Apple’s Annual iPhone Update – A Background Analysis

Announced on 27 June 2007 by Steve Jobs, the first ever iPhone still looks remarkably modern and similar to the latest models.
Announced on 9 January 2007 by Steve Jobs, the first ever iPhone still looks remarkably modern and similar to the latest models.

In little more than one hour’s time, we will experience Apple’s annual release event announcing details of their new model of iPhone, together with some other new product announcements too.  So, should you rush out and start lining up outside your local Apple store to buy a new iPhone as soon as it comes out?  Will Apple’s share price – stalled and dropping for the last five quarters – resume its earlier upward rush?  We’ll know more in the next few hours.

To understand the importance of these (always important) issues it is helpful to see the historical perspective of a product line that appeared from nowhere in a blaze of glory just nine years ago, then rapidly grew to become the dominant part of Apple’s product mix and was largely responsible for Apple’s revival and renaissance, and for its extraordinary climb in market valuation.

But, as amazing as the growth of the iPhone has been, there has been a disappointing decline in market share and a slowdown in innovation, matched by competitors not only catching up but overtaking Apple’s earlier dominance.  The stakes – always high for any new iPhone release – have never been higher than this year.

Let’s understand why.

The Growing Challenges of the iPhone

The annual iPhone update event this year reminded us again of how much things have changed since the departure and death of Steve Jobs five years ago.  Back then, iPhone updates were very big news, eagerly awaited, and there was little or no pre-event leaks about what the new model phone would feature.

The last several releases have seen more and more pre-event leaks to the point where now, for the last few weeks, the biggest unknown has been nothing more than whether the new phone would be called an iPhone 7 or labeled as another variation on the iPhone 6.  This ambiguity was due to a general consensus that the new iPhone would be so underwhelming as to be undeserving of a new number.

And, astonishingly, the biggest ‘excitement’ has not been about whether Apple will release any compelling new features, but whether Apple will instead remove what hitherto has been considered a universal mandatory feature – a headphone connector.  Ponder the bizarreness of this for a moment – rather than eagerly awaiting exciting new ‘must have’ features, the largest discussion has been an anxious expression of concern that Apple will instead eliminate a feature that most of us which to retain.

The probable lack of wondrous new features is not entirely Apple’s fault (but the threat to remove the headphone jack definitely is!).  There is only so much that a smartphone can do, and the technological limits on the capabilities of smart phones have been eroding to the point where, for most of us, our current phones do everything we want them to do and there is no real need or benefit to upgrading them yet again.  In the inescapable cruelty of marketing and product development, Apple’s earlier innovation is now making it harder to maintain an exciting pace of new feature development and release.

The problem has been made worse by the steady development of competitor phones with similar, identical, or even debatably superior features, based on the Android operating system, and at much lower prices.  Indeed, the day before Apple’s new iPhone launch today, Amazon announced new Android based high-end phones, selling for as little as $50, $100 and $150.  These are the total purchase prices for the three phones, these are not the ‘deposits’ that assume a two year contract with additional costs baked in to the monthly plan rate, or the monthly time-payment costs!  Compare that with the cost of a new iPhone – starting at $650 if purchased without a two year contract pricing subsidy.

Apple’s ability to command an enormous price premium is eroding, but its determination to remain at the top of the pricing curve seems unchanged.  As a result, the iPhone’s market share is dropping; and one wonders whether the iPhone isn’t transitioning from being the flagship and dominant smartphone product to now a niche non-mainstream product, much the same way that the Mac lags behind the PC.

After many years of extraordinary growth in monthly, quarterly and annual sales numbers for iPhones, Apple has now been suffering steady drops in numbers sold every month, with a 27% drop in overall corporate profitability in the last quarter ended July 2016 as a result of a 15% fall in iPhone sales numbers.  This page has several charts that starkly point to Apple’s enormous reliance on the iPhone as a driver of corporate profitability, and the decline in iPhone growth that has happened over the last six quarters. Add to that an already diminished market for the iPad and a lackluster failure by the smart watch product to capture much market interest, and the extraordinary growth of Apple on many fronts now seems largely stalled, and in need of a new ‘star’ product or service to rekindle its future prospects.

So, simultaneously, much is needed by Apple for its new iPhone, while little is expected in the market.

The Evolution of iPhones Until Now

Apple’s smartphone ‘problem’ (some would say that there is no problem with such spectacular sales to date) has been growing for years, with challenges on two fronts.

