With 50% of Apple’s value at stake the iPhone 5 has to be something special

By Jamie Moss

The public launches of flagship products generate plenty of hoopla these days and none more so than those brought to market by Apple; especially the iPhone.  The anticipated announcement of the 6th version of the iPhone (following the 2G, 3G, 3GS, 4 and 4S models) is the most critical for the company to date – and possibly for any technology company, ever. For at no point in Apple’s history has so much of its future depended on the fortunes of a single device.

Apple Inc. quarterly shipment & revenue breakdown, Q2 2007 to Q2 2012

Source Apple Inc. and Informa T&M

By examining Apple’s quarterly financials, the sales pattern for the company’s different product lines becomes clear. Revenue from Mac sales continue today in line with historical pre-‘iProduct’ growth rates. While iPod sales are ‘bursty’ and peak noticeably in the last quarter of each year as a result of people shopping for Christmas presents. 40 percent of annual iPod sales occur during this quarter’s reporting but year-on-year totals for iPod sales are falling – presumably as a result of the cannibalisation of the iPod’s primary function as a digital music player by the iPhone.

iPad growth is strong but tablet computers as both a product and a form-factor have a limited addressable market. Tablets are luxury items rather than necessities, designed to drive content consumption and to provide a complementary role to the general-purpose utility of desktop computers and mobile phones. Tablets have distinct limitations in their ability to act as true productivity tools, underscoring their status as a secondary/tertiary computing device rather than an outright replacement for other portable computers like laptops.

But the iPhone has a different sales profile – it is Apple’s bread and butter. The portion of total revenue that the iPhone accounts for is huge – just under 50 percent of all of Apple’s revenue during 2011; and 40 per cent of all of the company’s cumulative revenue since the iPhone’s launch in Q2 2007. Put simply, the iPhone is a product that Apple cannot afford to be without. Were Apple to no longer offer an iPhone product, the effect on the company’s revenues – and by association Apple’s share price – would be massively detrimental.

The more things change, the more they stay the same

When Apple first entered the mobile phone market it had nothing to lose and everything to gain, so the company was glad to take every percentage point of market share that it could from the established handset vendors. Today the situation is dramatically different and Apple, potentially, has a great deal to lose should its next iPhone fail to deliver: over $60bn dollars in annual revenue (as of 2011) and its record-breaking status as the biggest technology company in the world.

When one is small, one can be nimble and thereby tactical, so with sufficient preparation and the right market entry strategy it is possible to come up under the radar of incumbent players. But when one is large and a target for others to topple it becomes much harder to manouver for there it so much more at risk should one behave rashly and make the wrong decision. This is the situation that Nokia and Research in Motion (RIM) found themselves in during recent years – and is also the situation that Apple is in today.

Perhaps Apple could walk away from the mobile phone market, having ‘been there and done that’. But with half of its value and half of its product shipments being accounted for by the iPhone, it is simply too much of a void to leave unfilled. Apple must either admit its dependence on the mobile phone market and commit to a long-term future as part of the telecommunications industry, or find something else to take the iPhone’s place. But judging by the universally-accepted failure that was Apple TV the answer may not lie in television.

One size fits all – but for how long?

Apple has made great gains from the fact that it does not have a product range as such for the iPhone. It only ever has one current model while continuing to sell older variants as long as the market for them remains buoyant. This provides a consistency of experience for all users along with an acutely-heightened brand identity for the hardware. But it also means that there is an awful lot riding on the design and function of a single model, a fact that brings with it a tremendous risk of over-specialisation.

The iPhone is not just one of Apple’s products, it is the product that made the company what it is today – and it is also the product which could bring Apple back down to earth with a bump. By all accounts the company has already dodged two bullets with the last two versions of the device. Firstly, with the reception issues caused by the external antenna on the iPhone 4 whenever it was ‘held in a certain way’ – and secondly the fact that the iPhone 4S was not appreciably different from its predecessor.

Today’s iPhone is a physically small device considering the high retail price that consumers must pay. When the Samsung Galaxy S2 was launched it was considered unusually large, but a 4 inch-plus screen has now become the norm for all high-end touch-screen smartphones. The user experience provided by the iPhone’s operating system has also changed very little since its introduction. While Android’s entirely customisable widget home-screen is host to real-time interactive background applications; and the innovative interactive ‘live tile’ user interface of the Windows Phone 7 home-screen has taken intelligent menu systems to a new level of sophistication.

What the future may hold

As a consequence it makes sense that a new iPhone is likely to need a form-factor revolution with a bigger screen – despite the historical increases in its screen resolution. Work may also need to be done to address the physical strength of the screen, for as small as they are relative to so many other devices today, the sight of a smashed screen is a far more common phenomenon for Apple than it is for their competitors. New radio technologies such as NFC and LTE could also be earmarked for inclusion. But, if new technology is simply shoe-horned into the same tired old form factor and controlled by an unmodified UI their impact is likely to be diluted.

Apple shook up the mobile phone market a few years ago, especially with the 3Gs, but today’s reality is that the competition has caught up – and in some cases surpassed them. The feature set of the iPhone 4S was even considered by some to be out of date by the time it was launched.

Nevertheless, reported revenues from iPhone sales hit astonishing new heights in Q4 2011, so there is evidence to suggest that consumers might just keep buying regardless. And as a consequence no real changes to the formula may be required. But does Apple think that it can afford to take that risk? What will happen if the next iPhone is not a ‘true Mk 5’, but ‘just’ another massaged Mk 4? Consumers may come to the conclusion that, not only is their prospective new mobile phone very similar to their last, it’s very similar to their last several – and as a result they may decide to leave that latest offering on the shelf.