Apple’s Lack of iPhone Innovation Is Becoming a Big Problem | The Motley Fool

Apple’s Lack of iPhone Innovation Is Becoming a Big Problem | The Motley Fool

It wasn’t long ago that smartphone users had plenty of reasons to upgrade after two years. Smartphones were getting significantly better each year. Snappier processors, more vibrant screens, and greatly improved cameras whetted consumers’ appetites for new phones.

Today, innovation in the smartphone industry is tougher to find. Apple‘s (AAPL -0.85%) iPhone 15 family looks and performs an awful lot like its predecessor. For those with much older iPhones, an upgrade may make sense. But most people who upgraded within the past few years aren’t missing much by skipping this generation.

iPhone sales are slumping

While one month doesn’t make a trend, February was a rough month for Apple’s most important business. According to UBS, iPhone sales in the U.S. dropped 9% year over year, sales in China were down 16%, and sales in India were down 13%. There was solid growth in Europe, but overall sales were down 4% worldwide. UBS expects Apple to sell 51 million iPhones in the first calendar quarter, down from 56 million last year.

UBS cited a few reasons for the decline. In China, fierce competition from Huawei and other domestic competitors is proving to be a stiff challenge. In the U.S., the popularity of Samsung‘s recent Galaxy smartphones and weak carrier upgrade rates are hurting iPhone sales.

There could be multiple drivers behind the decline in carrier upgrade rates. One driver is probably that new smartphones just aren’t very exciting anymore. With Apple churning out incremental upgrades year after year, it may be getting tough to sell consumers on its latest devices.

Higher interest rates may also be a factor. Wireless carriers often offer incentives such as cheap financing or big discounts on new smartphones. Now that prevailing interest rates are no longer at historic lows, providing cheap financing has become a more expensive proposition.

The interests of wireless carriers and Apple also aren’t quite lined up. Carriers use smartphone incentives to help pluck customers from their rivals, but ultimately, the goal is retaining wireless subscribers, not selling phones. While a lower upgrade rate is a major problem for Apple, it’s only a minor problem for wireless carriers.

AI could be a problem

Apple appears to have missed the generative AI boat. The company is reportedly in talks with Alphabet‘s Google to use the Gemini AI model to power iPhone AI features, a sign that the company is nowhere close to developing something similar on its own.

The jury is still out on whether generative AI models run locally on smartphones will prove to be a game-changer. If it is, Apple is probably going to be playing from behind.

Recent antitrust developments raise the risks for Apple’s most important products. The U.S. Justice Department is suing Apple on charges of monopolizing the smartphone market, with one of the key sticking points being the company’s efforts to make it difficult for consumers to switch away from the iPhone.

If Apple is forced to make changes that lower switching costs for consumers, the cost of its slowing rate of innovation and its AI subservience could be amplified. Companies tend to become more risk-averse as they grow larger, and Apple is the largest of them all.

One thing that we can be absolutely sure of is that the iPhone will eventually be disrupted. Given Apple’s strategy of incremental upgrades and its AI missteps, I’m willing to bet that whatever ultimately disrupts the iPhone won’t be coming from Cupertino.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Apple. The Motley Fool has a disclosure policy.

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