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Yes, Apple Inc. Knows the iPhone 7 Needs to Be Amazing

By Chris Neiger - Apr 20, 2016 at 6:08PM

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The big question is whether or not the company can pull it off.

Apple (AAPL 0.17%) may never admit it, but it's probably a bit worried about the iPhone 7 launch this fall. Of course, we don't know if that'll be the name of the company's next phone -- or even if it will indeed bring one to market this fall -- but if past Apple history is any indicator, there's a pretty good chance of both happening. 

Apple investors are probably worried too. When the company reported quarterly earnings back in January, it said revenue would fall for the current quarter between $50 billion to $53 billion, which would the first quarterly drop since 2003 -- and would be lower than the $55.5 billion analysts were expecting. 

iPhone demand appears to be slowing, and that's weighing down Apple's ability to grow. And at least a few analysts think Apple may just see iPhone troubles in the current quarter, but that the devices could see their lowest sales level since June 2014 as well.

Whether iPhone sales drop to that level or not, Apple clearly need a win with its upcoming flagship iPhone. But despite Apple knowing it needs a big win, I think it'll likely have a hard time introducing new features that can win over customers. 

Not all new features are created equal
With each numerical change of the iPhone name, Apple has brought significant improvements to its phone. Screen sizes have gotten bigger, processors have gotten faster, cameras have been improved, etc. The significant changes for these years have usually helped drive sales. 

But some of the rumored iPhone 7 upgrades seem more like minimal changes than major product overhauls.

For example, Apple will likely eliminate the 3.5mm headphone jack on its next device, but there's little indication that this will help drive sales. Perhaps Apple needs the internal space for something more important, or it might just think it's time for all of us to stop using this outdated technology. Either way, it's a change that many (possibly all) could easily live without.

Two of the most important upgrades will likely come from larger camera sensors that are rumored to be in the next device, along with an upgrade from a five element lens to a six element one, and a new, faster processor.

The larger iPhone 7 Plus is expected to have an option for dual camera lenses, instead of just one. And both the smaller and larger iPhones could finally see an upgrade from the basic 16 GB internal storage capacities. 

But will those upgrades be enough?
Depending on who you ask, the next iPhone will speed up upgrade cycles among iPhone users or slow them down. 

BTIG Research's Walter Piecyk thinks the next iPhone probably won't be enough to speed up upgrade cycles among iPhone users:

[W]e have broader concerns that there is a structural change under way in the pace of upgrades. It will take a few quarters and the launch of the next iPhone to confirm if end users are, in fact, holding onto their phones longer. Many believe that longer upgrade cycles are tied to the bi-annual cycles of Apple's S model iPhones but the decline this year has been more steep than prior cycles.

But Goldman Sachs' Simona Jankowski thinks the next iPhone could push upgrade cycles in a positive direction. She conducted a 1,000 person survey between March and April, and says that when people were asked if they were upgrading to an iPhone 7 in the fall, 44% confirmed they were. 

To us, the most significant aspect of this response is that a third of the replacement demand is coming from current generation (i.e. less than 1-year old phone) users. This could suggest that the iPhone 7 will drive a shorter replacement cycle, perhaps in response to installment/lease plans such as the iPhone Upgrade Program, which allow a user to upgrade to the newest phone every year while maintaining a flat monthly bill. 

But overall, cell phone upgrade cycles don't match up with Jankowski's survey. According to a recent Citigroup report, cell phone users are keeping their devices for 29 months on average, up from 24 to 26 months a couple years ago. The elimination of service contracts, which has allowed users to see what they're really paying for devices, is a major reason for the shift. 

Even an amazing iPhone probably won't be enough
Apple's planned upgrades might amount to an amazing iPhone, but there are rumors that the company is gearing up for significant changes for its 2017 iPhone. 

If that's true, it may mean that Apple knows its iPhone 7 needs to be amazing, but couldn't quite pull if off this year. Or perhaps Apple didn't imagine itself in this iPhone predicament, and thought minor tweaks for the new iPhone 7 would be enough.

Unless Apple is keeping some amazing features under wraps for the upcoming iPhone, I have a hard time thinking that it will improve upgrade cycles right now, or be enough for Apple to bounce back from its projected slowing sales. What the iPhone really needs is features that you can't find anywhere else -- and that's becoming increasingly difficult to pull off.

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