Last week, Apple released its new flagship iPhone, the iPhone XS. The news is not ground-breaking, but it continues a trend that Apple has executed for the last 11 years. As has been the case for most of those 11 years, the new flagship iPhones are impressive. I’m genuinely excited about the new camera capabilities.
But, to me, the most interesting announcement was the non-flagship iPhone XR. Like the iPhone 5C, and last year’s iPhone 8, Apple’s non-flagship models say an awful lot about how it thinks about iPhone from a strategic perspective. It also gives us insights into how the company views itself through the lens of its most successful product line. So, what can we learn from Apple’s 2018 iPhone launch?
Lessons for the iPhone XR
Back in 2013, Apple was facing disruption from Android at the low-end while the top of the market was showing signs of saturation. Flagship phones were now ‘good enough’. The industry was searching for new growth opportunities, and led to the pursuit of larger devices.
This led to the introduction of the iPhone 5C. It changed Apple’s trickle-down approach to serving more price-sensitive consumers. It was really a replacement for iPhone 5, but one that Apple’s customers rejected. The choice iPhone customers faced up to that point was, “Do I buy the new iPhone, or do I buy last year’s flagship?”.
With iPhone 5C, this changed dramatically. The choice consumers faced was between the best iPhone and one that was “unapologetically plastic”, as Chief Design Officer Jony Ive described it at the time. Customers rejected the plastic iPhone 5C and bought the iPhone 5S instead.
Apple learned that it wouldn’t succeed by going down-market for price-sensitive consumers.
The iPhone 5S also introduced Touch ID and the Secure Enclave for the first time. This came at a time when the Edward Snowden leaks were high on the agenda. The fact the US government and its international partners had worked in secret to create a coordinated global surveillance program was of grave concern. The fact that governments were hoovering up data from the tech industry’s biggest players only served to raise the stakes higher.
It put consumers’ right to privacy right at top of the agenda across the world.
iPhone 5C did not include Touch ID and the Secure Enclave. This undoubtedly contributed to consumers opting to reject the plastic iPhone 5C and opt for the more secure iPhone 5S.
Apple’s second learning was that it had to be careful to balance feature-level differentiation, with a focus on the experience.
With the launch of iPhone X alongside the iPhone 8/8 Plus last year, it was the first time since 2013 where Apple had adopted a two-pronged approach. This time though, Apple framed it very differently.
The iPhone 8 was introduced as the next-in-line after iPhone 7, and every iPhone that came before it, while iPhone X was pitched as an outlier. To use the company’s famous phrase, it was a “one more thing”. Apple said iPhone X encompassed everything it had learnt over the first 10 years of iPhone. It launched as a vision for “the future of the smartphone”, with a $999 starting price to match.
The result? At last week’s keynote, CEO Tim Cook bragged that the iPhone X was the best-selling smartphone in the world. This was very clear in Apple’s recent financial results, where iPhone revenue increased healthily. Unit sales were flat though, and growth came from a significant uptick in ASP. This can only mean one thing: iPhone X sold by the truckload.
The third thing Apple learned was that, for its best customers, price was no object.
Why the iPhone XR is different
This brings us neatly onto why Apple launched the iPhone XR. It’s very clear that Apple learnt a lot from both iPhone 5C and iPhone X, and it’s demonstrated this with the design choices it has made with iPhone XR.
The iPhone XR does not have stainless steel edges, but its finish is a long way from being “unapologetically plastic”. The back cover is the same high-quality glass that’s on the back of iPhone XS. Meanwhile, the aluminium edges have a high-quality look and feel, but with most phones likely to be in a case, they’ll be hidden.
More importantly, the front of the iPhone XR looks just like the iPhone XS. It also retains feature parity. At 6.1-inches, the display is bigger than the base iPhone XS’s 5.8-inch display, but smaller than the iPhone XS Max’s 6.5-inches. The notch is there, as is the same iteration of Face ID that’s in the more expensive brethren.
Where the iPhone XR differs from iPhone XS is in display type (LCD instead of OLED), and resolution.
The iPhone XR’s display is of lower quality than the XS’s OLED display, but to say it is a bad display would be doing it a disservice. The specs suggest it is the best smartphone LCD available on the market - and by some margin. The move to LCD means that the bezels are not as thin, but on a device where more than 95% of the front glass is screen, it is unlikely to be a major hurdle.
There is just a single camera on the rear, meaning there is no telephoto option. But, what’s important is that the iPhone XR retains feature parity from both a hardware and a software perspective. All the exciting new camera software enhancements are there, albeit with just one lens rather than two on the rear. This camera is also industry leading, like much of the rest of the device.
Furthermore, inside the XR, Apple has included its brand new A12 Bionic chip - the same one that’s in iPhone XS. Apple’s newest SoC is so far ahead of the rest of the industry that it’ll still be competitive with other high-end SoCs two years from now.
