AI may not be the key to Apple's next iPhone sales

At its Worldwide Developers Conference on Monday, Apple is expected to announce enhancements coming to its next mobile operating system and plans for generative AI — the former in keeping with a longtime purpose of the event for the company, the latter now a must for the only tech company with a market capitalization of more than $1 trillion that has yet to unveil a generative AI strategy.

Apple doesn't typically reveal details about upcoming iPhone models at its WWDC conference. But AI is already expected to play a key role in the device series due to launch this fall, likely to be called the iPhone 16. Analysts widely expect the new iPhones to feature on-device AI, which refers to the ability to process AI algorithms on the phone's hardware. Apple's 12th-year digital assistant, Siri, is also expected to get a major AI upgrade. “We expect Apple to unveil its broadest and most significant AI-enabled software refresh at WWDC 2024,” Morgan Stanley analyst Eric Woodring wrote in a report this week.

The big question is whether an AI-enabled iPhone will translate into a big boost in sales. Major upgrades like larger screens and 5G capabilities have correlated with strong iPhone cycles in the past, and anticipation is already building for the upcoming device. In a report last week, Bank of America analyst Wamsi Mohan said the “Inteliphone” will drive a “multi-year upgrade cycle” for Apple. Referring to past iPhone “super cycles,” Melius Research's Ben Reitzes predicted in a May 20 note that “we may be seeing another super cycle that will last for a while.”

The new iPhones due out this fall are expected to boost sales by 9% to 242 million units in the fiscal year ending September 2025, according to analyst consensus compiled by Visible Alpha. That would be a big help for the iPhone, which remains Apple's bread and butter: For the past 12 years, the iPhone has accounted for more than half of the company's revenue.

But it's also a mature business in an industry where consumers are holding onto their phones for longer, largely due to rising prices, which in many cases are now well over $1,000. Analysts expect iPhone sales to fall for a second straight year in the current fiscal year that ends in September, the first time in Apple's history, according to Visible Alpha estimates and Apple data. Apple stopped reporting unit sales of its products in 2018.

But the lingering sales slump means Apple may be poised for a strong iPhone cycle anyway, especially considering that many users are now using the iPhone 12, which was released in the fall of 2020. Apple's first 5G-enabled iPhone was a huge hit, thanks in large part to heavy promotion by carriers. According to Visible Alpha, the iPhone 12 series accounted for 73% of iPhone sales in fiscal 2021. Its predecessor, the iPhone 11, accounted for just 63% of iPhone sales the previous year.

With so many users on a four-year-old device, it will be much easier for Apple to sell its first AI iPhone, even if the use cases seem incremental. Consumer interest in AI phones is still somewhat unclear. IDC estimates that Samsung sold about 13 million units of its first AI phone after its launch in the first quarter. However, this did not completely offset the weakness in the company's portfolio, and IDC data showed that Samsung's smartphone shipments in the quarter were slightly down compared to the same period last year.

Apple's smarter iPhones need to do even better.

Write to Dan Gallagher at dan.gallagher@wsj.com.