I still don’t have an iPhone 7; I’m probably not going to get one.   This, after owning every single iPhone since I stood in line for the original.   There are two basic reasons:

  • It’s arguably worse in that it lacks a headphone jack.
  • It’s not better in any really exciting way vs. my iPhone 6

I think these are important symptoms of a larger problem – especially the second one.

The headphone jack is a false signal.  Apple is jumping ahead of the curve and deprecating an old technology (just a bit early).  Phil Schiller invited ridicule by calling this courage, but Apple has shown much more courage than their competition in this arena.    I participate in the fun-making, but realize there’s truth behind his claim.  The headphone issue will go away soon enough.   They made the right moves and positioned it pretty well.

Not being better than the iPhone 6 or 6s is the bigger issue.   I’ve been to the last 4 or 5 Mobile World Congresses   I’ve seen radical change in the mobile business and have tracked every minute change in Android and iOS and phone hardware.   We have fallen into a predictable cycle:  The supply chain invents, Android OEMs use, Apple perfects, and Google copies.

For example, two years ago I visited a supplier in China that was offering double camera modules, and saw units from Chinese manufacturers that struggled to make them useful.   There were dual camera units that measure depth, ones that have dual light sensitivity to provide high speed HDR imaging, etc.    They were all terrible and gimmicky; it was predictable Apple would adopt and “perfect” the experience as they have in the iPhone 7 Plus.   Now Google and the Android OEMs will copy this and the cycle will repeat when Apple finds the next big thing.

Or will they?  I would argue that the rate of hardware innovation in smartphones is cratering.   Software and cloud are getting better rapidly, but the last time an iPhone really had serious hardware improvement was the iPhone 6 (big screens).   iPhone updates are increasingly incremental.  (I could be wrong.   Next year Apple could roar back with a new sensor or screen technology and set the world on fire again.    But for the sake of discussion, say the trend continues.)  How bad is it for Apple?

Pretty bad.   Remember that iPhone is $24B of Apple’s $42B in revenue. Because it’s Apple’s highest margin product, it dominates Apple’s profit picture even more profoundly.  So anything that hurts the iPhone business is disastrous for Apple.   How badly could the iPhone be hurt?

Let me give you a sense of the threat, using some simplified numbers.

Right off, let me say I don’t think many iPhone users will defect to Android.   iPhone user satisfaction is and always has been unbelievably high.   iOS users will stay with iPhone.

Let’s assume for the moment that we’re now entirely in a replacement market.   Almost everyone in the market for a premium Smartphone already has one.   There are some exceptions, and some Android users defect to iPhone every year, but it’s an increasingly accurate assumption.

Say there are 400M iPhone users in the world.   In 2015, Apple sold 232M new iPhones, which implies that users are replacing phones every 1.72 years.   This sounds valid on the face as user contracts end in 2 years in big markets, and a sizable number of users buy early because they just have to get the new, much better iPhone.

If new iPhones stop being much better, the replacement cycle will lengthen.   Phones get dropped and break, so they’ll get replaced eventually, but what happens if we get the point where almost no users jump in early?   We could see a replacement cycle of 2.25 years, which would result in only 177M iPhones being sold per year.   That’s still a lot of iPhones, but to Wall Street it would be the apocalypse, with Apple profits dropping dramatically. (Note:  This is what’s been happening in the PC industry).

Who care about shrinking  profits?  In a future post I’ll discuss the subtle ways a drop in profits would affect Apple (or any company) even if they’re still hugely profitable and wealthy.  But for now, take my word for it that Apple’s world would change for the worse.

What can Apple do?   It’s a very hard problem.

The first answer is to keep innovating like mad on the iPhone, but that’s easier said than done.   The smartphone revolution they invented may have played out as it was always bound to do eventually.  They played the revolution just right, stayed on top, sucked all the profit from the pool, and stayed ahead a long time.   But now it’s time for the next big thing…

The Tablet?  The Watch?   The TV?   None are significant compared to the awesome iPhone money machine.   It’s very unlikely anything will rival it.  The iPhone was a once-every-30-years opportunity.   The last revolution of this magnitude that was so dominated by a few players was the PC, with Apple+Wintel reaping the profits.  It could be just as long before the next appears.

Still these are the only real options:   Innovate on the iPhone while trying to invent the next big thing.  Sometimes it’s tough to be the King.