Apple Inc.'s "Super Cycle" Problem
January 17, 2017, 05:27:00 PM EDT By Ashraf Eassa, Motley Fool
Later this year, Apple (NASDAQ: AAPL) is expected to launch new smartphones that will,   per some analysts, catalyze a "super cycle" -- essentially a   significant acceleration in iPhone shipment growth because of a   major fundamental change to the phones.
Image source: Apple.
The last such super cycle was the iPhone 6 cycle. Apple was   late to bringing large-screen smartphones to market, which led to   significant pent-up demand for large-screen iPhones. Once Apple   finally delivered them -- and in late 2014, Apple released two   large-screen phones (iPhone 6 and iPhone 6 Plus) -- the company   enjoyed substantial iPhone unit and average selling price   growth.
After this super cycle, sales of Apple's iPhone 6s series of   smartphones were poor, driving the company's first-ever   year-over-year iPhone unit decline. The iPhone 7 series appeared   to be getting off to a good start, but now we are seeing several   analysts trimming their estimates as negative supply chain data   comes in.
Apple bull Katy Huberty with Morgan Stanley , for example, just reduced iPhone revenue estimates for the current fiscal year (units down   7%, partially offset by 4% increase in estimated average selling   prices) due to "weaker iPhone 7 demand" (though she notes that   iPhone 7 Plus is stronger).
However, Huberty, like many Street analysts, is expecting that   the iPhones released later this year will catalyze an iPhone   6-like super cycle. Huberty, for example, expects Apple to ship   253 million iPhones in fiscal year 2018 (up 20% year over year)   with average selling price growth of 6%.
All this talk about super cycles, however, leads me to wonder   the following: Can Apple find a way to grow iPhone unit shipments   and revenue between these so-called super cycles?
Killing the super cycle
The harsh reality is that the main reason that these super   cycles ever happen is that Apple's product development   methodology leads to the company delivering products that are, on   the surface, very similar for at least two generations (three, in   the case of the iPhone 6, 6s, and 7).
That's not to insult the hard work that Apple's engineers put   into each new generation of devices; under the hood, Apple's   iPhone 6s was a solid jump from the iPhone 6, and the iPhone 7   was a nice improvement from the iPhone 6s.
The engineering of Apple's latest phones is superb -- the   displays are excellent, the applications processor generations   ahead of the competition in some ways, and much more -- but the   phones have the same general look and feel as iPhones from 2014   and 2015.
New guts, old body -- Apple's entry level iPhone offering.   Image source: Apple.
Here's the problem, though -- does the average smartphone   buyer care about all of the fine work that went into engineering   the latest iPhones?
Do average consumers really care beforehand (and this part of   it is key) that the chip inside of the iPhone 7 runs circles   around the one in the aging iPhone 6 that they're using? Probably   not. But it is the sort of thing that a consumer can come to   appreciate once she or he has purchased the new phone for other reasons (such as, "I like how it looks").
Consumers seem to be attracted to devices with thinner bezels   than the ones found on the current iPhone models, and curved   displays also seem to be in vogue. OLED displays, too, are   becoming more popular, even in non-curved smartphones.
With the next-generation iPhones, Apple is rumored to deliver   these aesthetic and technical changes/improvements, which is why   so many are counting on a super cycle.
By introducing these features, Apple not only serves to stop   current iPhone users from defecting to competing devices, but it   can also bring people back who had switched precisely because   Apple wasn't delivering the "whiz-bang" features and aesthetics   that they were looking for.
In other words, pretty much exactly what happened when Apple finally introduced larger iPhones.
By now, it should be very clear how Apple can kill the super   cycle -- it needs to make aesthetic/design changes at a faster   pace. A new aesthetic every two years was already pushing it, but   forcing customers to wait three years simply seems to be too   much.
These changes don't even need to be sweeping   generation-over-generation, but they need to be noticeable to the   average smartphone buyer.
If Apple can do that, then the super cycle concept will die,   and along with it, the uncomfortable boom/bust cycles that   Apple's iPhone business suffers over multiyear periods.
10 stocks we like better than Apple
When investing geniuses David and Tom Gardner have a stock tip,     it can pay to listen. After all, the newsletter they have run     for over a decade, Motley Fool Stock Advisor , has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Apple wasn't one of them!     That's right -- they think these 10 stocks are even better     buys.
Click here to learn about these picks!
*Stock Advisor returns as of January 4, 2017
Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns     shares of and recommends Apple. The Motley Fool has the     following options: long January 2018 $90 calls on Apple and     short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
This article appears in: Personal Finance , Stocks
More from Motley Fool