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As iPhone 11 looms, Apple looks beyond the smartphone

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When Apple priced a smartphone above the $1,000 barrier for the first time two years ago, consumers balked. Analysts worried the iPhone X would flop. USA Today joked that buyers might need to take out a mortgage to purchase it.

But then the unexpected happened: people bought the device in such numbers that iPhone revenues reached a record $62bn in the holiday quarter, up 13 per cent from the previous year, even as unit sales declined.

The revenue boost proved shortlived, but ahead of Apple’s annual hardware event on September 10, pricing experts at the consultancy Simon-Kucher & Partners believe consumers are ready for the next milestone: a $2,000 iPhone.

In a new survey of 10,250 people across the US, Simon-Kucher found that 10 per cent of consumers in the market for a new iPhone were willing to pay $2,000 for a top-range model. A quarter were willing to pay more than $1,800.

“There’s an iPhone for every purse,” said Madhavan Ramanujam, a partner at Simon-Kucher.

The survey, of course, was taken before Apple has actually revealed its new line-up of iPhones. The percentage of customers willing to splash out the extra cash could be considerably lower if Apple fails to unveil any big technology improvements that might command such a premium.

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Days before the event, analysts say the smartphone looks set to underwhelm. While rivals such as Samsung push ahead with foldable phones and ultrafast 5G connectivity, it is widely expected Apple will unveil three new iPhones featuring the same screen sizes as current models but with upgraded processors and Apple’s first triple-lens camera — exciting, perhaps, but something Huawei has had for nearly two years.

“Apple doesn’t appear to have the lock on product innovation or enthusiasm that it used to have,” said Mark Mahaney, tech analyst at RBC Capital Markets.

The next breakthrough

In the past, anticipation ahead of Apple’s annual hardware event has become the stuff of legend. The 2015 Danny Boyle biopic Steve Jobs was almost exclusively about the drama behind the scenes leading up to the Apple founder taking the stage. All competitors have essentially copy-and-pasted the format for their own product launches.

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This year’s event has still been met with weeks of expectation, concept images from fans, and myriad leaks, but there is little to suggest it is shaping up to be anything spectacular.

Close observers anticipate a new Apple Watch, updates to Apple TV hardware, more details on its TV streaming service and its Arcade gaming subscription, and possibly a Bluetooth tracking device for finding lost items.

But in smartphones, where Apple earns more than half of its annual revenues, the iPhone increasingly struggles to meet, let alone outmatch, the latest line-up of devices from rivals Samsung, Huawei and Google, in terms of battery life, recharge time and cameras.

The excitement is “muted,” said Wayne Lam, principal analyst at IHS Markit. “Apple must come out with something better than what they’ve been doing,” he added. “The competition is stronger.”

Tim Cook (right) at the launch of the iPhone X in 2017 with Apple chief design officer Jonathan Ive, who left the company in June. Though the phone was Apple’s first to break the $1,000 barrier, people bought it in such numbers that iPhone revenues reached a record $62bn in the holiday quarter © Getty

And yet, it might not matter. Apple still depends on the iPhone and undoubtedly it wants to have the best device in the industry, but the hardware has taken a back seat to its push into wearables — the Apple Watch, AirPods and Beats products — and services, where more than 420m people subscribe to an array of offerings from music to movies.

“The hardware is essentially a known quantity and they don’t necessarily have the magic that they used to, but I think the differentiation and innovation is starting to come from elsewhere for Apple,” says Geoff Blaber, tech analyst for CCS Insight.

Tuesday’s presentation is still “the iPhone event”, he said, but the phones have been relegated from the central product to merely “the building blocks” for Apple’s wider ambitions.

Critics have long lamented that when Steve Jobs died in 2011, Apple’s innovation declined. But the lack of a major product breakthrough on the scale of the iPhone in recent years may equally reflect a moment in which the market for smartphones is reaching maturity.

Arguably it is Apple’s rivals that have gone awry in their attempts to take the innovative edge in smartphones. For instance, though Samsung can lay claim to beating Apple to a foldable phone, the spectacle proved embarrassing when review units broke during demos earlier this year.

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And while sales data suggest Apple is losing the battle for smartphone supremacy — last quarter iPhone sales fell 14 per cent to 39m units, even as Samsung sales rose 4 per cent to 75m units and Huawei sales jumped 16 per cent to 58m, according to Gartner — other indicators suggest Apple is winning the war.

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The company’s multiyear shift in focus from smartphone sales to building out its “installed base” of users — now at more than 1bn — has formed an unparalleled ecosystem of products that is proving hugely lucrative.

Last quarter Apple sold 5.7m smart watches, taking a commanding 46 per cent of the global market, according to Strategy Analytics. In the same period it sold 14m AirPods, a 53 per cent share of the worldwide wireless headphone market, estimates Counterpoint Research.

That ecosystem is only getting bigger with the release of Apple’s credit card and this autumn’s rollout of its streaming TV service and its Arcade subscription. Plus, it is in pole position to take an early lead in the emerging field of augmented-reality eyewear, a segment that is expected to quadruple in sales between 2017 and 2022, according to Gartner.

“We’ve gone past the era where iPhone is the most important product for Apple,” said Mr Lam. “There is no pressure from Wall Street to outperform on iPhones because they have so many other avenues.”

Not having 5G connectivity could hurt Apple in China, South Korea and Japan — regions where the ultra-speedy network is making inroads — especially because every Android phonemaker is expected to have a 5G model by end of this year, said Mr Blaber.

But Apple’s delayed entry might end up being an advantage if those rollouts are botched, he suggested. “Apple is rarely first, and they will undoubtedly argue that they are better launching 5G when the experience is right, there is broad coverage and they can comfortably deliver that experience,” he said.

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‘The biggest question mark’

When Apple chief executive Tim Cook takes the stage on Tuesday, Gartner analyst Annette Zimmermann said “the biggest question mark” will be the pricing for the new iPhones.

The decision is more consequential than many realise. Today, the most expensive iPhone on offer is the XS Max, which starts at $1,099 but balloons to $1,449 with the highest storage options. Storage upgrades alone will account for a huge $18bn in Apple revenue this year — just $1bn short of the $19bn total the company earned in 2006, a year before iPhone launched — according to Bernstein analyst Toni Sacconaghi.

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He estimates that Apple achieves a 90 per cent gross margin on storage upgrades, by mimicking the way airlines lure people in with competitive prices but then make fat profits on baggage fees. The profit from storage upgrades, Mr Sacconaghi said, is likely to make up 26 per cent of the $63bn in operating profit he expects this year.

An iPhone priced in the $1,800 to $2,000 range would not have to be a top seller for it to be a hit, thanks to the halo effect it creates for the brand. When Apple introduced the iPhone X in 2017, the $1,000 handset helpfully reframed expectations for prices across its line-up, masking how Apple lifted average prices because they looked reasonable in comparison to the pricey high-end model.

The same thing happened even with the notoriously expensive $17,000, gold edition of the Apple Watch, said Mr Ramanujam. The 18-karat product, released alongside Apple’s first smartwatch in 2015, is widely considered a failure, with sales reportedly just in the tens of thousands. But according to Mr Ramanujam, the received wisdom is wrong.

“It was genius,” he said. “Because once you have people talking about $17,000, a $400 Apple Watch doesn’t look expensive.”

Via Financial Times

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