The history of Apple being doomed doesn’t necessarily repeat, but it does rhyme.

Take the latest installment , from Professor Mohanbir Sawhney at the Kellogg School of Management (one of my former professors, incidentally):

Have we reached peak phone? That is, does the new iPhone X represent a plateau for hardware innovation in the smartphone product category? I would argue that we are indeed standing on the summit of peak “phone as hardware”: While Apple’s newest iPhone offers some impressive hardware features, it does not represent the beginning of the next 10 years of the smartphone, as Apple claims…

As we have seen, when the vector of differentiation shifts, market leaders tend to fall by the wayside. In the brave new world of AI, Google and Amazon have the clear edge over Apple. Consider Google’s Pixel 2 phone: Driven by AI-based technology, it offers unprecedented photo-enhancement features and deeper hardware-software integration, such as real-time language translation when used with Google’s special headphones…The shifting vector of differentiation to AI and agents does not bode well for Apple…

Sheets of glass are simply no longer the most fertile ground for innovation. That means Apple urgently needs to shift its focus and investment to AI-driven technologies, as part of a broader effort to create the kind of ecosystem Amazon and Google are building quickly. However, Apple is falling behind in the AI race, as it remains a hardware company at its core and it has not embraced the open-source and collaborative approach that Google and Amazon are pioneering in AI.

It is an entirely reasonable argument, particularly that last line: I myself have argued that Apple needs to rethink its organizational structure in order to build more competitive services. If the last ten years have shown us anything, though, it is that discounting truly great hardware — and the sort of company necessary to deliver that — is the surest way to be right in theory and wrong in reality.

The Samsung Doom

When Stratechery started in 2013, Samsung was ascendent, and the doomsayers were out in force. The arguments were, in broad strokes, the same: hardware innovation was over, and Android’s good enough features, broader hardware base, and lower prices would soon mean that the iPhone would go the way of the Mac relative to Windows. 1

At that time the flagship iPhone was the iPhone 5; Apple was still only making one iPhone a year. That phone — the one that, many claimed, was the peak of hardware innovation — featured a larger (relative to previous iPhones) 4 inch LED screen, 8MP rear camera and 1.2 MP front camera, and Apple’s A6 32-bit system-on-a-chip, the first from the company that was not simply a variation on a licensed ARM design. To be sure, the relatively small screen size was a readily apparent problem: one of my first articles argued that Samsung’s focus on larger-screens was a meaningful advantage that Apple should copy.

Obviously Apple eventually did just that with the iPhones 6 and 6 Plus, but screen size is hardly the only thing that changed: later that year Apple introduced the iPhone 5S, which included the A7 chip that blew away the industry by going 64-bit years ahead of schedule; Apple has enjoyed a massive performance advantage relative to the rest of the industry ever since. The iPhone 5S also included Touch ID, the first biometric authentication method that worked flawlessly at scale (and enabled Apple Pay), the usual camera improvements, as well as a new ‘M7’ motion chip that laid the groundwork for Apple’s fitness focus (and the Apple Watch).

And, even as critics clamored that the pricing of the iPhone 5C, launched alongside the 5S, meant the company was going to be disrupted, the iPhone 5S sold in record numbers — just like every previous iPhone had.

The iPhone X

I’m spoiled, I know: gifted with the rationalization of being a technology analyst, I buy an iPhone every year. Even so, I thought the iPhone 7 was a solid upgrade: it was noticeably faster, had an excellent screen, and the camera was great; small wonder it sold in record number everywhere but China . 2 What it lacked, though — and I didn’t fully appreciate this until I got an iPhone X — was delight:

Face ID isn’t perfect: there are a lot of edge cases where having Touch ID would be preferable. By its fourth iteration in the iPhone 7, Touch ID was utterly dependable and, like the best sort of technology, barely noticeable.

FaceID takes this a step further: while it takes a bit of time to change engrained habits, I’m already at the point where I simply pick up the phone and swipe up without much thought; 3 authenticating in apps like 1Password is even more of a revelation — you don’t have to actually do anything.

In these instances the iPhone X is reaching the very pinnacle of computing: doing a necessary job, in this case security, better than humans can. 4 The fact that this case is security is particularly noteworthy: it has long been taken as a matter of fact that there is an inescapable trade-off between security and ease-of-use; TouchID made it far easier to have effective security for the vast majority of situations, and FaceID makes it invisible.

The trick Apple pulled, though, was going beyond that: the first time I saw notifications be hidden and then revealed (as in the GIF above) through simply a glance produced the sort of surprise-and-delight that has traditionally characterized Apple’s best products. And, to be sure, surprise-and-delight is particularly important to the iPhone X: so much is new, particularly in terms of the interaction model, that frustrations are inevitable; in that Apple’s attempt to analogize the iPhone X to the original iPhone is more about contrasts than comparisons.