The first problem was a refusal to acknowledge the marketplace demand for larger screens on phones.  When the iPhone first released in mid 2007, its 3.5″ screen was one of the very largest, and Apple then doubled down on the screen’s size a few years later with its iPhone 4 which introduced the concept of higher resolution screens, quadrupling the pixels on the screen and giving a razor sharp display to what had formerly been a somewhat grainy image quality.

But other smartphones started experimenting with larger sized screens (and copied the higher pixel density), and for sure, as smartphones increasingly became windows into the internet in general, the value of a larger sized screen became compelling to most users.  Apple stubbornly adhered to Steve Jobs’ proclamation that the 3.5″ sized screen was the perfect size, the same way it resisted larger or smaller sized screens on its iPad products too (only releasing smaller and subsequently larger screened iPads ‘too late’ after allowing competitors to muscle in to the tablet market and displace the iPad from its dominant leadership position).

Four years ago, in September 2012, Apple grudgingly acknowledged the market demand for larger sized screens when it released the iPhone 5, but the screen size increased only a tiny bit, from a 3.5″ diagonal to a 4″ diagonal.  It wasn’t until September 2014 that Apple finally accepted the need for truly larger screens, and released the two models of the iPhone 6 and the iPhone 6+, with 4.7″ and 5.5″ screens, while maintaining also an iPhone 5 product with a 4″ screen, giving it the range of screen sizes that the market needed and expected – small, medium and large.

The iPhone 6 was a success, due to the bottled up demand for a larger screened iPhone.  Last year, the new model iPhone 6S was essentially the same as the previous year’s iPhone 6, other than for a pressure sensitive touch screen, a feature that has been little used and little appreciated by users and software in general.  There was no change in screen sizes offered, and indeed, at 5.5″, the larger screened version is nearing the upper limits of convenient size for a phone.  (A small amount of extra screen area without increasing the phone’s physical size could still be created by reducing the amount of bezel around the edges of the screen.)

It is probably fair to say that almost no-one who bought the iPhone 6 chose to upgrade to the iPhone 6S, and in general, the earlier rush of annual upgrades of phones has steadied to now see at least two years between upgrades, and often longer.  This page has slightly confusing statistics, but the key point seems to be that 47% of iPhone users are now waiting until their iPhone becomes ‘obsolete’ before upgrading.

Exactly what ‘obsolete’ means is not clearly defined, but probably means ‘when a major new software release can’t be installed on an older phone, or a major new feature is announced which can’t be used’.

The second problem Apple has increasingly been confronted with has been the improvement of competing model phones, which have become, to the average/typical phone user, identical in function and features compared to iPhones, and very much less expensive.  Apple enjoyed a technological lead – its first iPhone, released in June 2007, largely had the market to itself until the first Android phone struggled to market in October 2008, and for several years after that, there was generally some clear lead between the iPhone design, functionality, and appearance, and that offered by Android devices.

But with the power of Google and Samsung and Motorola, as well as lesser players, all pushing Android as far and fast forward as possible, and the abject failure of Blackberry and Nokia/Microsoft to split the market into a third or fourth slice, Android has caught up with Apple in all significant respects, while offering enormously better values and comparable/identical features.

This problem has been made worse by the trend among wireless phone service providers to ‘expose’ the cost of phones.  In the past, the carriers have obscured the cost of phones by folding the purchase cost of the phone into the monthly service fee, so most customers would see deals like ‘this wonderful new phone can be yours for free if you just extend your current phone contract’.  That was an easy concept to sell and respond to.  And even for premium phones, the offers were ‘for only $100 or $200 (or whatever) you can upgrade your phone to this new top of the line premium model phone’.

But starting with T-Mobile, most of the carriers are now separating out the cost of the actual phone service, and then showing any installment plans for phones separately.  It is now obvious that there is no such thing as a free phone, and this makes the ridiculously over-priced iPhones more obviously as expensive as they truly are, and makes people more sensitive to the pricing differential.  As mentioned above, Amazon announced yesterday three new models of good high end Android phones, with total purchase prices of $50, $100 and $150.  Persuading someone to pay $750 instead of $150, or $650 instead of $50, is a difficult challenge.

What Apple Needs to Achieve With the New iPhone

So, in a nutshell, Apple needs to come up with a new ‘must have’ feature to encourage current iPhone owners to upgrade, and to help regain some market share from the Android family of phones, and it needs to do something about the ever larger pricing gap between iPhones and similar/identical/better Android phones.

The next article, written shortly after the formal release of details of the new phone, will reveal how well the new iPhone appears to promise to fulfill these essential objectives.

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