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iPhone SE Gives Apple a Lifeline as Phone Sales Slump

Apple saw its quarterly revenue fall for a second consecutive quarter, as its iPhone sales continued to falter. So why isn't Apple CEO Tim Cook reaching for the panic button — or at least telling Siri to activate it?

Because it could have been much, much worse. And the Phone SE is a big reason why.

Apple sold a little less than 40.4 million phones during its fiscal third quarter, a 21 percent drop in unit sales from the year-ago quater. But Wall Street analysts believed Apple would only sell 40.2 million, so the company wound up finishing just ahead of those expectations.

Credit the iPhone SE for the better-than-expected performance. The phone, which began shipping at the end of March, restored a 4-inch model to Apple's smartphone lineup while also adding a low-priced option to Apple's offerings. The iPhone SE starts at $399 versus $649 for the iPhone 6s.

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Cook told analysts that the SE had a "very successful global launch," with demand for the smaller phone outstripping supply. The iPhone SE" places us in a better position to meet needs of customers who love 4-inch phones and attract more customers into our ecosystem," Cook told analysts during a conference call today (July 26). "In both cases, that strategy is working."

While Apple does reveal sales figures for specific products, Cook says the iPhone SE has proved popular in emerging markets as well as in the U.S. It's attracting a strong number of first-time smartphone buyers. More importantly from Apple's perspective, iPhone buyers switching from other mobile platforms accounted for the highest percentage of phone sales that the company has ever measured.

"From a user point of view, as the smartphone becomes more and more essential to people's daily lives... we think people will put more and more focus on what they're buying," said Cook, explaining how Apple has managed to attract switchers. "And the thing that Apple does best is provide the killer user experience that becomes integrated into their lives."

All those new Apple customers are using their shiny new iPhone SEs to hop on the App Store to download apps and use other services like Apple Pay. Apple chief financial officer Luca Maestri said that the growth rate of the App Store has been accelerating for four consecutive quarter, while revenue from services segment of Apple's business proved one of the bright spots for the third quarter. Revenue from services grew 19 percent year-over-year to $5.97 million.

Put another way, the more phones Apple sells, the more business it can expect in its services segment down the road. And the iPhone SE helped Apple sell more smartphones than it otherwise would have during the just-completed quarter. And it did that without eating too much into sales of other iPhones: Maestri told Wall Street analysts that there was "no clear cannibalization" of iPhone 6s and 6s Plus sales.

So why did the iPhone SE prove to be a success for Apple? Look no further than the smaller screen size. The market for phones with screens 5-inches and smaller fell 14.3 percent in 2015, according to market research firm IDC. But IDC's Ramon Llamas told me back in March that 56 percent of phones still had 5-inch or smaller screens. In other words, while more customers are clamoring for larger phones, there's still a significant segment of the smartphone-buying populace that wants a compact phone.

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They also want an inexpensive phone if the iPhone SE's sales figures are anything to go buy. The SE packs a lot of the same features you'd find in the iPhone 6s — it's powered by the same A9 processor and features the same 12-megapixel camera as Apple's more expensive phone. All you're really giving up is the 3D Touch feature that summons up app shortcuts and image previews, plus a high-resolution display. (Oh, and the front-facing camera on the iPhone SE is a little weaker than the one featured on both the 6s and 6s Plus, so you're depriving the world of sharper selfies.)

I speak from personal experience here. When my iPhone 5c gave up the ghost a month ago, rather than go for Apple's top-of-the-line phones or scrounge up a loaner until this fall's expected iPhone update, I happily bought an iPhone SE. For me, the price was right, the form factor was even better, and the few features I would have to give up didn't seem that much of a sacrifice. (Although I do miss the expanded powers of 3D Touch in the iOS 10 beta on my SE.)

Still, while Apple has enjoyed some degree of success with the iPhone SE, it still faces some challenges going forward. Its phone sales are still shrinking from year-ago numbers, and its rivals — chiefly Samsung — are putting out better and better devices. Apple has the iPhone 7 launch this September to regain more of its smartphone mojo. But based on the iPhone 7 rumors we've heard so far — the features we've heard about so far are only modest improvements over what Apple offers now — it's going to take some doing to match the success of past iPhone rollouts.

Nevertheless, in a quarter with some daunting numbers, Apple can at least point to the iPhone SE as something of a hit with customers both old and new. In what's been a challenging year for Apple up until this point, I'm sure the company will take that.