Apple's debut of its redesigned iPhone will test anew its high-stakes strategy of once-a-year upgrades for a product that accounts for about 70 percent of the company’s profits.
The new phone, to be introduced tomorrow by Chief Executive Officer Tim Cook, will probably have a new hardware design, including a bigger screen and thinner body, as well as new mapping software and compatibility with speedier next-generation data networks. Analysts predict the iPhone may be among the biggest consumer-electronics releases in history. Still, Apple’s reliance on the device leaves Cook little margin for error.
"The iPhone is the make-or-break product for Apple," said Sarah Rotman Epps, a mobile-phone industry analyst at Forrester Research. (FORR) "Apple has the undeniable lead, but to stay on top they need to keep innovating."
Apple could sell as many as 10 million iPhones by the end of September alone, according to Gene Munster, an analyst at Piper Jaffray Cos. (PJC) By contrast, it took Samsung Electronics Co. (005930) about 50 days to sell 10 million of its flagship Galaxy S III smartphone.
"Until they do something really unimpressive, which I don’t see happening this time around, Apple has a serious hit on its hands," said Ramon Llamas, senior research analyst at IDC.
Almost one year removed from the death of Apple co-founder Steve Jobs, the newest iPhone faces a growing army of competitors looking to grab a piece of a smartphone market that Bloomberg Industries estimates was worth $219.1 billion last year. Samsung, Google Inc.’s Motorola Mobility, Nokia Oyj (NOK1V) and HTC Corp. (2498) are among those taking aim at Apple by introducing dozens of new devices each year, instead of just one.
The new iPhone will be Apple’s first change to the handset’s hardware design since 2010, raising anticipation among customers who have been holding off on buying a new smartphone.
The company garnered 43 percent of its $108.2 billion in sales last year from the iPhone. And because wireless carriers such as AT&T Inc. (T) and Verizon Wireless subsidize the roughly $620 Apple gets for each iPhone sale, the device accounts for about 70 percent of its profits, according to Sanford C. Bernstein & Co. IPhone sales last quarter alone reached $16.2 billion, 33 percent higher than Google Inc. (GOOG)’s total sales and almost as much as Microsoft Corp. (MSFT)’s $18.1 billion.
Apple’s new iPhone could contribute as much as a half a percentage point to U.S. economic growth in the fourth quarter, according to analysts at JPMorgan Chase & Co.
IPhone sales also are what investors watch the most closely. Apple’s shares fell in July after the company reported disappointing sales of the handset. The shares have since recovered ahead of the new iPhone release, gaining 64 percent so far this year. They rose less than 1 percent to $663.96 at 1:58 p.m. today in New York.
"A lot is riding on this," said Chris Jones, an analyst at market-research firm Canalys. "They have to make sure it’s as good as people expect."
Apple’s once-a-year iPhone introduction also helps build anticipation for each upgrade, with news outlets and websites speculating about what new designs and features will be unveiled. Glyde Corp. and Gazelle Inc., two companies that facilitate the trade-in of older gadgets, said they’ve seen a surge in business in recent weeks as people look ahead to upgrading to the newest iPhone.
One of the biggest challenges for Apple may be manufacturing enough devices to keep up with demand. Shortages from screen manufacturers LG Display Co. (034220) and Japan Display K.K. may limit how many iPhones Apple can ship, according to Barclays Plc. That may hinder Apple’s ability to sell about 50 million iPhones by December, as many analysts have predicted.
Apple’s event starts at 10 a.m. local time at the Yerba Buena Center for the Arts Theater in downtown San Francisco. It will be the company’s first iPhone introduction since Jobs died last October on the day after the iPhone 4S was unveiled.
With the newest iPhone, Apple will attempt to balance giving existing customers a design different enough from previous models to inspire purchases, while also remaining true to the style that has made it a market leader among first-time buyers, said IDC’s Llamas. Adding a bigger screen will be a critical new feature for consumers who want to use their phones for basic tasks that were once completed on laptops and personal computers, he said.
Data demands of new iPhone users could also put a strain on mobile data networks being introduced by wireless carriers including Verizon Wireless and AT&T. Known as long-term evolution, or LTE, the communications technology allows users to watch video, stream music or perform other data-intensive tasks at a faster speed than existing 3G networks.
"Apple is going to sell a lot of LTE phones. If the network doesn’t perform, it could put a cloud over LTE," said Walter Piecyk, an analyst at BTIG LLC. "The network operators will say the networks are ready, but in wireless, you never really know."
Apple previewed some new software features for iPhone’s operating system in June, including a partnership with Facebook Inc. (FB) so that members will be able to quickly post photos, comments and other content to the world’s largest social network. Apple also has built its own mapping software that will replace Google’s technology, as well as a new feature for consolidating all of a user’s digital loyalty and gift cards.
The software upgrades will give developers new tools for making shopping and navigation applications as well as others for Apple’s App Store, said Matt Murphy, a partner at venture capital firm Kleiner Perkins Caufield & Byers.
"There are a ton of developers that are very excited," said Murphy, whose firm invests in companies that make iPhone applications.
To get ahead of Apple’s iPhone event, Nokia and Motorola introduced a lineup of new smartphones last week with features such as edge-to-edge screens and a spring-mounted camera for steadier pictures.
Samsung, which uses Google’s Android mobile operating system and offers several different models, has emerged as Apple’s biggest competitor in smartphones. The South Korean manufacturer, which is also one of Apple’s biggest suppliers of components, accounted for 19.1 percent of global smartphone shipments last year, compared with Apple’s 18.8 percent, according to Bloomberg Industries data. Samsung said last week that it has sold 20 million Galaxy S IIIs.
The two companies also are battling in court, with Apple winning a more than $1 billion verdict last month from a California jury, which said that Samsung copied the iPhone’s design. Samsung said it will appeal.
Apple, Samsung and smaller rivals are racing to win over customers who will be upgrading to smartphones from older phones. By 2013, smartphones will for the first time account for the majority of global mobile-phone shipments, two years earlier than expected, according to IHS.
Apple’s growing popularity in China and elsewhere outside the U.S., as well as its built-in fan base, will help make the new iPhone one of technology’s biggest debuts, said Canalys’s Jones.