Apple may struggle with this year's upgrade cycle

Delays rumored for iWatch and 5.5-inch iPhone because of major adjustments to design and supply chain

By Caroline Gabriel

The past couple of years have seen Apple struggle with its traditional annual iDevice upgrade cycle. With excited rumors about the next model starting up almost as soon as an iPhone is delivered, the vendor becomes a victim of its own unmatched ability to create consumer anticipation. Months before the expected unveiling of a new upgrade, purchasing of the current handset slows - so if, as reports indicate, some of the hoped-for features are delayed this year, the problem will get even worse.

Reports indicate that both the iWatch and the 5.5-inch iPhones may arrive later than expected because Apple is having to adjust its supply chain to support unfamiliar components, some of them hard to make in the volumes it requires. This not only raises the prospect of new iDevice mass market sales being pushed into 2015, with negative impact on the important fourth quarter, but also shakes confidence in the once-infallible control that Apple has of its components suppliers and manufacturers. It has suffered parts shortages before, but in this intensely competitive mobile market, product delays have a far greater effect than in Apple's heyday at the top of the smartphone tree.

Apple is widely expected to boost its holiday season revenues with larger-screen models for both its premium and 'budget' iPhone families, as well as introducing the long expected iWatch. However, diversifying the iDevice range has its own supply chain challenges, and well respected analyst Ming-Chi Kuo believes the iWatch will not ship in volume until late November, rather than September as originally believed.

The product "represents a new level of difficulty for Apple in regard to both hardware and software development", wrote Kuo in a research note, and has involved the OEM adding new (and hard to manufacture) parts to its supply list. That will make it hard for Apple's manufacturers to hit the volumes Wall Street is anticipating for this year - analysts have touted 10m by year end, while the reality may be closer to 2m. If that prediction proves true, Apple will have missed some of the opportunity of the holiday period to shift smartwatches.

Kuo also suggests that the 5.5-inch iPhone may also be late. Apple is reportedly planning to launch two models, both with larger displays. The 4.7-inch model would go ahead as expected, this fall, if the reports are right, but the 5.5-inch version could be pushed back into next year. AppleInsider, quoting Kuo, said there may be issues with the in-cell touch panels and with the quality of color on the display. "The new in-cell touch panels may have issues related to touch sensitivity on the edges of the panel as displays become larger in size, making the 5.5-inch model a much greater technical achievement for Apple to accomplish," says the research note. The larger smartphone is expected to sport a sapphire front panel to make it scratch-resistant but Kuo suggests this is not passing the tests for being shatter-proof.

Even if both sizes make their debut in September as expected, and ship in volume during Q4, analysts are bracing for the biggest freeze ever on sales of current models, in the run-up to the launches - making it even more important that Apple can meet that pent-up demand quickly during the fourth quarter, before Samsung intervenes with a tempting new Galaxy.

T Michael Walkley of Canaccord Genuity wrote in a research note that "our surveys indicated growing consumer anticipation for new larger-screen iPhones. Based on our analysis of global iPhone sales by region, we believe consumers slowed the pace of iPhone upgrade purchases during the iPhone 5 and 5s product cycles. We believe the extended replacement rates combined with new larger-screen iPhones position Apple with its large installed base for record iPhone 6 sales. Recent history definitely indicates that Apple's September quarter iPhone sales will slow ahead of the iPhone 6 launch."

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