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Why Apple’s Lackluster New iPhones Will Still Pay Off

Higher prices and aging phones in the pockets of consumers could give a boost to the iPhone business

Apple unveiled its iPhone 17 line on Tuesday. Photo: Poppy Lynch for WSJ

Apple unveiled its iPhone 17 line on Tuesday. Photo: Poppy Lynch for WSJ

Apple AAPL -3.20%decrease; red down pointing triangle might be trailing in artificial intelligence, but the company is still betting that users will pay up for its newest iPhones, aided by the slow march of time.

Apple unveiled its iPhone 17 line on Tuesday along with a new smartphone called the iPhone Air. The company says the latter is the thinnest iPhone it has ever produced, about 2 millimeters thinner than current iPhone 16 models. The company also announced new versions of its Apple Watches plus a long-awaited update to its AirPods Pro wireless earbuds. All of the updates were widely expected, and the lack of surprises led Apple’s stock to slip 1.5% on Tuesday following the event.

The iPhone is the largest business of one of the world’s largest companies. The smartphone generated nearly $207 billion in sales for the 12-month period ended in June—which would rank as the 15th largest company in the S&P 500 as a stand-alone business. It is also a mature business; iPhone revenue has averaged less than 2% annual growth over Apple’s past three fiscal years. The smartphone hasn’t delivered sizable growth since the fiscal year that ended in September 2021, when iPhone unit sales jumped 26%, owing to the launch of the first 5G models, which were heavily promoted by wireless carriers.

New physical designs have typically helped iPhone sales in the past. But the appeal of the iPhone Air might be constrained by a shorter battery life, a single-lens camera and Apple’s limited AI offerings. The artificial-intelligence situation is unlikely to improve significantly soon because Apple typically holds major software upgrades for its developers conference in June.

But time might be on Apple’s side. Rising smartphone prices have compelled users to hold on to their devices for longer periods in general, and Apple’s well-heeled customers are no exception. About 38% of the current iPhone users in the U.S. have devices that are at least three years old, according to a June survey by Consumer Intelligence Research Partners. That compares with 33% using such devices in the same period two years earlier.

Older phones will make it harder for some users to wait another year, when Apple is expected to launch its first foldable phones with a more robust AI offering. And the company appears to be betting on the same. The new iPhone Air and the higher-memory configurations of other models are lifting the average selling price of this year’s new crop of iPhones by 12% over the iPhone 16 family launched a year ago. The iPhone Air is priced at a notable premium to the iPhone Plus models it replaced in the lineup, and Apple added a new 2-terabyte model to the iPhone Pro priced at $1,999—25% higher than the most expensive iPhone that Apple has sold in years past.

Higher prices mean that even a small uptick in unit sales could have a magnified impact on revenue. And expectations there are currently modest; Wall Street expects iPhone revenue to rise just 4% in Apple’s fiscal year that ends next September, to be driven primarily by the new devices announced Tuesday. Separately, Apple’s wearables business—its second-largest product segment—should get a boost from the new AirPods Pro 3. The popular wireless earbuds hadn’t seen a major upgrade in three years.

Apple still needs to navigate difficult waters, with President Trump pushing it to bring more manufacturing back to the U.S. And its lagging position in AI could force the company to boost both its capital investment and research and development spending merely to keep pace with its megacap tech peers, which are doing the same.

But Apple still depends largely on the iPhone, and loyal customers who are unlikely to switch to even the folding AI computers that rivals such as Alphabet’s Google and Samsung Electronics now sell. Even a thin iPhone might have a beefy enough price to satisfy investors.

Write to Dan Gallagher at dan.gallagher@wsj.com

Author: Dan Gallagher

Source: WSJ:

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