Smart money backs latest iPhone launch

Shares in Apple touched another record high on Friday, as anticipation built for this week’s iPhone launch.

Hints in the artwork of the invitation to the launch event in San Francisco’s Yerba Buena Center suggest that Apple’s latest smartphone will indeed be called the iPhone 5, which was one of the world’s most popular search terms in 2011 despite that year’s launch of the iPhone 4S.

The 4S was an incremental step up from its predecessor, identical in external design but with a faster processor and the addition of Siri, the voice assistant. Although the phone sold in record numbers, besting most analysts’ expectations in its first few months, it underwhelmed those who had come to expect more from Apple’s innovation factory.

“The key with this launch is that the new features and form factor make it a major upgrade versus a rather minor upgrade with the iPhone 4S,” said analysts at Barclays in a note to clients.

Yet the leaks and rumours coalescing around the new iPhone suggest that it may not be the huge leap forward that many Apple investors and customers long for.

The device is expected to have a thinner profile with a longer screen that is nonetheless still smaller than Samsung’s Galaxy S3 or Motorola’s latest RAZRs, launched last week.

The iPhone 5 is almost certain to be faster, with an upgraded processor and 4G cellular data connection, using the same LTE technology as the latest iPad and most other new smartphones. But many of the new features of Apple’s new mobile operating system, such as its own 3D mapping and navigation software and Facebook integration, were already unveiled at June’s developer conference.

“Unless they have really doubled down on secrecy, it doesn’t seem that revolutionary,” said Walter Piecyk, wireless analyst at BTIG. “It’s not clear if LTE alone is a driver for product sales. It’s almost expected in a phone at the moment. If the new [iPhone] body is just adding half an inch to the screen, is that enough of a change to induce new excitement in it?”

The iPhone launches into a more competitive mobile market than ever. A raft of new devices is arriving just as the US smartphone market passed more than 50 per cent penetration, according to analyst Horace Dediu’s projections of ComScore figures.

“In December 2009 the total number of smartphone users in the US was 39m whereas now it’s about 115m,” Mr Dediu, head of analyst group Asymco, wrote last week.

“And yet, half of the phone users still remain to be converted. It’s possible that the growth in adoption will remain steady, but it’s also possible that it might slow down . . . If growth slows immediately then there will be more churn between platforms.”

Last week Nokia unveiled its Lumia 920, with its distinctive design, superior navigation and camera, and the novelty factor of wireless charging. Yet Nokia’s shares collapsed when the struggling Finnish giant failed to announce a price or launch date.

As the flagship Windows Phone device, the Lumia carries significant goodwill from telecoms operators, who are hoping for a third alternative to the current Apple-Google smartphone duopoly

IHS Screen Digest predicts that Windows Phone will grow 140 per cent in 2013 but remain “a distant third” behind Apple and Google’s Android-based smartphones.

If Windows and Nokia remain unlikely to derail the new iPhone, a more immediate threat is from Google itself. IHS forecasts Google’s Android smartphones will retain a huge lead over Apple by the end of this year, with 550m active smartphones globally compared with 250m iPhones.

Google’s purchase of Motorola Mobility was largely motivated by the desire to boost Android’s patent protection from cases such as Apple’s recent court victory over Samsung in San Jose.

The patent litigation has not yet affected Android sales but it has raised the stakes for manufacturers who must come up with more distinctive designs, or risk being taken to court.

Looking to lead by example, Google last week unveiled its first new smartphones since buying Motorola. The Droid Razr Maxx HD, offers an extra-large screen and a longevity that few smartphones can match, with a claimed 32-hour battery life.

The close timing of Nokia and Motorola’s launches – as well as another from HTC later this month – is not coincidental.

The fourth quarter and Christmas buying season is becoming increasingly vital to phonemakers, especially with so many existing smartphone customers locked into two-year contracts that expire around this time.

“The notion that we are entering a period of increased cyclicality – and earnings volatility – is persuasive,” wrote Craig Moffett of Bernstein Research in a note last month. “In particular, low churn rates and low handset upgrade rates appear to reflect a waiting period ahead of a new iPhone launch.”

Yet Samsung, which has been largely absent from this month’s launch frenzy, has capitalised on the pre-iPhone pent-up demand, which saw Apple’s last quarterly results miss analysts’ expectations.

Samsung announced last week that it has sold 20m Galaxy S3 smartphones in its first 100 days, making it the clear leader of the iPhone’s Android challengers.

Samsung is working hard to catch up to Apple’s formidable branding power. In 2011, the iPhone’s ad budget in the US was $251m, according to Kantar Media, almost twice that of Nokia, Google and Samsung’s combined spend on mobile devices.

This brand power, together with the “lock-in” effect of Apple’s iTunes and App Stores, may mean that the new iPhone can set new sales records even without a major technological leap forward.

Most Wall Street analysts predict it will surpass the 37m iPhones sold in the three months to the end of December 2011, with a range of forecasts between 40m and 50m units for the same quarter this year.

The combination of the iPhone 5 launch, strong Samsung Galaxy S3 sales and accentuated cyclicality in the smartphone market together mean few other tech companies, Nokia included, will get a look in over the coming months. “The sheer size of the upcoming iPhone 5 and iPad cycles could amount to hundreds of billions in revenue,” said the Barclays analysts, “which leaves little room for growth in other tech areas.”

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