Last September, Apple (NASDAQ: AAPL ) released its latest smartphone, the iPhone 5, to great fanfare. Nevertheless, many pundits claimed that the new iPhone was a disappointment; it didn't seem innovative compared with its predecessors. The iPhone 5 is thinner and lighter than the iPhone 4S, has a bigger screen (4 inches, as opposed to 3.5 inches), provides LTE support, and offers an upgraded camera and processor. However, to many observers, these features seemed like minor tweaks. The result was hysteria about whether innovation at Apple had died along with Steve Jobs. Apple's stock subsequently dropped 40% in less than six months.
Strictly speaking, Apple critics may be right that the company's smartphone designs won't be as innovative in the future as they were in the past. However, that's primarily because Apple began with a great concept, so that the iPhone quickly became the gold standard among smartphones. By the time the iPhone 4 was released in June 2010, there wasn't much left for Apple to improve on. (And that explains why the iPhone 4 remains so popular; demand outstripped supply in the fall quarter.)
Since 2010, Samsung and other vendors of Google (NASDAQ: GOOG ) Android phones have made significant progress to catch up with the iPhone. Recently, BlackBerry (NASDAQ: BBRY ) has taken a great leap forward as well. However, a look at the most recent product launches on rival platforms -- Samsung's Galaxy S4 and BlackBerry's Z10 -- suggests that Apple isn't the only smartphone maker for which innovation is reaching a dead end. Smartphones are all converging toward a common look and feel, with similar capabilities.
That doesn't necessarily spell doom for smartphone makers. There are plenty of people who still don't own a smartphone, or who have a low-end smartphone but will eventually want a better one. And as Henry Blodget recently argued, significant improvements to battery life could persuade many smartphone users to upgrade. Finally, smartphones don't last forever. Manufacturers should see strong replacement cycles over time, because of the recent increase in smartphone penetration.
An iPhone clone?
When the BlackBerry Z10 was introduced in January, many observers quickly noted its visual similarity to the iPhone. Its 4.2-inch screen makes it just slightly bigger than the iPhone 5, and the Z10 is an all-touch device, differentiating it from most previous BlackBerry phones. While the user interface is significantly different from iOS and Android, the general experience is similar: It's all about apps.
BlackBerry has talked up the differentiating features of its BB10 OS, such as the Hub (a collection point for emails, texts, social media messages, and so on) and BlackBerry Balance (a feature to separate personal data from work data). Still, most observers agree that there aren't enough differences to persuade iOS or Android users to switch in significant numbers. In other words, it's different, but not especially innovative. From an investor standpoint, BlackBerry's main advantage is that it is cheap, with a market cap just 2% of Apple's.
Boom or bust: Samsung's Galaxy S4
Commentators who think Apple is falling behind in the "smartphone wars" almost universally point to Samsung as the major challenger. However, when Samsung revealed its new Galaxy S4 smartphone last month, it became clear that there were no game-changing improvements. (Not coincidentally, following the S4 launch event, Apple logged its best two-day stock performance in months.) The S4 is slightly bigger than its predecessor, but as Apple critics were quick to point out following the iPhone 5 and iPad Mini launches, changing a product's size is not really "innovation." The S4 has a variety of other hardware upgrades compared with the S III, such as a better camera and faster processor. (Sound familiar?)
The biggest "innovations" for the S4 are a variety of software features. One pauses a video when the user looks away from the screen. Another allows the user to bring up a preview by hovering over an email message or a photo. Another is designed to allow users to scroll up and down with their eyes. However, early reviewers -- such as Tiernan Ray of Barron's and Jessica Dolcourt of CNET -- didn't see any of the new software capabilities as "must-have" features. They also found that many didn't work nearly as well in practice as in theory. While Samsung may be able to correct some of the software's limitations by the time the S4 hits store shelves, it is nevertheless clear that Samsung is also running out of ways to spruce up its phones.
Apple critics may be right that the iPhone 5 didn't have any particularly innovative new features. However, that isn't due to any particular fault on Apple's part: Other vendors such as Samsung and BlackBerry are encountering the same problems. I wouldn't go so far as to say that the smartphone experience has been "perfected," but there is limited room for improvement after all of the progress that has occurred in the past five to 10 years.
The leveling of the playing field does mean that Apple's advantage over its rivals has narrowed considerably. However, shareholders need not panic. Apple has a large, loyal installed base of users who want the iOS experience -- which is exclusive to Apple, obviously. Upgrades for these users will produce a significant stream of recurring revenue. Meanwhile, Apple can continue to seek growth in emerging markets, by adding new carrier partners and potentially by releasing a cheaper iPhone ($300-$400 unsubsidized). Apple's growth may be more modest going forward, but the recent worries that Apple is falling behind competitors have been blown out of proportion.
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