Steve Jobs' heirs gird for first real test

Get ready for the mother of all product launches.

That was the message earlier this week from the top brass at Apple. Sales of the iPhone 4S are winding down: with the coming of the iPhone 5, Steve Jobs' heirs are about to face their first real test.

Even by Apple's own vaunted standards, this is shaping up to be a product launch for the ages. It is hard to overstate the significance of this single gadget to the world's most valuable company. If sales in the fourth quarter of this year manage even the relatively modest 20 per cent growth that passes for a down quarter at Apple these days then the iPhone 5, which is expected to debut in the autumn, would notch up nearly $30bn in sales in the final three months of this year.

To put things in perspective: that is as much as the entire portfolio of IBM, one of the biggest tech companies in the world, generated in sales during last year's fourth quarter, which is always Big Blue's strongest period of the year.

The volatility that has crept into the iPhone sales cycle, revealed in the company's latest quarterly figures on Tuesday, shows just how challenging it has become to manage the world's most successful consumer product. iPhone revenues jumped by 120 per cent in the final months of last year after the device was launched, eased back 7 per cent in the next quarter, and have now slumped nearly 30 per cent. That the latest sales drop equates to more than $6bn gives a sense of how much of a rollercoaster the iPhone product cycle has become.

The iPhone's main selling point has never lain in having industry-leading tech specs, but by making relatively few changes to the last iPhone, there is now a risk that Apple will be perceived to be playing catch-up. Smartphone screen sizes have crept up and Samsung has consciously positioned itself as the tech leader in the category.

The inbuilt advantage that comes with the App Store is still significant, but Apple faces a challenge in turning heads by inventing new things to do with each new generation of the iPhone. The supposed "killer apps" shown with the past two versions – FaceTime video conferencing and the Siri question-and-answer function – have failed to make the leap from gimmick to essential utility. The new Apple maps service will be an essential ingredient of future iPhones, but this will hardly be seen as a differentiator.

Pulling off the company's biggest-ever product launch is only one part of the balancing act that Tim Cook and the rest of the tech industry's highest rated management team face this autumn.

The second challenge will be to prove that they can expand the market for both the iPhone and iPad and are not destined to be caught in the trap of high prices. That will mean hitting lower price points without crushing their company's profit margins.

This is starting to make Wall Street uneasy. From 47.4 per cent in the first three months of this year, Apple is now predicting that its gross margin will drop to 38.5 per cent in the current quarter, about the level it hit two years ago. Average selling prices for both the iPhone and iPad edged down by about 4 per cent in the latest quarter. As growth shifts to the emerging markets and to new opportunities in the developed world, such as the education market, pricing decisions are starting to loom large.

The strategy Apple has chosen is very different from the one it pursued with the iPod. That device became a textbook case of effective market segmentation, as the Mini and Nano enabled it to dominate all parts of the market.

With the iPhone and iPad it has taken a different tack, holding out against diluting the products: instead, it has shaved something off the price of older models. Meanwhile, it is locked in a power battle with the real customers for the iPhone "the mobile carriers who subsidise the device in most parts of the world – to prevent a faster erosion of its prices.

The challenge for Apple has been to manage all this without leaving a pricing umbrella that allows rivals to steal in and take a large slice of the expanding market. Enter the latest challenger: Google's new 7-inch tablet, the Nexus 7. While the device has drawn glowing reviews for its impressive hardware, the real disruption lies in its price; at $199 in the US, it costs only half as much as the cut-price version of the older iPad.

The time is fast approaching for Mr Cook to prove that his company deserves its place at the head of the new touchscreen computing and smartphone industry. As always with Apple, the hyperbole is likely to be deafening.

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