Editorial — Apple, more than ever hostage to its iPhone

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Apple's AI strategy is radically different from that of its competitors. While Meta, Google or OpenAI can deploy their AI assistants for free to billions of users (Meta alone can reach 3.3 billion daily active users), Apple makes access to its “Apple Intelligence” service conditional on to the acquisition of an iPhone 15 Pro or 16, whose average price exceeds 1,000 euros.

While this approach aims to encourage users to renew their iPhone more quickly, it remains very risky. Above all, it reinforces Apple's dependence on its iPhonewhich still represents 50% of its revenues.

This strategy is all the riskier since the deployment of Apple Intelligence is not the clearest. We could even, without taking any risks, call it a damp squib. This is already being felt in iPhone 16 sales, if analysts' estimates are to be believed.

iPhone 16 sales worrying

The signals are far from green for the iPhone 16. Recent data reveals a certain tepidity in the market, with unusually short delivery times and a significant drop in renewal rates among American operators. AT&T, Verizon and T-Mobile report a 9% drop in renewals compared to the previous year, a figure that worries analysts.

Brandon Nispel of KeyBanc Capital Markets has also revised his recommendation on the stock downward, reports the Wall Street Journal.
More generally, estimates are for modest 5% growth in iPhone revenues for the December quarter. A very average performance, not to say disappointing.

Apple not so Intelligent ?

Beyond the figures, it is above all Apple's capacity to realize its vision of AI that will be scrutinized in the months to come.
Because the arrival of Apple Intelligence is currently based only on promises. The gradual deployment of AI features, which began this Monday in the United States, more than a month after the launch of the iPhone 16, raises many questions about Apple's delay. But also on its strategy based on device sales.

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This phased deployment, which will extend over 2024 and 2025, could paradoxically slow down the device renewal cycle, with consumers preferring to wait for the full availability of features before taking the plunge.

The case of the iPhone 16 is a perfect illustration of this delay. Apple's latest model faces the challenges of a product that has reached maturity. The lack of major innovation is no longer in line with the iPhone's ultra-premium positioning. When hardware and software no longer make a difference in everyday life, renewal is no longer appropriate.

The worm in the Apple

Furthermore, some experts, including Edison Lee of Jefferies, highlight the technical limitations of current smartphones in terms of AI. Unlike cloud servers, phones lack high-speed memory and advanced packaging technologies, which are essential for optimal AI performance. It is also for technical reasons that only the latest generations of iPhones are capable of running Apple Intelligence.

The iPhone case is based on the principle of the glass being half full or half empty. Apple tends to see it as full: since its most recent iPhones are the only ones capable of running Apple Intelligence, consumers will renew their models more quickly. Problem: Apple Intelligence is not yet fully available and its features have yet to convince.

For now, investors remain optimistic. Despite these headwinds, Apple shares have risen 36% over the past twelve months, even outperforming Microsoft and Alphabet, which are considered leaders in generative AI.

This generous valuation – 31 times forward earnings – is a 20% premium to its historical average – could however prove fragile if iPhone 16 sales are not there.The first sales results will therefore be decisive for the future of Apple, which is clearly being held hostage by its iPhone.

• Apple is facing disappointing sales of the iPhone 16, which is nevertheless essential for its AI strategy
• Unlike its competitors, Apple is in fact linking access to its AI services to the purchase of premium devices
• The success of its AI strategy will depend on its ability to convince users to pay a high price for its innovations

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