There's a phenomenon that's permeated the tech media -- I like to call it the "incremental update fallacy." If you've read a review of just about any flagship smartphone released in the last few years -- especially those made by Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF) -- you've no doubt encountered this fallacy.
It goes something like this: A reviewer, writing about the latest phone, will praise the newest model, complimenting its speedier internals, additional features, and more intuitive interface. Yet, despite being objectively better than the handset that preceded it in almost every way, the phone will be derided as just an "incremental" upgrade. Some will suggest that the company in question has passed its innovative peak.
This week, it's Samsung, whose recently released Galaxy S5 is being derided for failing to move the needle. But just a few days ago, HTC was getting slammed for offering a flagship phone with only marginal improvements. Six months prior, Apple's iPhone 5s was criticised for not being revolutionary enough.
If the pace of smartphone innovation is indeed slowing, then it stands to reason that these companies are in trouble -- consumers may be less likely to upgrade, finding it unnecessary.
Just an incremental update
But you'd never be able to tell, at least by reading the reviews. Since the very first revisions to their phones, Apple and Samsung have been derided for delivering only incremental updates. Walt Mossberg, for example, has praised most of Apple's iPhone revisions; yet, at the same time, he has very rarely found the newest model to be a major upgrade over the previous one.
Of Apple's iPhone 3G, Mossberg suggested that existing iPhone owners "hold off." A year later, he characterized the 3GS as being more "evolutionary, rather than revolutionary" and not a "compelling" upgrade. Apple's iPhone 4 was found to be "big" upgrade, but Mossberg declared that the 4S wasn't a "dramatic game-changer like some previous iPhones." Other reviewers have come to similar conclusions: In 2012, CBS said the iPhone 4S fell short of expectations, and that the iPhone 5 offered only "incremental improvements."
Samsung's current Galaxy S5 is widely being characterized as only an incremental upgrade over the Galaxy S4, but a year ago, pundits were saying the exact same things about Samsung's 2013 model: "Evolutionary, not revolutionary," was how CNN characterized the general consensus. The same was said of the Galaxy S3.
Those increments add up
At this point, the "incremental upgrade" characterization has become a tired cliche. When Apple unveils the iPhone 6, expect reviewers to complain that Apple didn't do enough -- no matter what the phone offers.
Each year, Apple and Samsung make only minor changes to their flagships, but over time, those changes add up -- screens have grown and become sharper, processors are faster, net connectivity has improved, cameras have gotten better, and radical new features like waterproofing and biometrics have been added. Apple's iPhone 5s may not be a major step up from Apple's iPhone 5, but it's dramatically better than the iPhone 3GS; Samsung's original Galaxy S hardly compares to its current flagship.
It's all about the two-year upgrade cycle
In terms of recurring sales, the size and scope of the improvements are largely irrelevant. Rather, it's really about the continued existence of the two-year contract model. In the U.S. and Japan, and other markets where Apple's iPhone and Samsung's expensive Galaxies are common, carrier subsidies are the norm. You buy your phone on a two-year contract, and when it expires, you get a new one -- because you don't get a discount, holding on to your old handset just doesn't make sense.
At least in the U.S., there's a growing trend to move away from this model, which could increase the length of upgrade cycles by making it more cost-effective to hold on to older handsets -- a threat to both Apple and Samsung in terms of sales. But at least for now, unsubsidized plans remain in the minority in the U.S. -- until that changes, the "incremental upgrade" accusations can be ignored.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.