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Technology Despite new iPhone hype, Apple faces long road back to growth

One of the first customers to buy a new iPhone walks out of an Apple store in Manhattan on September 16, 2016 in New York City.

Spencer Platt/Getty Images

They lined up at stores around the world on Friday, eager to be one of the first to own the latest iPhone.

For Apple Inc., the enthusiasm capped a week of stronger-than-anticipated indicators for a device that had garnered tepid reviews when it was unveiled just 10 days ago.

"This is a BFD," U.S.-based wireless carrier T-Mobile exclaimed on Tuesday, touting a four-fold increase in preorders of the new iPhone 7 over last year's iPhone 6s. The larger iPhone 7 Plus sold out before they could hit store shelves. Apple investors responded, driving Apple's shares to a four-day rally the likes of which the Cupertino, Calif.-based giant hadn't seen since 2014.

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But the iPhone 7 has arrived in the midst of a rare slump for Apple. Driven down by slowing iPhone sales, the company's revenue fell in the two most recent quarters, breaking a quarterly growth streak that had lasted 13 years. And even after this week's jump, shares remain well off their highs.

Despite the first-week iPhone 7 hype, igniting a new long-term growth streak will not be easy. The newest iPhone has been released into what may be the softest smartphone market in years as manufacturers enter the crucial holiday season amid slowing sales that experts have blamed on an oversaturated market, weakness in China and a broad lack of innovation.

"We're not growing at the breakneck pace of five years or even a decade ago," said Ramon Llamas, research manager for wearables and mobile phones at IDC. His team expects the smartphone market will grow just 3.1 per cent in 2016. In 2015, the market grew by 11.3 per cent, in 2014 it grew by 27 per cent, in 2013 it was up 38.4 per cent (the same year the industry shipped a billion phones for the first time in a calendar year).

Apple's piece of that overall market has been slipping, too – even in the United States, which boasts one of Apple's strongest market shares. "In the U.S., in the second quarter of 2016 Apple had a 31.9-per-cent market share, down from the fourth quarter of 2015, which was closer to half at 40.8 per cent," Mr. Llamas said.

Gartner Inc.'s global tracking numbers for Apple suggest the company grabbed just 12.9 per cent of sales in the second quarter of 2016 with 44 million units shipped, a decline from the same period in 2015, which saw 14.6-per-cent share with 48 million units.

One big problem area for Apple has been in the key battleground of China, where a vicious price war among home-grown players has pushed both Apple and South Korea's Samsung into a crowded race for market share.

Analysts at Trendforce reported that Huawei maintained its sales leadership in China with a 20.8-per-cent share of the 139 million phones shipped in China in the second quarter of 2016. Counterpoint Research pegs Apple's share at roughly 10 per cent in the same quarter, while four other Chinese firms largely unknown in the West – OPPO, Vivo, Lenovo and Xiaomi – also carved off about 10 per cent each.

"Apple is facing its toughest ever year in China," says Neil Mawston, executive director of global wireless practice with Strategy Analytics Inc. "To stay relevant, it ideally needs to be above the psychologically important threshold of 10 per cent. Any lower than that and Apple risks drifting from the mass market's consciousness over time.

"Chinese smartphone makers have closed the quality gap on Apple in the premium segment and are delivering improved products … and shipping them through extensive retail or online channels in urban and rural areas."

At this stage, Mr. Llamas said it's unclear who will win China – or what the cost of that victory will be. "From what I'm seeing, it's a constant game of musical chairs; once we get [stability], we can talk about if any of these can try to stage a serious run at the big guys."

Beyond China, there remain markets with growth potential. Analysis by market research firm Emarketer has predicted the Asia-Pacific market will add 300 million smartphone users between 2016 and 2017, with growth rates hitting 12.7 per cent in 2016, and 11 per cent in 2017. Countries such as Vietnam, India, Indonesia and the Philippines are projected to grow at 15, 20, even 30 per cent this year. Latin America is also projected to add tens of millions of new smartphone customers, with Mexico, Peru and Argentina expanding the fastest.

And while it doesn't seem that such countries – with smaller middle classes and lower incomes – are a natural fit for Apple, there is an advantage.

"People who can afford iPhones in Latin America are 5 or 10 per cent of the population," said Tuong Nguyen, a principal research analyst with Gartner. "If there's an impact to the economy, they don't feel it. If I'm Apple, my competitors are selling to more price-sensitive users."

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Apple faced criticism last week when CEO Tim Cook unveiled the iPhone 7. The company "took a year off" some critics said, citing a lack of change from previous models in the phone's appearance. Questions about innovation have plagued Apple and others in the industry in recent years.

Some say it's simply a matter of maturation; the smartphone market is beginning to behave like other product categories as it enters into a replacement-level growth cycle.

Brian Piccioni, senior technology strategist at Montreal's BCA Research issued a bearish view of Apple, saying the overall smartphone market has reached "feature saturation," in which innovation has slowed to a stop. "This translates to low or negative revenue growth and lower margins for manufacturers as the sector commoditizes," Mr. Piccioni wrote in a note.

But Asymco writer Horace Dediu says those who say Apple's new iPhone isn't innovative enough should re-examine the word.

"People use innovation as a way to describe an invention, or a market entry or improvement or a novelty or a discovery. It's none of those things. An innovation is all of those things, multiplied by a minimum number of buyers." If you can't make people buy your new idea, you haven't really innovated, Mr. Dediu says.

"The greatest trick in business is if you can make people want something that they didn't know they wanted, whether it's an improvement or a whole new thing," Mr. Dediu said. Apple's addition to this trick is in making customers pay handsomely for those things.

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