The Original iPhone and Overshooting

While the iPod wheel may be the most memorable hardware interface in modern computing, and the mouse the most important, touch is, for obvious reasons, the most natural. That, though, only elevates the original iPhone’s single button: everything about touch interfaces needed to be invented, discovered, and figured out; it was that button that made it accessible to everyone — when in trouble, hit the button to escape.

Over the years that button became laden with ever more functionality: app-switching, Siri, TouchID, reachability. It was the physical manifestation of another one of those seemingly intractable trade-offs: functionality and ease-of-use. Sure, the iPhone 5 I referenced earlier was massively more capable than the original iPhone, and the iPhone X vastly more capable still, but in fact an argument based on specifications makes the critics’ point: the more technology that gets ladled on top, the more inaccessible it is to normal users. Clayton Christensen, in the The Innovators’ Dilemma , called this “overshooting”:

Disruptive technologies, though they initially can only be used in small markets remote from the mainstream, are disruptive because they subsequently can become fully performance-competitive within the mainstream market against established products. This happens because the pace of technological progress in products frequently exceeds the rate of performance improvement that mainstream customers demand or can absorb. As a consequence, products whose features and functionality closely match market needs today often follow a trajectory of improvement by which they overshoot mainstream market needs tomorrow. And products that seriously underperform today, relative to customer expectations in mainstream markets, may become directly performance-competitive tomorrow.

This was the reason all of those iPhone critics were so certain that Apple’s days were numbered. “Good-enough” Android phones, sold for far less an iPhone, would surely result in low-end disruption. Here’s Christensen in an interview with Horace Dediu :

The transition from proprietary architecture to open modular architecture just happens over and over again. It happened in the personal computer. Although it didn’t kill Apple’s computer business, it relegated Apple to the status of a minor player. The iPod is a proprietary integrated product, although that is becoming quite modular. You can download your music from Amazon as easily as you can from iTunes. You also see modularity organized around the Android operating system that is growing much faster than the iPhone. So I worry that modularity will do its work on Apple.

Shortly after the iPhone 5S/5C launch, I made the case that Christensen was wrong :

Modularization incurs costs in the design and experience of using products that cannot be overcome, yet cannot be measured. Business buyers — and the analysts who study them — simply ignore them, but consumers don’t. Some consumers inherently know and value quality, look-and-feel, and attention to detail, and are willing to pay a premium that far exceeds the financial costs of being vertically integrated…

Not all consumers value — or can afford — what Apple has to offer. A large majority, in fact. But the idea that Apple is going to start losing consumers because Android is “good enough” and cheaper to boot flies in the face of consumer behavior in every other market. Moreover, in absolute terms, the iPhone is significantly less expensive relative to a good-enough Android phone than BMW is to Toyota, or a high-end bag to one you’d find in a department store…

Apple is — and, for at least the last 15 years, has been — focused exactly on the blind spot in the theory of low-end disruption: differentiation based on design which, while it can’t be measured, can certainly be felt by consumers who are both buyers and users.

Needless to say, in 2013 we weren’t anywhere close to peak iPhone: in the quarter I wrote that article — 4Q 2013, according to Apple’s fiscal calendar, the weakest quarter of the year — the company sold 34 million iPhones; the next quarter Apple booked $58 billion in revenue. We are now four years on, and last quarter — 4Q 2017, again according to Apple’s fiscal quarter — the company sold 47 million iPhones; next quarter Apple is forecasting between $84 and $87 billion in revenue.

More importantly, the experience of using an iPhone X, at least in these first few days, has that feeling: consideration, invention, and yes, as the company is fond to note, the integration of hardware and software. Look again at that GIF above: not only does Face ID depend on deep integration between the camera system, system-on-a-chip, and operating system, but the small touch of displaying notifications only when the right person is looking at them depends on one company doing everything. That still matters.

Moreover, it’s worth noting that the iPhone X is launching into a far different market than the original iPhone did: touch is not new, but rather the familiar; changing many button paradigms into gestures certainly presents a steeper learning curve for first-time smartphone users, but for how many users will the iPhone X be their first smartphone?

Artificial Intelligence and New Market Disruption

Still, I noted that while Apple doom-sayers rhyme, they don’t repeat. The past four years may have thoroughly validated my critique of low-end disruption and the iPhone, but there is another kind of disruption: new market disruption. Christensen explains the difference in The Innovator’s Solution :

Different value networks can emerge at differing distances from the original one along the third dimension of the disruption diagram. In the following discussion, we will refer to disruptions that create a new value network on the third axis as new-market disruptions. In contrast, low-end disruptions are those that attack the least-profitable and most overserved customers at the low end of the original value network.

Christensen ultimately concluded that the iPhone was a new market disruptor of the PC: it was seemingly less capable yet simpler to use, and thus attracted non-consumption, and eventually gained sufficient capabilities to attract PC users as well. This is certainly true as far as it goes; 5 certainly there are an order of magnitude more smartphone users than there ever were PC users.

