The iPhone "super cycle"—a wave of upgrades and new customers that was supposed to wash over Apple this year with the introduction of its model X—was pronounced dead on arrival.
In Apple's first earnings report since the launch of the pricey flagship smartphone, the company reported lower-than-expected handset sales from the holiday period. Chief Financial Officer Luca Maestri also forecast a decline in the average selling price of iPhones in the current quarter, suggesting the most-expensive models aren't as popular.
The results are part of a broader malaise in the global smartphone industry. Shipments in the fourth quarter dropped 9 percent, year over year, the biggest decline in history, according to Strategy Analytics.
"The super cycle is dead," Steven Milunovich, an analyst at UBS, wrote in a note to investors on Friday. Apple shares slipped 2.9 percent to $163 at 12:18 p.m. in New York, leaving the stock down 3.7 percent so far this year.
To adjust, Apple is now focusing on its huge installed base of devices and how to make more money from that—rather than selling a lot more phones each year, Milunovich added.
Indeed, CEO Tim Cook highlighted late Thursday that Apple has 1.3 billion devices in use now, an increase of 30 percent in two years. The company is trying to sell more services through these devices, along with more accessories and related gadgets. Apple services revenue jumped 18 percent in the fourth quarter, while sales of other products, like the Watch and AirPods, jumped 36 percent.
Milunovich and other analysts quizzed Apple executives on the slowing phone upgrade cycle, during a conference call late Thursday.
"You have an installed base that's 20 percent-plus higher, and a unit growth that's relatively flat, which would suggest that your upgrade rate is going down, or your replacement cycle is elongating. And I'm wondering whether you agree with that," says Toni Sacconaghi, an analyst at Sanford C. Bernstein.
Cook advised against looking at 90 days of sales. "The far bigger thing is to look over a longer period of time and customer satisfaction and engagement and number of active devices are all a part of that."
Over longer periods, the smartphone market still looks weak, though. Global smartphone shipments slipped 0.1 percent in 2017, with iPhone shipments up 0.2 percent, according to research firm IDC.
-- Bloomberg News