Apple’s lack of iPhone innovation is becoming a big problem

It wasn’t long ago that smartphone users had plenty of reasons to upgrade after two years. The performance of smartphones has improved significantly year by year. Snappier processors, brighter screens, and vastly improved cameras whetted consumers’ appetite for new phones.

Innovation is now even harder to find in the smartphone industry. apple‘s (AAPL -0.85%) The iPhone 15 family looks and performs very similarly to its predecessor. For those with much older iPhones, an upgrade may make sense. But most people who upgraded within the past few years won’t lose much by skipping this generation.

iPhone sales are slumping

One month alone doesn’t create trends, but February was a tough month for Apple’s most important business. According to UBS, iPhone sales in the U.S. were down 9% year over year, sales in China were down 16% and sales in India were down 13%. Although there was solid growth in Europe, worldwide sales fell by 4%. UBS expects Apple to sell 51 million iPhones in the first quarter, down from 56 million last year.

UBS cited several reasons for the decline. In China, intense competition from Huawei and other domestic competitors is proving to be a tough challenge. Popularity in America is samsung‘s recent Galaxy smartphones and weak carrier upgrade rates are hurting iPhone sales.

There may be multiple factors behind the decline in carrier upgrade rates. One reason is probably that new smartphones are becoming less attractive. Apple makes a ton of incremental upgrades every year, which can make it difficult to sell the latest devices to consumers.

Rising interest rates may also be a factor. Wireless carriers often offer incentives like cheap financing or deep discounts on new smartphones. Now that prevailing interest rates are no longer at historic lows, cheap financing has become an even more expensive proposition.

The interests of wireless carriers and Apple aren’t exactly aligned either. Carriers use smartphone incentives to help lure customers away from rivals, but the ultimate goal is to retain wireless subscribers, not sell phones. Lower upgrade rates are a big problem for Apple, but a small problem for wireless carriers.

AI could be a problem

Apple seems to have missed the generative AI boat.The company is reportedly in talks with: alphabetGoogle plans to use the Gemini AI model to power iPhone AI capabilities, but this indicates that the company is not yet at the stage of developing something similar on its own.

The jury is still out on whether generative AI models running locally on smartphones will be a game changer. If that were the case, Apple would likely reverse itself.

Recent antitrust developments have increased risks to Apple’s most important products. The U.S. Department of Justice is suing Apple for allegedly monopolizing the smartphone market, and one of the key issues is the company’s efforts to make it harder for consumers to switch from their iPhones.

The costs of slowing innovation and subordination to AI could be amplified if Apple is forced to make changes that lower switching costs for consumers. As companies get bigger, they tend to be more risk-averse, and one of the biggest companies is Apple.

One thing we can be absolutely sure of is that the iPhone will eventually be destroyed. Given Apple’s gradual upgrade strategy and AI failures, I’d wager that whatever ultimately disrupts the iPhone won’t come out of Cupertino.