The iPhone is Apple’s most profitable product line and it just received an interesting revision. On the surface it’s not that impressive. In the immediate wake of the announcement, the stock took a hit and the narrative that the post-Jobs Apple Inc. can’t innovate appears to have gone unchallenged. Wall Street, however, has never understood Apple and the company’s policy of secrecy forces us to interpret its strategy based on what it does. Here is my take on what this latest move means.
Until yesterday, Apple’s strategy was to keep older model iPhones around to offer up at lower prices. This worked well for them in subsidized markets, although it didn’t really do anything for them in markets where people pay full price for their phones up front. When the rumors of a new plastic iPhone emerged a few months ago, most analysts took this to mean that Apple would finally be trying to compete in the unsubsidized smartphone markets with a significantly lower-cost iPhone. While the iPhone 5C is essentially a repackaged iPhone 5 and is cheaper than the new flagship iPhone 5S, it is not built to compete in the unsubsidized markets. Apple has chosen instead to make their midrange phone more attractive by differentiating it from last year’s model. The pundits were wrong. Apple is essentially staying the course. They are building premium devices and ignoring the low-end unsubsidized market altogether.
The new flagship device looks almost identical to last year’s iPhone 5 which continues Apple’s tic-toc strategy of innovation followed by refinement. This year’s refinement, however, includes three major components that hint at Apple’s overall strategy moving forward:
1) Thumbs Up
The most obvious new feature of the iPhone 5S is the fingerprint scanner built into the home button. When rumors of this feature hit the internet, speculation about Apple’s intentions ran rampant. It was clear that this would be a simple way to unlock the iPhone, but two important questions arose. First, would this be another Siri-like moment of over-promising and under-delivering? Given our terrible experience with existing fingerprint scanning technology, would Apple's implementation be qualitatively different? Second, how deeply would Apple integrate this technology into the phone?
Based on preliminary reports, the answer to the first question is that Apple has achieved a major breakthrough in fingerprint scanning technology. It is accurate, quick, and secure. The answer to the second question is very interesting. While it’s not as deeply integrated into the phone as it might be, Apple is shipping the 5S with the ability to use the fingerprint scanner to purchase content from the iTunes Store. This means that they are confident enough in their breakthrough to use it for their own business. The theoretical possibilities for a fingerprint scanner that works and is secure are tantalizing. Aside from standing in for any password that you would ever need to enter, given the right kind of adoption, it could eventually replace the credit card as the default method of payment.
2) Photographic AI
The improvements that Apple has introduced to their camera are impressive. With an ordinary camera, even something as sophisticated as a high-end DSLR, the on board computer is clever enough to guess in some situations what the proper exposure ought to be for any individual image. Pro photographers understand that this automatic exposure detection system is mostly useless and with the exception of autofocus, typically do not rely on it for critical photographic decisions. With the iPhone 5S Apple has added a sophisticated artificial intelligence to the equation. The intelligence knows not only about basic exposure, but also about motion blur, color temperature, and skin tones and it uses this information on the fly to make better images. Apple can do this, because they have an incredible custom-built chip inside the phone that is capable of processing hundreds of parameters per second. For amateur photographers, this means that photos will more often than not look right. For pros, it might mean that more attention can be paid to composition. Of course, it’s still a tiny camera with a tiny sensor and a fixed focal length lens. Unlike the company formerly known as Nokia, Apple hasn’t overcome this fact by “reinventing zoom” and it remains to be seen how well the iPhone 5S camera performs against the incredible Lumia 1020. But Apple is pushing the state of the art forward and their moves in this space are slowly but surely redefining the craft of photography.
3) Motion Detection
Buried in the news about the more flashy features of the 5S was the fact that Apple had included an “M7” chip in the device to precisely track a user’s motion and allow for a whole new class of apps. Products like the Fitbit and the Jawbone Up have been doing this for quite some time, but I think this is Apple tipping its hand toward a new product category. There’s a lot of smoke around the idea of Apple working on some kind of wearable device. I believe these particular rumors and I think that Apple’s move in this field will likely come next spring and involve this new sensor.
The question of whether or not Apple Inc. can innovate in the post-Jobs era remains an open one. This coming year will likely bring new product categories which will answer that question definitively one way or the other. It’s possible that Apple are past their prime. Personally, I am encouraged by the fact that they are taking their time and refining existing product lines even as they lay the groundwork for whatever is next. On the other hand, this is the first year in which the iPhone is not the all round best smartphone money can buy. It’s certainly still a contender. But there are three or four other phones out there that are as good or better, depending on your particular needs. And Google has brought the manufacturing of the Moto X back to the US, which makes it a more ethical purchase. Is Apple in trouble? Far from it. They will sell as many of these new iPhones as they can make and have the biggest quarter in the history of the company. But there’s no getting around the fact that they are not as dominant in this space as they used to be. Hopefully this will inspire them to double down on innovation. If the last few years have shown anything it's that the industry needs an Apple that's foolish and hungry.