For all intents and purposes, Apple looks to have made some really sound decisions with the XR. I’m excited to see how the new model is received when we start hearing sell-through reports.
The iPhone XS & XS Max
Apple first experimented with more expensive iPhones in a big way with the release of iPhone 6 Plus. This was the first time the company adopted a two-tier flagship approach. We all know what happened next: it was the last time Apple saw major unit volume increases.
That combined with increased ASPs to send Apple on a run of phenomenal annual revenue growth. Its stock price grew rapidly off the back of this. And over the next couple of releases, ASPs flattened before dipping slightly. But with iPhone X, iPhone ASPs were back on the up in a big way, blasting through the $700 barrier for the first time.
If the iPhone XR is as good as it looks, there is the question of cannibalism. Why would a user spend $250 more on an XS, or $350 more on the bigger XS Max?
Logic suggests that it’s a big ask, but that’s why the iPhone X lesson is very interesting. Apple’s best customers are prepared to pay big bucks for the best iPhone available.
It’s hard to believe that the iPhone XS Max is available with 512GB of storage. It’s even harder to believe that it costs £1,449. The thing is, given what happened with iPhone X, it’s hard not to back Apple to sell these in reasonable volume… for a £1,500 product!
However, the camera seems to be what most are talking about. It’s a significant step forward compared to the camera system on both the iPhone 8 Plus and iPhone X.
The neural engine in the new A12 Bionic SoC is playing a big part in that, but there was an interesting snippet from John Gruber’s review. He discovered that the wide-angle sensor on the new iPhone is 32 percent larger than the one on iPhone X.
As a keen photographer, that’s a huge update. But I digress.
The New A12 Bionic chip
The new neural engine inside the A12 Bionic SoC is perhaps the most intriguing part of the new iPhone series.
Neural networks enable computers to become smarter by learning from past experiences. Machine learning (or artificial intelligence) has become a bit of a buzzword for the tech industry in recent times, but it’s been a very interesting area to watch for several years. Long before that day in 2016 when Google’s AlphaGo computer beat one of the most accomplished Go players in the world. If you’ve never heard of Go, it is the most complex board game in the world. Orders of magnitude more complex than Chess.
The A12’s neural engine is a specialised part of the iPhone’s process dedicated to just learning. This is supposed to be massive for AR, but it’s going to be huge for both photos and video. Could it be the case that, over time, your iPhone XS will take even better pictures as it begins to understand the types of photos you take?
It’s already being used to improve the quality of photos in real-time, with live raw data from the camera sensor. But could the quality of photos improve even further with use?
This is something that no Android device maker will be able to just buy off the shelf, unless the likes of Qualcomm, Intel and others introduce processors with the same capabilities. That’ll take years. Processor designs don’t just happen overnight - I believe Apple has been working on A12 Bionic for at least three years, possibly longer.
In a recent conversation I had with an analyst, we discussed what it was about the iPhone that makes people come back year after year. Yes, the design is gorgeous. It continually breaks ground with new technologies. And it has a fantastic camera.
But for me, what really sets the Apple ecosystem apart from the rest is the way Apple bakes you into their platform. In this regard, Apple is nearly impossible to topple. It’s one of the reasons why it controls the lion’s share of profit in the smartphone industry. This is all down to its app ecosystem, and the fact it’s far superior to the alternative.
If I buy an Android device, I can easily switch between device makers whenever I want to. It means very little in the way of baked-in loyalty, and device makers are in a bloodbath to earn your business when your contract comes up for renewal.
Yes, I get to keep my apps no matter which manufacturer I choose, but continuity disappears with the fragmented nature of the market. Some will see this as a bad thing, but Apple has been one of the few companies to buck Clayton Christensen’s theory of disruptive innovation.
Smartphones have been ‘good enough’ for years. But iPhone buyers are paying more than they ever have. And I don’t see that trend bucking with iPhone XS.
This is because iPhone users pay for vertical integration. Developers are vertically integrated into iOS. This increases the intrinsic value of the platform, which ultimately enables Apple to charge a premium for its hardware.
The work they do on the hardware side is industry leading, but it is the ecosystem that they bake users into that creates value. That’s why users come back, because their choice is not “Apple or Samsung”; it’s now standard or XL, or a little bit cheaper.
What is staggering, looking at handset contract trends over the last few years is what is now considered an entry point. £60+ per month with an iPhone XS 256GB is the entry point with minimal data. £70 a month is a pretty ‘normal’ contract. Over a 24 month contract, almost £50 per month of that is paying for the handset at full retail price. Take 20% out for VAT and another 12-18% margin for distribution. It’s still more than half the value of the contract.
Where this leaves the networks, I don’t know - particularly now that they’re being forced to adopt the eSIM standard. This only serves to improve customer choice, but could it lead to all out war? That’s for another article, but it’s a thought worth pondering.