Drop in iPhone Sales Drives Apple to Tout Apps and Services

Apple executives played down a significant drop in revenue and net income in a conference call with investors today to discuss third-quarter earnings, explaining that profitable apps and services would play a large role in the company's immediate future.

Net sales dropped to $42.3 billion from $49.6 billion during the same period a year earlier. Much of that decline was due to softening demand from China, which is currently facing an economic slowdown. Apple CEO Tim Cook said he was optimistic about Chinese demand for Cupertino's products and services, but admitted that the decline of sales in China was one of his company's key challenges.

Apple's expansion in China has been swift, with the company opening its 41st retail store in Macau last month, up from zero in 2010. China now has the third largest number of Apple stores, behind the UK and the US. The expansion has also been mostly successful. Cook said that China Mobile, the world's largest mobile phone operator by number of subscribers, now counts more iPhones on its network than smartphones made by any other manufacturer.

But iPhone sales both in China and worldwide were down in the third quarter; in fact, the only bright spot on the hardware side of Apple's business was the iPad, of which it sold 9.9 million, up sharply from 4.9 million a year ago. iPads account for 84 percent of the market for tablets over $200, according to Apple's CTO Luca Maestri.

With troublesome iPhone sales, it was perhaps unsurprising that Cook spent much of the call touting Apple's services business, which includes everything from platforms like iOS, macOS and Apple Pay, to the iTunes store, to Siri, Apple's personal digital assistant. Revenue from these services surpassed that of Mac computers earlier this year, and it continued to do so in the third quarter.

"I'm very bullish about our long-term prospects," Cook said, noting that revenue from the App Store is up 37 percent and has set a new record. He also said that the upcoming iOS 10 and macOS Sierra releases will be flush with app integrations from developers, something he sees as crucial for improving Apple's bottom line and its customer experience. Many of those apps—especially Siri integrations—will rely on Apple's artificial intelligence (AI) research, which Cook said gives Siri the ability to understand not only words, but also the speaker's intent.

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In addition to AI, another tech industry buzz phrase got Cook excited. He said the augmented reality (AR) craze driven by Pokemon Go was an example of the innovative app development that Apple is trying to support. "There's a tendency in this industry to call everything new," he said. "That said, AR can be huge."