Apple’s Future Depends on When You Update Your iPhone Next

April 26, 2016, 11:05 PM UTC
CUPERTINO, CA - MARCH 21: Apple VP Greg Joswiak announces the new iPhone SE during an Apple special event at the Apple headquarters on March 21, 2016 in Cupertino, California. The company is expected to update its iPhone and iPad lines, and introduce new bands for the Apple Watch. (Photo by Justin Sullivan/Getty Images)
Photograph by Justin Sullivan Getty Images

Apple just reported the first ever decline in iPhone sales from the same quarter a year earlier. That’s the first ever, reaching back to when the iPhone first came on the market in 2007.

Analysts had widely predicted just such an outcome, in part because iPhone sales in the first three months of 2015 were artificially boosted by severe supply shortages that delayed sales from the last quarter of 2014. Another factor was the strengthening of the U.S. dollar from a year ago, which effectively cut the value of Apple’s sales abroad by more than $2 billion, or about 4 percentage points.

But selling just 51.2 million iPhones, down 16% from a year ago, to bring in sales of $32.9 billion, down 18%, there was a lot more going on than just a tough comparison and the stronger dollar.

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Some onlookers and analysts see a more fundamental problem for Apple (AAPL). New smartphone sales are slowing to a crawl worldwide, especially in the high-priced, developed markets where Apple has the most success.

At the same time, the rate at which current iPhone owners are trading up to Apple’s latest devices has slowed. That could be because iPhones have gotten “good enough” to make upgrades less appealing, or because mobile carriers are no longer subsidizing and hiding the price of the iPhone. Executives from the two largest U.S. mobile carriers, AT&T (T) and Verizon Communications (VZ), said on their earnings calls that they had experienced lower upgrade rates since they began phasing out subsidies, and they that might not rise anytime soon.

On Apple’s call, Tim Cook fielded question after question from analysts about the slowing upgrade rate. His basic response was that the upgrade rate for the current generation 6S and 6S Plus has been “a lot lower” than for the 6 and 6 Plus generation, but “slightly better” than the upgrade seen two years ago on the 5S. If the 6S upgrade rate had matched the rate on the 6, “it would be time for a huge party.”

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That matches data from market researcher Consumer Intelligence Research Partners, which found that the two newest 6S models comprised 61% of sales in the first quarter, compared to a 78% share for the two comparable 6 models in the first quarter of last year.

A year ago, Cook was more forthcoming, reporting that 20% of iPhone owners had upgraded to a 6 or 6 Plus. And six months ago, Cook said the upgrade rate had risen to the “low 30 percentages.”

Cook’s bottom line on Tuesday appeared to be that the more significant outward upgrades to the iPhone in a model like the 6—and presumably the 7 coming out this fall—drive more upgrades than the less evident changes of the “S” years. He also pointed out that the base of iPhones in use has grown 80% over the past two years, meaning a lot of users still have relatively new devices.

“There’s still really, really good business in the developed markets, and I wouldn’t want to write those off,” Cook said.

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There are all kinds of rumors circulating about the upcoming iPhone 7. It may be thinner and have a much improved camera with two lenses. It may be waterproof and charge wirelessly.

Whether those features or others will be enough to improve the upgrade rate will be critical to Apple’s future over the next year or two. If they’re not, Cook may need a whole new line of excuses when he talks with analysts in April 2017.

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