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Investors beware: Despite lack of innovation, Apple still sizzles

One sign of Apple Inc.'s vise-like grip on our collective psyche: Even when it's late to dinner, it still gets treated as the guest of honour.

Analysts and bloggers have been buzzing about the company's rumoured plans to release bigger iPhones, with screens of 4.7 and 5.5 inches. That, of course, would merely be following in the path of Samsung and others, which have been serving up big-display phones for close to two years. Somehow, though, when it's Apple, the normal rules of newsworthiness don't apply.

One reason the company's fans are so excited is that the larger phones are expected to be just part of a gush of innovation this year. Even more eagerly awaited than big-screen iPhones is a wearable device that will track a user's fitness and allow remote control of a smartphone, according to the Financial Times.

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If all goes according to plan, the new gadgets will mark a fresh era of growth at Apple. But investors have every reason to remain cautious.

For one thing, Apple has not actually been an industry-leading innovator for a while. Yes, its smartphone is still generally considered to be the best all-round device on the market, but other companies – notably Samsung – have taken the lead in introducing new sizes and features. The better-late-than-never giant iPhones would simply be Apple's acknowledgement that its rivals are right.

Another negative is the smartphone industry's spiral into commoditization. As devices grow increasingly similar, the new battleground is price. Samsung is already reeling, in part because of fierce competition from the low-priced offerings of Chinese competitors such as Lenovo, Huawei and Xiaomi.

Apple's response has been to position its products as luxury alternatives to the bargain offerings of others. There's a good reason that some of its recent key hirings have been from the fashion industry. Those executives – who include Paul Deneve, former CEO of Yves Saint Laurent, and Angela Ahrendts, former chief of Burberry – know about the high-end lifestyle market.

But fashion is a tough and fickle business. Ultimately Apple has to introduce products that will distinguish it from the low-priced competitors nipping at its heels.

To do so, it boosted spending on research and development by 36 per cent in the most recent quarter compared with a year earlier. Walt Piecyk, an analyst at BTIG Research, says R&D expenditures were equal to 4 per cent of sales, the highest ratio since 2006, the year before the first iPhone was introduced.

The outpouring of R&D funds is expected to lay the foundation for a major refreshing of the company's product line over the next few months – but the question is whether the new products can offset the fading fortunes of Apple's iPad tablets. Unit sales of the once iconic device fell 9 per cent in the most recent quarter and growth rates for the tablet market as a whole are also swooning.

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The iPad accounted for roughly 18 per cent of the company's sales last year. A new iWatch, as the wearable device may be known, would have to be a sizable hit to offset the decline in the tablet segment.

What could an iWatch actually offer users? That is vague. Maybe e-mail alerts. Maybe biometric sensors. Maybe access to other smartphone functions.

Despite the lack of specifics, analysts and the public are already excited – yet another example of Apple's ability to generate sizzle. Cautious investors should wait to see the steak.

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