Apple, lacking hardware innovation, needs artificial intelligence more than ever before

Lack of innovation has been the most common criticism Apple has faced in recent years.

Indeed, on the hardware front, since the removal of the Home button on the iPhone X in 2017, the only visible innovation from Apple is the Dynamic Island in 2022. In the past two years, apart from the Vision Pro, which is remarkably expensive and unlikely to become a mass consumer device, Apple has hardly delivered any groundbreaking industrial design achievements.

As the annual updates to the iPhone become increasingly lackluster, the replacement cycle for consumers is getting longer. Renowned tech writer Mark Gurman commented in his latest column that after the slowdown in hardware innovation, Apple is increasingly relying on software and AI to drive revenue growth.

Lack of Hardware Highlights

Mark Gurman pointed out that Apple's success has largely been achieved by regularly innovating its products in terms of hardware and industrial design, with completely new appearances, more powerful cameras, new materials, etc., being key factors in attracting consumers to upgrade.

However, looking at the product line in recent years, Apple's pace of hardware innovation has slowed down.

For example, in the products released last year, although the iPhone 15 Pro adopted a new titanium alloy shell, the overall design is not significantly different from the iPhone 12 four years ago. The appearance of the third-generation Apple Watch Ultra has hardly changed, and other models of Apple watches still look similar to the Series 4 from 2018. The iPad Pro with the M4 chip, while being the most powerful tablet on the market, looks almost the same as the first-generation iPad Pro from six years ago, with the only selling point being a slight thinning. The MacBook Pro series has also not seen major external updates in three years.

The lack of hardware innovation makes it even harder for ordinary consumers to upgrade to new models. To make matters worse, inflation in Europe and the United States is still constraining the consumer electronics industry, with many consumers preferring to hold onto their money.

Apple seems to have adapted to this. In a recent report on the lifespan of its products, Apple stated that new manufacturing technologies, software support, and repair services can make Apple devices last longer—unable to sell new products, but can earn Apple ESG points, and no one understands PR better than Cook.

Of course, longer device lifespans are not a bad thing. Apple devices are the most valuable among consumer electronics brands, which has tangible benefits for consumers and corporate image. However, from the financial reports, the slowdown in consumer upgrade frequency has significantly slowed down or even declined Apple's hardware sales revenue growth—in the past six fiscal quarters, Apple's revenue has declined in five quarters.

Finding new sources of revenue is crucial for Apple.

New Growth Momentum: AI and Software

Although hardware sales growth is weak, Mark Gurman emphasizes that software and AI can take over from hardware to continue generating revenue for Apple.

At this year's WWDC conference, Apple just released "Apple Intelligence," which allows consumers to use a series of large model combinations of edge-side + private cloud + external AI on their devices. However, using Apple Intelligence comes at a high cost—at least requiring 8GB of RAM—very few iPhones meet this performance requirement From the existing product lineup, Apple's AI is expected to only support the latest generation flagship models iPhone 15 Pro, iPhone 15 Pro Max, as well as iPad and Mac devices equipped with M1 or subsequent chips. In other words, consumers with older models must buy new ones to experience the latest AI features.

Mark Gurman believes that the upcoming iPhone 16 series will not have many hardware changes, and its sales volume can verify how enthusiastic consumers are about Apple's AI. He believes that a series of AI features, including an upgraded version of Siri, will be the biggest test of whether software can drive an increase in hardware sales. AI features are likely to become the core of Apple's iPhone 16 marketing, just like how the advertising of the first generation Siri in 2011 boosted sales of the iPhone 4S.

Furthermore, Mac and iPad users may also be attracted to upgrade due to the distinctive features of the new system. Although Macs from 7 years ago can also run the latest macOS Sequoia system, features unique to the new system such as iPhone mirroring and game mode require new hardware to use. Apple's AI features similarly require updated models with M-series chips.

The slowdown in hardware upgrades will also force Apple to rely more on service fees and subscription fees to drive sales. Mark Gurman believes that Apple's struggle with regulatory agencies over the App Store is because software sales are crucial to the company's future revenue growth curve.

He also predicts that although Apple's AI is currently free, Apple may charge for these features in the future. He believes that Apple may eventually introduce a product similar to "Apple Intelligence+" that offers additional features requiring a paid subscription, similar to iCloud+ and Apple TV+.

Most importantly, Apple can also earn subscription revenue sharing from AI partners. In addition to the collaboration with OpenAI announced at last month's WWDC conference, Google's Gemini in September, as well as another star startup, Claude from Anthropic, may become Apple's AI partners.

If his predictions come true, then in the booming AIGC track, Apple may become one of the first application layer companies to make money beyond upstream infrastructure manufacturers like NVIDIA.