Source: Wall Street See

Lack of innovation is the most common criticism faced in recent years.$Apple (AAPL.US)$The most common criticism faced in the past few years.

This fact is indeed true. At the hardware level, aside from the Vision Pro which is too expensive to be a mainstream consumer device, and the Dynamic Island which will debut in 2022, Apple has hardly produced any fresh industrial design achievements in the past two years.

As the hardware updates have lacked highlights, the average consumer's upgrade cycle has become longer and longer. In his latest column, the renowned technology author Mark Gurman commented that, following the slowdown in hardware innovation, Apple increasingly relies on software and AI to drive revenue growth.

Hardware updates have lacked highlights.

Mark Gurman pointed out that a significant portion of Apple's success is based on regularly innovating its hardware and industrial design of its products, which include brand new product appearances, improved camera functions, new materials, and so on, all of which are essential for attracting consumers to upgrade their devices.

However, from the product line in the recent years, Apple's hardware innovation has slowed down.

Take last year's releases as an example, aside from the iPhone 15 Pro which has a new titanium alloy shell, the overall design of the device is not much different from the iPhone 12 four years ago. The appearance of the third-generation Apple Watch Ultra has remained almost unchanged, and other models of Apple Watch still look similar to the Series 4 in 2018. The iPad Pro with the most powerful chip, M4, looks pretty much identical to the first-generation iPad Pro launched six years ago, the only selling point being that it is thinner. The MacBook Pro has not undergone any significant external changes in three years.

Lack of hardware innovation makes it more difficult for ordinary consumers to upgrade to new models than before. What's worse is that inflation in Europe and the US is still limiting the consumer electronics industry, and many consumers would rather hold onto their cash.

It seems that Apple has also adapted to this situation. In a recent report on the life cycle of its products, Apple suggested that new manufacturing technologies, software support, and repair services can make Apple devices last longer and contribute to ESG credit, even if new products cannot be sold. No one knows PR better than Cook.

Of course, having longer device life spans is not a bad thing. Apple devices are the most valuable among all consumer electronics brands, which has tangible benefits for both consumers and corporate image. However, from the financial reports, the longer consumer upgrade cycle has caused significant slowdown and even decline in Apple's hardware sales revenue: in the past six quarters, Apple's sales revenue decreased in five quarters.

Finding new sources of revenue is crucial for Apple.

New growth drivers: AI and software.

Although hardware sales growth has slowed, Mark Gurman emphasized that software and AI can take over hardware and continue to generate revenue for Apple.

At this year's WWDC conference, Apple just released 'Apple Smart', which allows consumers to use a series of large models by combining edge-side, private cloud, and external AI. However, using Apple Smart comes at a price - at least 8GB of RAM is required. There are only a few iPhones that meet this performance requirement.

From the existing product lineup, Apple Smart is expected to only support the latest generation flagship models - iPhone 15 Pro, iPhone 15 Pro Max, and the iPad and Mac devices equipped with M1 or later chips. That means consumers who use older models must purchase new ones if they want to experience the latest AI features.

Mark Gurman believes that the iPhone 16 series which will be released soon will not have too many hardware changes. Its sales volume will be able to validate consumers' enthusiasm for Apple Smart. He thinks that a series of AI functions, such as an upgraded Siri and other such features, will be the biggest test of whether software can boost hardware sales. AI features are likely to become the core of Apple's iPhone 16 marketing, similarly to how the first generation of Siri in 2011 helped drive the sales of the iPhone 4S.

In addition, users of Mac and iPad devices may also be attracted to upgrading by the new system's characteristic functions. Although Mac devices from seven years ago can still run the most recent macOS Sequoia system, functions unique to the new system, such as iPhone mirroring and game mode, can only be used with new hardware, just like the AI functions from Apple also require M-series chips that are only available on newer models.

The slowdown in hardware updates will also force Apple to rely more on service and subscription fees to drive sales. Mark Gurman believes that Apple's struggle with regulators over the App Store is tied to software sales, which will be the focus of the company's future revenue growth curve.

He also predicts that although Apple Intelligence is currently free, Apple may charge for these features in the future. He believes that Apple may eventually launch a product like "Apple Intelligence+", which offers additional features that require paid subscriptions, similar to iCloud+ and Apple TV+.

Most importantly, Apple can also receive subscription revenue share from its artificial intelligence partners. In addition to the partnership with OpenAI announced at last month's WWDC conference, Gemini from Google and Claude from another star start-up, Anthropic, may become partners of Apple Intelligence in September.

If his prediction comes true, Apple may become the first application-layer company to make money in the booming AIGC race, in addition to upstream infrastructure providers such as Nvidia.

Editor / jayden