A few weeks ago Apple were hit by a 10% slump in their quarterly profits, thanks largely to a decline in sales for the new iPhone.
Not ideal, certainly, but not wholly unanticipated either. Far from being an aberrant result, this blow is just the latest sign of a wider phenomenon that is progressively hitting technology manufacturing companies across many industries – from phones, to computers, to TVs, to washing machines, to cars.
The phenomenon? The upgrade paradox.
The upgrade paradox goes something like this: as technology products become increasingly capable, and well made, the need for consumers to regularly replace them decreases, thus resulting in a slowing of sales for the manufacturers. For this reason it’s fair to say that companies like Apple in fact pay a penalty for making their products “too good”, prompting people to hold onto them for longer, and buy less.
Think, for a moment, about the car industry. A modern car – meaning one made in the last 20 years perhaps – is more than capable of running up half a million, or even a million miles quite comfortably. They don’t rust, they don’t fall apart, and no essential new technology is being introduced which makes older cars unusable. Indeed there is very little meaningful difference between a 2005 mid-range Ford, and one from 2019. Assuming that electric cars don’t take over completely, there shouldn’t be any necessity for you to upgrade your current car for another quarter century if you take care of it.
Almost everywhere you look, this problem is hitting high tech products; sales cycles are becoming progressively longer, and manufacturers are suffering.
So what are they going to do about it? Well, there are a few options, all of which have their problems:
- Innovation. This is the ideal solution to the upgrade paradox – and the one all manufacturers pretend they are doing. Simply make the next generation of product irresistibly better than the generation before it, so upgrading becomes a no-brainer. This is indeed how things worked for a long time. With PCs for instance, in the past you would invariably hit a point where the latest software required a more powerful model to run smoothly, so by upgrading you would achieve an exponentially better experience. However this logic started to fizzle out in 2011, when hardware finally began to catch up with software, and upgrade cycles began to slow. These days there is almost no functionality you could wish for which can’t be handled quite happily by a 6-year-old laptop, or phone; and nor are there any concrete signs that this is about to change. The same thing applies in other sectors. Since the advent of HD-ready flat screens, nothing has happened that would compel you to buy a new TV. There’s no killer difference between 2005 white goods and their 2019 equivalents. Broadly speaking, most things have become pretty much as good as they need to be, restricting so called “innovation” to superficial baubles like 3D TV, and face unlock on your phone. Therefore, in most industries, innovation is not going to be the answer to this problem.
- Built-in obsolescence. The cynical way for manufacturers to counter the longevity of their products, is simply to kill them themselves. Make them a bit more shoddy than you need to so they fall apart; design them so they can’t be repaired; release a software update that’s incompatible with the old model’s engine. Washing machine manufacturers have profited from playing this game, increasingly constructing their machines in ways that make it impossible for technicians to repair them. In 2017 Apple were forced to admit to something similar, slowing down old phones deliberately with new OS updates. This led to them pledging that in the future all updates would work on old phones – a promise which, as an old school iPhone SE user, I can attest to them keeping so far. In short, although this is an effective and common strategy, increasing consumer savviness is going to make it difficult to get away with for much longer.
- New ownership models. A cleverer and more subtle way to outmanoeuvre the upgrade paradox is to shift consumers away from owning your products towards renting your products. This – up to a point – has been the model for smartphones for some time, with many of us getting them “free” as part of our network package. This means that we essentially pay for the phone perpetually, and after a little while get offered a “free upgrade”, which we take because “why the hell not?”. Of course this model is something of an illusion, one that relies on us not owning our phones outright (the upgrade cycles of people who buy their handsets fully are far longer), but nonetheless it keeps a perpetual cycle ticking along, even if only for reasons of inertia. Perhaps for this reason, the car industry has started to follow suit, with an explosion in the popularity of leasing vehicles rather than buying them. This once again ensures a healthy market for unnecessary new cars – although the long term effects of flooding the used market with so many high quality vehicles remains to be seen. Regardless, we can expect to see non-ownership models become more commonplace in all technology sectors as a means to artificially inflate demand for new products.
What these three strategies have in common, sadly and fundamentally, is a desire to coerce people into buying products they simply don’t need. We should celebrate reaching a point where we have better, longer lasting products, which we have to buy less often, saving us money and doing the planet an almighty favour to boot.
Nonetheless we have to be honest about the commercial realities facing these companies – saying “just make do with selling less” is not a solution. Therefore perhaps the most constructive (but also most difficult) way to counter the paradox is the fourth option: diversify streams of revenue.
This is something Apple, to their credit, have always placed a great emphasis on – starting with iTunes, then the App Store, and fast forwarding to today with products such as Apple Music. They recognise that their hardware doubles as a platform upon which to launch subscription and service based revenue streams. For manufacturers in other industries, there is similar potential, be it in the form of component upgrades, subscription programs, product diversification, and so on. For example, imagine if cars had their own equivalent of the app store, or could be easily augmented, updated, and upgraded piece-by-piece from the original dealer. Or imagine if owning one came with a subscription element which entitled the owner to deals on fuel, or parking. These are not necessarily good ideas but the principle is clear: whilst great technology damages upgrade cycles, it also opens doors for differing forms of revenue.
If I were a betting man, I would expect challenging times ahead for the majority of technology manufacturers over the coming few years; as well as an increasing intolerance from the public towards wasteful upgrades, and the scrapping of perfectly functional products. How they respond to these challenges should be well worth watching.