Apple (NASDAQ:AAPL) has enjoyed tremendous success with its iPhone series of smartphones. The company practically redefined the notion of a smartphone with the first iPhone and has, with subsequent iPhone releases, brought compelling new features and use cases to the product category.
Although it would be ridiculous to claim that the smartphone innovation is nearing an end -- I expect that the phones Apple sells in five years will be dramatically different and substantially better than what it sells today -- the iDevice maker does have a very serious long-term problem on its hands: the problem of "good enough."
What do people do with their smartphones?
At some point, smartphones will become "good enough" for what the average smartphone user is interested in doing. comScore put out a report showing the top 15 most used smartphone applications in the United States at the end of last year. You can see the full list here.
Looking at this list, it's clear that the most common uses for smartphones include:
- Communicating via social media.
- Watching videos.
- Checking stocks.
- Listening to music.
- Buying stuff.
I would imagine that browsing the web via a web browser such as Apple's Safari is also an extremely popular use case.
At some point, a phone becomes "good enough" for all of the above use cases. If the iPhone 6 didn't represent such a "good enough" device, the iPhone 6s, with its extremely fast A9 chip and two gigabytes of memory, certainly does, in my mind.
The "good enough" problem
I don't mean to suggest that the smartphones of tomorrow won't do things much better than the smartphones of today. Smartphones are multidimensional products and with each generation, companies put out devices that are better along multiple different vectors.
Communication speeds (cellular and Wi-Fi) will get better, processing power will continue to improve, display technology still has a lot of room to improve, and so on. And, since smartphones seem to be devices that people often buy out of want rather than out of need, upgrade cycles will probably never get to be as long as, say, typical personal computer upgrade cycles.
However, I do think that upgrade cycles are lengthening as the improvements generation-on-generation in the smartphone market become less obvious to the average consumer.
Take, for example, what we saw with the iPhone 6s. An incredible amount of engineering went into the iPhone 6s and from a technical perspective, the device is quite impressive. The implementation of 3D Touch was certainly an engineering triumph (read this piece in Bloomberg to understand), the A9 processor is a truly excellent, world-class piece of semiconductor technology, the second-generation Touch ID is quite nice, and much more.
The problem is that because potential customers' current smartphones already work quite well, it's much harder to convince people to part with the substantial amount of cash required to buy in "nice-to-have" features.
Can Apple's iPhone business return to sustainable growth?
Apple's job now is multifaceted as iPhone sales dropped in the most recent quarter but still make up 57% of Apple's total net sales. First, it needs to build increasingly desirable products that put prior generation products to shame and can help the company gain share in the overall smartphone market.
Beyond that, though, Apple needs to figure out compelling use cases that drive customers to upgrade to newer phones. These use cases can't be gimmicky or obviously designed as "tech demos" for new hardware features. They need to be genuinely useful to the average smartphone buyer.
Can the iDevice maker pull it off? Only time will tell.