Product life cycles are a tricky business. Car models often have a five year lifespan. Computers have a couple of years. But somewhere along the way, the world decided that iPhones should have a yearly cycle. Today, Apple announced the iPhone 4S. It’s an upgraded iPhone 4 and labelled as such. During the announcement Apple’s share price dropped 3.8%. Why?
We have to disentangle a few things. First, there is a perception that Apple is running off people buying the latest device and upgrading each year. To be sure, there are people who do that — yours truly amongst them. However, that is still a very small share of Apple’s actual sales. Most consumers are normal. They buy things when they need them. The last time I looked mobile phone contracts are tailored so that you are on a two to three year cycle not a yearly one.
Second, there is a perception that Apple have created these expectations. To be sure, when Jobs took the world by surprise and announced the iPhone in 2007, it looked like they could do anything. But what is true is that most years there isn’t a revolution coming from Apple. Indeed, just two years ago, Apple announced the iPhone 3GS which was to the iPhone 3G what today’s product is to the previous generation. The fact that they would do it again is no surprise. The iPhone 3GS was a very successful product. Indeed, Apple are still making them (now being offered in freemium form).
Third, is it really a good idea to completely redesign the iPhone every year? No, it couldn’t possibly be. It is hard enough to rework the insides let alone rework the outsides into something consumers want at the same time. The room for error is large. And the evidence was that the outside was just fine this time around. What is more, this old design fits with current cases etc. It is a modular upgrade and that surely makes economic sense. To expect otherwise is to invite over-spending on R&D and plant retooling. Apple could choose to compete with itself but that can create variance in demand, consumers not knowing whether to wait or purchase and then being uncertain about the economic life of their devices.
Fourth, the iPhone (and iPod and iPad) will be getting their big upgrade next Wednesday in the form of iOS 5. This is the stuff that really matters for how much use people get from their devices. Apple, more than anyone else, have managed to build a platform that allows them to increase the value of devices all their customers have regardless of which version they bought. In other words, buy an iPhone today and you can expect to receive a better version of it, for free, next year and the year after that. If that isn’t a compelling customer value proposition I don’t know what is.
So how do we explain the share price drop? My bet is that we can’t. When investors wake up from their media expectations stupor, they’ll realise that what Apple did today was in shareholder’s interests. The biggest risk Apple faces is from going off strategy. But all it did today was stay the course ruthlessly.
There is, of course, the ‘he’s no Steve Jobs’ effect. But that is surely perception and far from reality. Whatever we saw today was the result of decisions taken months ago. If we come back in a year’s time, that will be another story.
That said, Apple didn’t update the iPod line-up. Maybe investors are focussed there. Oh I’m kidding but when you think about that, it is amazing. With all the talk of Android, there are no iPod competitors; that is, smart devices not bundled with a phone. Microsoft dropped the Zune today. Yet here is an entire class of product that has sold tens of millions of units per year, and Apple is still the only innovator.
And even with all that, the iPhone 4S is a decent upgrade: better camera, Siri Assistant, faster processor, longer batter life and $200 cheaper than its predecessor. That and its a World Phone with both GSM and CDMA; something that seems more significant economically and I’ll have to investigate and come back to you on what that means.
[Update: by the market close today, the market appeared to return to its senses.]