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Apple Faces Update With Destiny

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Apple may have an upgrade problem. Now almost 30% below its all-time high, Apple's stock slid again Monday on news that the company cut orders for iPhone 5 components. While sales of Apple's latest smartphone are likely to best previous versions, it likely won't be by the same blowout margin some have come to expect.
One problem could be that users don't feel the need to rush and get the latest device. The iPhone 5 is only an incremental improvement over prior iPhones, which were heavier and had a slightly smaller screen. There was one significant advance: an LTE chip that downloads data at much faster speeds. But AT&T ads labeling older iPhones as "4G" may be confusing many U.S. users that their older device is as fast.
Add it up, and many users may feel the iPhone 4 or 4S are perfectly adequate, especially considering that they are able to run the latest version of Apple's mobile operating system and work fine with key apps like Google Maps. Some recently released data back that up. According to survey data from Consumer Intelligence Research Partners, in the three months after the iPhone 4S was launched in 2011, 73% of iPhone buyers in the U.S. opted for the latest version of the device. But in survey results yet to be published, CIRP tells The Wall Street Journal that in the three months after the iPhone 5 was launched, the percentage of U.S. iPhone buyers opting for it fell to 50%.
U.S. carriers looking to avoid paying high handset subsidies also are discouraging upgrades with new or increased fees.
A silver lining from users buying older devices would be if Apple can attract more users to its software platform who don't want to buy its priciest smartphone. Sales of apps or content on iTunes aren't as big a contributor to profits as the sale of hardware. They aren't even close. But such new users may be more inclined to buy more Apple devices in the future. Other moves to bring new users to the Apple ecosystem may include the release of a low-end iPhone for emerging markets, especially as the tailwind from increased distribution tapers off. It has already done that with the iPad, releasing the iPad Mini while also leaving older versions of the tablet on the market.
In the end, the best way to keep users in the Apple fold is the same as the strategy needed to maintain high gross profit margins—and that is to keep selling exciting new devices. It is debatable whether the iPhone 5 has excited average users. And the next iPhone may disappoint, unless there is some big, unexpected improvement coming to iOS, Apple's mobile operating system.
If Apple hasn't already released the last devices developed under the direction of Steve Jobs, it is getting close. The hard work for CEO Tim Cook is just beginning.

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