And, to that end, Sawhney’s argument is in this way different from the doomsayers of old: it’s not that Apple will be disrupted by “good-enough” cheap Android, but rather because a new vector is emerging — artificial intelligence:

The vector of differentiation is shifting yet again, away from hardware altogether. We are on the verge of a major shift in the phone and device space, from hardware as the focus to artificial intelligence (AI) and AI-based software and agents.

This means nothing short of redefinition of the personal electronics that matter most to us. As AI-driven phones like Google’s Pixel 2 and virtual agents like Amazon Echo proliferate, smart devices that understand and interact with us and offer a virtual and/or augmented reality will become a larger part of our environment. Today’s smartphones will likely recede into the background.

Makes perfect sense, but for one critical error: consumer usage is not, at least in this case, a zero sum game. This is the mistake many make when thinking about the way in which orthogonal businesses compete:

The presumption is that the usage of Technology B necessitates no longer using Technology A; it follows, then, that once Technology B becomes more important, Technology A is doomed.

In fact, though, most paradigm shifts are layered on top of what came before. The Internet was used on PCs, social networks are used alongside search engines. Granted, as I just noted, smartphones are increasingly replacing PCs, but even then most use is additive, not substitutive. In other words, there is no reason to expect that the arrival of artificial intelligence means that people will no longer care about what smartphone they use. Sure, the latter may “recede into the background” in the minds of pundits, but they will still be in consumers’ pockets for a long time to come.

There’s a second error, though, that flows from this presumption of zero-summedness: it ignores the near-term business imperatives of the various parties. Google is the best example: were the company to restrict its services to its own smartphone platform the company would be financially decimated. The most attractive customers to Google’s advertisers are on the iPhone — just look at how much Google is willing to pay to acquire them 6 — and while Google could in theory convince them to switch by keeping its superior services exclusive, in reality such an approach is untenable. In other words, Google is heavily incentivized to preserve the iPhone as a competitive platform in terms of Google’s own services; granted, Android is still better in terms of easy access and defaults, but the advantage is far smaller than it could be.

Apple, meanwhile, is busy building competing services of its own, and while it’s easy — and correct — to argue that they aren’t really competitive with Google’s, that doesn’t really matter because competition isn’t happening in a vacuum. Rather, Apple not only enjoys the cost of switching advantage inherent to all incumbents, but also is, as the iPhone X shows, maintaining if not extending the user experience advantage that comes from its integrated model. That, by extension, means that Apple’s services need only be “good enough” — there’s that phrase! — to let the company’s other strengths shine.

This results in a far different picture: the “hurdle rate” for meaningful Android adoption by Apple’s customer base is far greater than the doom-sayers would have you think.

Apple’s Durable Advantage

I am no Apple pollyanna: I first made the argument years ago that the ultimate Apple bear case is the disappearance of hardware that you touch (which remains the case); I also complimented the company for having the courage to push towards that future.

Indeed, Apple’s aggressiveness in areas like wearables and, at least from a software perspective, augmented reality, suggest the company will press its hardware advantage to get to the future before its rivals, establishing a beachhead that will be that much more difficult for superior services offerings to dislodge. Moreover, there is evidence that Google sees the value in Apple’s approach: the company’s push into hardware may in part be an attempt to find a new business model , but establishing the capabilities to compete in hardware beyond the smartphone is surely a goal as well.

What is fascinating to consider is just how far might Apple go if it decided to do nothing but hardware and its associated software: if Google Assistant could be the iPhone default, why would any iPhone user even give a second thought to Android? I certainly don’t expect this to happen, but that giving away control of what seems so important might, in fact, secure Apple’s future more strongly than anything else, is the most powerful signal possible that the integration of hardware and software — and the organizational knowledge, structure, and incentives that come from that being a company’s primary business model — remains a far more durable competitive advantage than many theorists would have you think.

1. Which, for the record, is a misreading of history [ ↩ ]
2. Speaking of China, the point of that article was that hardware differentiation mattered more there than anywhere else; I expect the iPhone X to sell very well indeed [ ↩ ]
3. Many of those edge cases are in cases where you are not picking up the phone and thus triggering wake-on-rise; the car, for example, or the desk [ ↩ ]
4. To be clear, this is all relative; in fact, Face ID is arguably even less secure than Touch ID. Sure, 1 in a million chances of a match are better than 1 in 50,000 if the sample is fully random, but given that close siblings, for example, can overcome it in theory is a reminder that relevant samples are not always random. The broader point, though, is that security people use is better than superior solutions they do not. [ ↩ ]
5. Christensen never did explain why the iPhone defeated Nokia et al, who he originally expected to overcome the iPhone; I put forward my theory in Obsoletive [ ↩ ]
6. What I wrote in this Daily Update about Google’s acquisition costs almost certainly explains the bump in Apple’s services revenue last quarter; more on this in tomorrow’s Daily Update [ ↩ ]