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Why Apple Watch Sales Are Down 71 Percent, and iPhone Sales May Fall

After reporting double-digit declines for the past two quarters, Apple is expected to report similar slides on Tuesday.
Tim Cook, chief executive officer of Apple. Marlene Awaad | Bloomberg | Getty Images
Tim Cook, chief executive officer of Apple. Marlene Awaad | Bloomberg | Getty Images
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In October 2008, as the stock market was panicking, Apple did something remarkable: It reported that in the iPhone's first full year, it saw unit sales pop over 500 percent.

The iPhone came to represent the company's main source of revenue, and ever since, it reported year-over-year growth in sales and shipments of the product.

That is, until this year.

After reporting double-digit year-over-year declines for the past two quarters, Apple is expected to report on Tuesday that it shipped 44.8 million iPhones, down from 48.04 million a year ago, according to analysts surveyed by StreetAccount.

The company is also expected to report earnings of $1.65 per share on revenue of $46.9 billion, according to a Thomson Reuters consensus estimate. That would be down from fiscal fourth-quarter earnings of $1.96 per share on sales of $51.5 billion this time last year.

Investors will hang on the company's commentary and guidance to see whether Apple's iPhone 7 and iPhone 8 can turn around the trend, and how the company can look to apps for a new source of revenue growth and upgrades.

"It's been a challenged smartphone industry, and consumers as well as the industry have been yearning for that next major smartphone release," said Dan Ives, senior vice president of finance and corporate development at Synchronoss Technologies, a mobile cloud services platform. "Can iPhone 7 be the hero to rescue Apple from the fallout that we've seen from the iPhone 6S?"

Hardly any sales of the iPhone 7 will be reflected in the company's quarterly earnings report on Tuesday. It was unveiled in early September and since then, supply has been tight, according to estimates by Piper Jaffray's Gene Munster.

But the company may hint at whether generous carrier promotions and the stumble of rival Samsung could boost sales of the new iPhone model. Brian White, an analyst at Drexel Hamilton, expects that the iPhone cycle bottomed out in the second half of this year, according to a Monday research note.

"Especially in light of the Note 7 fiasco, I think there is a lot of focus to see what types of market share gains Apple has, with iPhone 7 now in their back pocket, "Ives said. "In the last 18 months Samsung had a strong momentum. The question is, does iPhone 7, as well as the Note 7, change the dynamics between Apple and Samsung."

The iPhone's market share has inched up to 43.5 percent in the U.S., up from 43.3 percent last year, eMarketer estimates. The iPhone 7 and 7 Plus are about 10 percent of global iPhone usage, Suhail Doshi, CEO of analytics firm Mixpanel, told CNBC's "Squawk Alley" on Monday.

But unlike when the iPad and iPod passed their peak growth, Apple's latest new products — like Apple Watch — remain challenged, notes Ben Schachter of Macquarie Capital. While Apple is still the leader of the smartwatch market, its year-over-year growth fell 71.6 percent in the third calendar quarter, by IDC estimates.

That squares with CEO Tim Cook's assessment that the iPhone will be more important than ever going forward.

Industry blogs expect the next iPhone — the tenth anniversary phone likely to be released next year, by the normal schedule — to see a massive design overhaul, which could be another catalyst for Apple's turnaround. An all-glass design and wrap-around screen could be among the changes, according to 9to5Mac, citing reliable analyst Ming-Chi Kuo of KGI Securities.

Another way the phone will grow in importance is the App Store, Ives said. Munster said he expects services to grow at 18 percent, after the hype of Pokemon Go died down.

"As you've seen a lot of commoditization on the hardware side, you're going to see a lot of differentiation on the software side," Ives said.

Meanwhile, companies like China's Huawei and Google are upping their bets on high-end phones within the Android ecosystem, another looming challenge for Apple. Apple is also expected to release new Macs and iPads soon.

"It's going to be interesting: The next 6 to 12 months are pivotal for the industry," Ives said. "It speaks what type of pent up demand there is. Does Google become a player? Will Samsung get back on track? I think it's almost like a game of high stakes poker. You want to see where everyone's cards stand."