The iPhone is 10, where does Apple go from here?

By Hayley Tsukayama, Jena McGregor

Washington Post·

11 Sep, 2017 02:10 AM8 mins to read

Apple CEO Tim Cook speaks during an event. Photo / Getty Images

When Apple chief executive Tim Cook steps onto the stage early Wednesday morning (NZ Time) to introduce its 10th anniversary iPhone, tech enthusiasts and business analysts alike will be looking for a glimpse of Apple's future.

It is a high-stakes moment for a company 10 years after it released what was its most revolutionary product of the century: the original iPhone.

This iteration could prove a test of its consumer tech dominance as it faces a bevy of challenges: Samsung seems to have resumed its smartphone momentum with the new Galaxy Note 8, Apple trails competitors like Google in the home hub space, Siri's artificial intelligence isn't as advanced as others, and it is losing to Amazon as an entertainment innovator.

For Apple and Cook, some are wondering: Is this the moment they reclaim the mantle as tech's top innovator?

Apple's disruptive reputation was famously first forged by Cook's predecessor Steve Jobs, whose showmanship turned such product announcements into glimmering spectacles of consumer technology. Indeed, Cook will speak in the Steve Jobs Theater on Apple's new US$5 billion campus.

"It is a big deal," said Andy Hargreaves, an analyst at Pacific Crest Securities who has a rating similar to a hold on Apple's stock.

"They have this spaceship new campus where they're holding the event. It is the 10th anniversary. It's supposed to be the most innovative phone they've come out with in years. If they disappoint, it will be a mark on him."

Cook's tenure at Apple's helm has been characterised by considerable financial success. Apple's share price has climbed 234 per cent on his watch, compared with 138 per cent for the Standard & Poor's 500-stock index.

It is up close to 60 per cent over this point last year, headed into the event, and the company's stockpile of cash topped US$250 billion this year. Revenue for Apple's services business over the past four quarters, which includes sales from the iTunes and App stores, reached US$27.8 billion - the size of a Fortune 100 company. And Apple has seen its wearable devices - including headphones and watches - become as big as a Fortune 500 company in just a couple of years.

But Apple fans, who crave the days when the company changed the world with revolutionary products, are eager to see more of those industry-disrupting ideas. So far, despite a recognition of the enormous task of repeating the iPhone's runaway success, analysts say nothing under Cook's watch has fit that bill yet for a wide swath of consumers.

"Everybody still wonders if there's going to be a Jobsian twist and we just haven't seen it," said Scott Anthony, managing partner of the consulting firm Innosight, which was founded by Clayton Christensen, a guru in disruptive innovation.

"It's hard to denigrate someone who has grown Apple the way he has grown it, but I think the world hungers for an Apple continues to truly surprise and delight us."

The hope is that the 10th-anniversary edition of the iPhone will offer that. That phone, one of three predicted to be announced this week, is expected to get a design overhaul. Analysts expect wireless charging and a nearly all-screen front with no home button, which will make the phone appear more like a sheet of glass - both features that Samsung has already incorporated. One premium feature they hope to see is advanced cameras for facial recognition, which among other uses could put Apple a step ahead on offering innovative financial transactions.

But Apple's biggest splashes haven't always come from being first with new technology - and aren't always recognised immediately for their impact.

Many have struck a chord with consumers because of their polish and industrial design, such as the candy-coloured iMac or the sleek iPod, said Tim Bajarin, a longtime Apple analyst from Creative Strategies. A new design, Bajarin said, gives Apple a chance to show the evolution of the company over the past decade - and forecast where it's headed next.

It's unclear to me whether or not AR is a big game changer that can drive software sales or App Store sales for a long period of time.

One area where Apple does seem to be making a mark is in augmented reality (AR), which lets developers use the phone's camera to blend the digital and physical worlds. In June, Apple unveiled its ARKit, a set of tools for developers, and Cook has touted it as a big deal: In a recent earnings call, he said, "I think AR is big and profound, and this is one of those huge things that we'll look back at and marvel on the start of it."

For instance, a painter could use an app to remotely map the contours and square footage of a room and offer an estimate for the cost without having to visit the home, said Gene Munster, managing partner at Loup Ventures and a longtime Apple analyst. That might be something the painter would be willing to pay, he suggests, US$100 a year for, helping to drive up revenue from an App Store that tends to more typically deal in one-time US$3 purchases.

In other words, Munster sees the expected move toward AR technology as having a symbiotic relationship with an increasingly critical - if less sexy - part of Apple's business model: its services business. Not only will it be essential to maintaining downloads of apps that will increasingly feature AR tech, but it presents an opportunity for higher value apps and subscriptions that could further drive that revenue growth.

If it works, Munster said, it will be a huge moment for Apple. "I think people won't recognise that it was a defining event until probably two years from now," he said. The event may be being held at the new headquarters - arguably the last product Steve Jobs, who conceived of the campus, ever created - but "I think more broadly it's kind of appropriate that Apple starts down this road of really innovating themselves beyond their core business in this new campus."

Though a small part of Apple's overall revenue, at just 12 per cent, its services business has been growing at a double-digit rate in recent years, and will account for an estimated 35 percent of Apple's revenue growth this year.

That's had payoff for the stock. Investors like stability rather than the variability that comes with new technology cycles, Munster said. More sustainable revenue from services could help drive up the stock price. The most exciting expected features for the new, high-end iPhone - the screen, the facial recognition, the new cameras - serve the double purpose of offering cutting-edge hardware that also supports Apple services such as streaming video or Apple Pay.

Not everyone is convinced about AR's potential.

"It's unclear to me whether or not AR is a big game changer that can drive software sales or App Store sales for a long period of time," Hargreaves said.

But the steady approach Munster describes fits with the company's management by Cook, who as chief operating officer built the logistics and supply chain system that helped make the iPhone the hit it is now. And analysts expect that Cook will do his best Tuesday to use the next iPhone to tie together past and future, home runs and base hits.

What will matter most is whether consumers, who have slowed their pace of buying new iPhones in the last two years, get the message, said Jan Dawson of Jackdaw Research. "If they're able to launch new iPhones next week that move the needle in terms of growth rate, it goes a long way toward answering those criticisms about Cook's ability to lead Apple."

And while Jobs may always cast a shadow on Apple, that doesn't have to be a bad thing, Bajarin said.

"Steve's legacy is not going away," he said.

"They'll continue to drive the company around Steve's vision. But this is, more and more, becoming the company of Tim Cook. And that's why in that sense they can use the 10th anniversary as a critical juncture. It takes on more of Cook's vision and personality - guided by Steve Jobs's vision."