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Almost. For a product everyone knew was coming out, the crowd in that darkened auditorium looked elated. “We’re introducing three revolutionary products—an iPod, a phone, and an internet communicator,” proclaimed Jobs, ever the showman. Icons for each spun around in a giant Keynote presentation behind him. “Are you getting it? These are not three separate devices. It’s one device. We are calling it iPhone.” The crowd roared, as if Jobs had scored a touchdown.
Watching an old Apple keynote is a strange exercise. Yes, it’s a stark reminder of tech’s hype machine. At the same time, it’s a throwback to a simpler time in tech when people could truly feel anticipation, a more innocent excitement about getting a peek at the next shiny thing that could truly change the future. Today, there’s lots in tech to be cynical about. But the iPhone holds up—at least for the people using them.
At the end of 2006, Apple was a $70 billion company. Little more than seven years later, its value had grown more than tenfold. Its record $18 billion profit in the third quarter of January 2014 is still a corporate record. Apple’s retail stores pull in more profit per square foot compared to any other company in the US—including luxury jeweler Tiffany & Co. The reason for this massive, universe-altering success? The iPhone, which famously accounts for two-thirds of Apple’s revenue.
Now Apple is facing a turning point, and once again the iPhone is the reason—but not in a good way this time around. The smartphone market is saturated. Rivals, especially Google, are building hardware that truly rivals the iPhone. After 10 years, the iPhone can no longer serve as Apple’s growth engine. The company now faces the same challenge it did a decade ago: figuring out what’s next.
Building MomentumIt wasn’t like Apple introduced a brand-new class of gadget. A vibrant mobile phone market already did exist. Smartphones— then-premium devices that could make calls, send emails, and browse the internet—were still nascent. But it was already crowded with brands like Nokia, BlackBerry, Motorola, and Palm.
Into this competitive field, Apple launched the iPhone. Tech pundits and mainstream outlets both gave it glowing reviews, admiring the keyboard-less multitouch functionality and its ability to sync easily with iTunes. But others laughed it off as a niche product that had come to market far too late and which was far too expensive to go mainstream. “Talk … all I’m hearing is talk,” scoffed Mike Lazaridis, then-CEO of Blackberry-maker RIM. “Apple’s design-centric approach will ultimately limit its appeal by sacrificing needed enterprise functionality.”
For a while, it didn’t. Apple released the iPhone in June 2007 at $500 for a 4GB model and $600 for an 8GB model—and that was with a contract. But within a year Apple had halved the price, introduced the iPhone 3G, and unveiled what would become the single greatest reason for the iPhone’s success outside of the phone’s design itself: the App Store.
“The touch screen, and the new way you could interact with the internet, your phone and contacts, made the iPhone radically better,” says Gene Munster, for years the most famously bullish Apple analyst and now a partner at Loup Ventures. “But what really brought the iPhone to the next level was the App Store.” The App Store truly transformed the iPhone into a computer that fit inside people’s pockets.
And so the momentum for the iPhone began to build. The iPhone 4’s Retina screen and FaceTime app were huge hit with consumers (never mind that they knew about all that well in advance because of an iPhone 4 prototype left in a bar and recovered by Gizmodo). Jobs passed away a day after Apple revealed the iPhone 4S in October 2011, but the iPhone’s success continued to grow. The iPhone 5 got faster LTE technology, and Apple sold 5 million of them during the first weekend they were available. (The first iPhone sold 6 million units total before Apple discontinued it a year later.) The big-screened 6 Plus which was a massive hit in China and evolved into today’s barely discernibly different iPhone 7 and 7 Plus. And that’s where Apple’s trouble becomes clear.
Apple’s New RealityToday, Apple is facing a new reality. The smartphone market has gone flat, and Apple saw iPhone sales decline for the first time ever in 2016. Last year also saw Apple post its first annual sales decline since 2001, breaking a 15-year winning streak.
The problem is, at this point, if you want an iPhone, you probably already have one. “The smartphone is your mobile phone, and the mobile phone market grows about 5 percent a year,” says BGC analyst Colin Gillis. “We all used to have flip phones, and now we have smartphones. That transition is still ongoing, especially in emerging markets. But the booming growth is over.”
‘The iPhone is like the sun that blinded us to the other stars in the sky.’Complicating matters, says Tim Lesko, a partner at Granite Investment Advisors, is the fact that there’s no real technological leap at the moment that Apple can use to its advantage, a tactic that’s served Apple well in the past. Upgrading to the iPhone 3G gave you a much faster phone, as did 4G LTE. “Those were the technological steps Apple benefited from in those first few versions of its phones,” Lesko says. “You don’t really have something like that today.” For one thing, he says, 5G is still in its infancy. “So there’s no compelling reason to get a new phone, unless your battery is starting to fail on you.” And these days, that’s not likely to happen for two or three years.
Yes, Apple users are fiercely loyal. Munster says Apple could take advantage of this by lowering its prices to grab more market share and then make up the difference by offering more services. In some ways, Apple is already starting to shift in this direction—most notably by giving a greater cut of revenue to app makers who lock in long-term subscribers.
But Apple is at a crossroads. The iPhone has grown up, and Apple’s share price has fallen since its peak a few years ago. “The iPhone is like the sun that blinded us to the other stars in the sky,” says Horace Dediu, an independent analyst at the Clayton Christensen Institute. If that sun burned too bright in the past, it’s fading out now.