was deliberately slowing down their expensive handsets, and naturally assumed the goal was to nudge them into buying new iPhones. Only Apple knows how the scandal affected sales of new and used iPhones. But from the beginning, Apple’s first concern was maintaining the iPhone’s durable image, and it quickly offered low-cost battery replacements that sped up older iPhones and cut into new phone sales (why buy new if your old phone is running as good as new?). When asked about those lost sales, Cook referred to the growing market for used iPhones and professed not to be worried: “I view this as a positive as it increases iPhone user base.”

For decades, that kind of thinking was confined to car dealerships with used-vehicle inventory. Cook is no car salesman, but he’s quickly waking up to what his peers with car lots have long known: You can’t built a sustainable secondhand business on a reputation for lemons and breakdowns. As new phones become more expensive, and the secondhand market grows in importance, Apple has no choice but to double down on durability as a quality is nearly as important as the innovation that has long defined the company.

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Minter is a Bloomberg Opinion columnist. He is the author of “Junkyard Planet: Travels in the Billion-Dollar Trash Trade” and the forthcoming “Secondhand: Travels in the New Global Garage Sale.”

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