Apple Inc.'s "Super Cycle" Problem

By Ashraf Eassa Markets Fool.com

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.

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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%.

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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.

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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.