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.]

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7 Responses to Dampening iPhone upgrade expectations

  1. Although you’re right in saying that Android-using manufacturers for the most part do not seem to be interested in competing with the iPod, I would like to draw your attention to the Samsung Galaxy Player which is the exception that proves the rule.

  2. Tal says:

    I don’t understand why explaining a price drop is hard. Before the 4GS announcement, there was some probability (say 70%) that the announcement would be of a small upgrade, and some probability (say 25%) that they would announce a more revolutionary upgrade. Before the announcement, that 25% chance was inflating the stock price. After the announcement the world knew we were in the 70% case so the stock price changed accordingly. Wouldn’t that explanation make sense?

  3. Joshua Gans says:

    @tal. You ask why? The market wiped $13b from Apple’s value at that moment. That is the level of revenue (not profits) from the whole iPhone division. So the implication is that they were placing a 25% chance that Apple would quadruple iPhone revenues with an iPhone 5 — something that it has never come close to doing with a previous generation. Or alternatively that they believed that the iPhone would die without an iPhone 5. In any case, the market returned to its senses a few hours later.

  4. Jake Lopata says:

    At first glance I would say your statement about mobile phone contract cycles is correct, most of them are 2 or 3 year contracts. However, manufacturers and cellphone carriers must recognize that people are on different contract cycles (that is, our contracts all start at different times). This means consumers are constantly renewing and/or shopping around for new phones and services. By coming out with new models everyone few months, carriers can attract new customers with the “hot new thing”. Likewise, manufacturers such as apple, can attract new customers by yearly releasing newer versions of their highly successful IPhone.

    So I believe Apple is doing something smart here, but as you suggested, there is much more room for error. Although, I would suspect that Apple plans things ahead well in advance. They are probably already working on IPhone 10.

  5. Richard T says:

    As a business school doctoral student, it’s heartening to see that the sanest analysis of this event comes from an academic : )

    I also find it very clever how Apple solved its premium pricing conundrum. When the original iPhone was released, analysts predicted model variants (“iPhone nano”) that would target different price ranges. It seems what Apple is doing is simply discounting last years model(s). It’s smart first of all because it minimizes undermining Apple’s overall brand value. Most importantly, it reduces fragmentation that would occur when introducing variants with smaller/bigger screens and non-matching screen resolutions. Given Apple’s track record, I expect only to see 2x increases in screen resolution. And if/wehn the iPad with “retina screen” launches, it’s a safe bet that the then current iPad will not be discontinued, but instead be offered as the lower price variant.

  6. Tal says:

    @Joshua, thanks. I wasn’t paying enough attention to the magnitude of the drop.

  7. TF says:

    I think that most of the backlash was due to the fact that the hardware upgrade (to a dual core 1 Ghz processor and it remaining at 512MB of ram) is already behind the market. Apple has always been ahead of the market in terms of hardware, and with this release they are already behind many phones currently available and will only fall further behind over the next 12 months until the iPhone 5 comes out.

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