DETHRONED

China already lost its title as Apple’s second-biggest market

Apple reached a crossroads in China earlier this year when it reported its first-ever decline in year-on-year revenue from the segment, which slipped 26% to $12.5 billion.

The third quarter yielded an even more startling result: China lost its title as Apple’s second-biggest market.

Greater China had overtaken Europe as the company’s no. 2 operating segment by revenue in the second quarter of 2015, when it contributed $16.8 billion to Apple’s top line. It remained there, behind the Americas in terms of quarterly sales, until today when Apple said its China revenue fell to $8.8 billion for the last three months, down 33% year-on-year. Europe, which tallied $9.6 billion in revenue for the most recent quarter, reclaimed second place.

Revenue numbers weren’t the only thing troubling Apple’s China business in the most recent quarter. In late April, Beijing’s top media regulator called for Apple to shut down its iBooks and iTunes movie stores. That ban is still currently in place. In June, a local court ordered Apple to stop selling the iPhone 6 and 6 Plus in Beijing after Shenzen-based Baili claimed that Apple copied its smartphone design.

Admittedly, Apple’s books and movies stores make up a small portion of the company’s overall China revenue. “For the months that we had them operational, which was several months, the revenue was less than $1 million,” Apple CEO Tim Cook said in a call with investors, adding that Apple is “working very closely with the appropriate government agencies” and hopes “to make books and movies available again to our customers there.” Meanwhile, the Beijing court order was stayed while Apple appeals, and its iPhone 6 models remain on sale in China.

More worrisome for Apple in China are the macro-trends: a smartphone market nearing saturation, experiments with other hardware products that have fallen flat, and a “services” play that promises to be made difficult by China’s regulatory authorities.

For now, though, Cook is downplaying worries about the Middle Kingdom. “What we have to do and what we’re doing is innovating like crazy, and delivering the best smartphone to our customers there,” he said on this evening’s earnings call. “If we do a really great job of that—which we will—then I’m confident that we will do well.”

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