Editor’s note: Analysis: Apple’s latest revenue and profit declines as reported Tuesday show its influence on the devices market is weakening, says Technology Business Research analyst Jack Narcotta.

HAMPTON, N.H. – A third consecutive quarter of year-to-year revenue, gross profit and operating profit declines for Apple in calendar 3Q16 show that Apple has become a victim of its own success.

Apple’s largely iterative updates to Mac PCs and the iPhone, which TBR believes is due to Apple perceiving a lack of true competition in its target markets, have provided competing mobile device vendors such as Huawei, Samsung, OPPO and vivo, and PC OEMs such as Asus, Dell and HP Inc. with opportunities to loosen Apple’s grip on the premium device segment, the most coveted as it generates greater profits. Apple’s addressable markets, and the company’s revenue and profits, are shrinking as sales of hundreds of millions of entry-level and midrange Android smartphones and resurgence in Windows premium consumer PC demand weaken Mac PC and iPhone demand.

The iPhone is at the nexus of Apple’s current and future ambitions, and while the iPhone’s revenue and profit volume surpasses its competitors – in TBR’s 2Q16 Devices and Platforms Benchmark, the iPhone alone accounted for 24.1% and 41.8% of the total device revenue and gross profit, respectively, generated by 17 vendors – Apple’s 3Q16 results highlight the challenges presented by the hundreds of millions of iPhone customers that are keeping older iPhones longer, which stunts the one-to-two-year upgrade cycle that drove most of Apple’s prior growth.

A third consecutive quarter of weaker iPhone unit shipments caused iPhone revenue to decline 12.6% year-to-year to $28.2 billion, or 60.1% of Apple’s total revenue in 3Q16; fewer Mac PC shipments were also a contributor. Apple’s overall revenue declined 9% year-to-year to $46.9 billion, in line with Apple’s stated forecast in calendar 2Q16, and operating income fell 19.6% from 3Q15 to $11.8 billion, with the magnitude of both declines somewhat exaggerated as Apple posted company-record results in calendar 3Q15, largely due to demand in APAC for the iPhone 6.

As iPhone demand wanes, Apple has begun to prioritize pursuing growth in markets adjacent to the iPhone. Specifically, the company’s Services segment revenue climbed 24.4% year-to-year to $6.3 billion, as a result of Apple’s commitment to greater monetization of iPhone user engagement.

The emergence of the iPad Pro as a “hero device” for the company’s iPad business, particularly in (for Apple) underserved commercial PC markets, inform Apple’s post-iPhone direction. Sustaining revenue growth in these segments will emerge as a priority for Apple in 2017 as iPhone demand wanes, but the scale of the iPhone business will dictate Apple’s overall gains or, more likely through 2017, declines.

Newer versions of Android are viable threats to the “Apple experience,” hampering iPhone revenue and profit growth

Google’s Android operating system, once considered to be a distant competitor to Apple’s iOS, has vastly improved over its last two major releases, Marshmallow (version 6) and Nougat (version 7), particularly by injecting a more consistent look-and-feel to the user interface, and in emerging input technologies such as voice-powered interaction and search. Android OEMs are designing mainstream smartphones that equal, or in some cases surpass, the technical specifications and features sets of the iPhone.

As a result, TBR believes among Apple’s greatest obstacles to overcome in 2017 will be in rekindling demand for the “Apple experience, the mantra on which the company has built its branding, go-to-market strategies and value propositions. Revenue growth in China, once projected by Apple to become its largest revenue by region, continued to retreat in 3Q16 as Android OEMs, particularly Huawei, gained momentum amid a slowdown in China’s consumer markets, and Apple’s efforts to establish India as a growth engine has been undermined by a glut of Android OEMs intent on relentlessly pursuing market share, even at the expense of profitability.

Apple will be able to mine its loyal existing customer base for iPhone revenue and profits, but stronger competition from Android OEMs, particularly from Huawei, means the iPhone segment overall is no longer in growth mode and will pose a significant threat to Apple’s intent to influence China’s mobile market and quickly gain scale in India. Additionally, the lack of a compelling new device or service – Watch sales are retreating, and while usage of Pay and Music services is climbing they generate micro-revenue compared to hardware sales – is hampering efforts to ease the burden of the iPhone to generate revenue and profit.

Incumbent Windows OEMs are complicating Apple’s enterprise strategy – and are moving to claim greater share in the premium PC market

Bolstering growths of growing, but smaller, segments such as the iPad, and restoring growth of flagging segments such Mac PCs, are typically secondary concerns for Apple given the rate at which the iPhone has usually generated gross and operating profits. Mac PC revenue declined 16.6% year-to-year to $5.7 billion in 3Q16 as unit shipments fell 14.4% year-to-year to 4.9 million; iPad revenue was essentially flat year-to-year as the iPad Pro lifted overall iPad average selling price (ASP) 6.1% year-to-year to $459. Even in a declining state, the substantial profits generated by the iPhone allow Apple to underwrite longer-term initiatives in enterprise computing (via its partnerships with IBM, Cisco and SAP, and in-house development of the iPad Pro) that have not yet become meaningful contributors to overall revenue and profit, as well as support shorter-term initiatives to supplement overall profits by accelerating MacBook refreshes.

Apple’s enterprise initiatives aim to curb slowing growth in its Mac PC segment, particularly as iterative, if not outright questionable updates such as removing USB ports that would ostensibly amplify the MacBook’s functionality and extend its peripherals support, hamper demand for the company’s latest PC models. In parallel, TBR believes the iPad Pro has helped validate the enterprise tablet market as much as it announced Apple’s renewed interest in enterprise computing. Additionally, the growing enterprise-ready iOS software ecosystem surrounding the iPad Pro boosts the legitimacy of Apple as an enterprise computing vendor, enabling it to compete for new deployments as well as protect its iPad enterprise install base.

However, enterprise Windows PC vendors, particularly Microsoft partners Dell, Lenovo and HP, with greater expertise and broader support portfolios are well-equipped, particularly in the area of commercial PC services for which Apple lacks a comprehensive portfolio, to deflect Apple’s attempts to infiltrate their install bases. Additionally, the evolution of Windows’ touchscreen capabilities into a supportive input method – instead of the wholesale computing change it was originally intended to be – has cultivated greater awareness and purchases of premium Windows traditional notebook form factors and 2-in-1 PCs.

HP Inc., Lenovo, Asus and, to a lesser degree, Acer are now fully engaged in enticing users to upgrade to higher-end PCs as well as loosening Apple’s grip on the premium PC market. TBR- forecasted revenue growth between 5% and 15% year-to-year each quarter through 2017 in premium consumer notebook PC, gaming PC and commercial PC segments promises greater profits, and is enticing Windows OEMs to enact new strategies to capitalize on these lucrative segments, at Apple’s expense, dually complicating the company’s enterprise computing strategy and efforts to recover premium PC market share lost to its Windows competitors. Apple’s inability to leverage these adjacent product segments to slow any overall financial erosion highlights the risk inherent for Apple to continue to depend on a single device for the bulk of its revenue and profits.

(C) TBR