iPhone 7 Flop Is Apple Inc.'s Nightmare Scenario -- Here's Why It Might Happen

With a $517 billion market capitalization, it’s hard to see Apple Inc. as vulnerable. But the reality is that the world’s most valuable publicly traded company, the one with $216 billion in cash on hand, is betting its next few years of growth and its vaunted brand cachet on a single product: the iPhone 7.

While Apple has had a good track record on its numbered smartphone releases — such as the iPhone 3, 4, 5 and 6 — it has a lot riding on the next big number. For the first time, the company is expected to see revenue decline year-over-year going into its quarter ending March 26. If the iPhone 7 flops, or consumers react with a collective “Meh,” it’s not at all clear how the firm begins to grow again.

What’s troubling is that the iPhone 7, expected to make its debut this year, could face some strong headwinds. There’s a chance its features won’t be compelling enough for customers to upgrade. It’s a problem that hurt the iPhone 6S. Apple’s current smartphone looks mostly the same as its predecessor on the exterior, save for the additions of a rose-gold color option and a pressure-sensitive 3D Touch screen.

If the iPhone 7 isn’t much different from iPhone 6S, sales could slump. Also, some consumers may dismiss as gimmicky a number of the device’s rumored features. For example, it’s unclear whether a supposed dual-camera setup would be significantly better compared with the camera featured by the 6S. Also, Apple is rumored to be considering the elimination of the standard headphone jack entirely, in favor of audio via Bluetooth or the Lightning port. That could give some buyers pause.

And while wireless charging was originally anticipated in the iPhone 7, it may not find its way into an Apple smartphone until 2017, according to Bloomberg News.

Another big challenge facing this next iPhone is beyond Apple’s control: volatile global currencies. The strong U.S. dollar makes the company’s products more expensive in foreign markets that the firm is relying on for growth.

In response to weakening foreign currencies, Apple has already had to raise its iPhone prices in a number of countries, such as Australia and Germany. But even that has its limits, with company CEO Tim Cook pointing out in an earnings call this week that “$100 of Apple’s non-U.S. dollar revenue in Q4 of 2014 translated to only $85 last quarter due to the weakening currencies in our international markets.”

Continuing weakness in foreign currencies and strength in the U.S. dollar threatens to make the iPhone prohibitively expensive in key growth markets such as China and India, the latter of which had some of the most expensive iPhone 6S prices at launch, with 16 GB models starting at 62,000 rupees ($912).

“As long as their foreign currencies continue to depreciate against the dollar, then they’re going to have that problem,” said Jan Dawson, the founder and chief analyst at Jackdaw Research. “Then they’re left with the fine balancing act of trying to figure out to what extent they need to raise prices to preserve margins and to what extent they need to keep prices the same to preserve demand.”

Most analysts aren’t modeling an iPhone doomsday scenario, but they do recognize that Apple’s heavy reliance on its smartphone to drive its revenue poses a huge potential risk for the company and its investors.

“If iPhone sales deteriorate over a prolonged period of time — let’s say, the next 18 to 24 months — there’s really nothing that could buffer a prolonged decline in the smartphone [market],” said Angelo Zino, an analyst at S&P Capital IQ. “That being said, there are opportunities for [Apple] to grow in areas such as services. The problem is when you combine all their services together, it isn’t big enough to offset any potential magnified iPhone decline.”

While Apple is looking to bolster its product lineup with new devices such as the Apple Watch, the revenue generated by such offerings is still miniscule compared with that produced by the iPhone line, which accounted for 66 percent of the $76 billion booked by the company during its latest quarter. The Apple Watch was initially expected to go gangbusters out of the gate in 2015, but its performance has been less than impressive so far, with unit sales forecasted to be behind the performance of the first iPad, according to International Data Corp.

Apple’s big problem is its lack of product diversity in the post-Steve Jobs era. “There’s a school of thought out there that’s legitimately questioning [Apple’s] innovation,” said Timothy Arcuri, managing director at Cowen and Co. “They’re still not giving out watch numbers. And if the watch numbers were off the charts, they’d be telling me what they are. So you’re left to conclude that the watch has been disappointing.”

Not only that but a number of moon shots Apple is counting on to drive future growth aren’t expected to contribute meaningfully to revenue anytime soon. The Apple TV live-streaming television service hasn’t found its way out of negotiations with content providers. And the Apple Car, code-named Titan, isn’t expected to ship until 2019 — that’s if it doesn’t run into additional roadblocks such as its project leader leaving the company and a hiring freeze within the Titan team.

Apple’s flat quarter of iPhone sales shows, more than anything else, that incremental, midcycle upgrades such as the iPhone 6S may have trouble moving the needle on sales.

“The key for Apple is to make the two-year upgrade a really compelling one,” Jackdaw Research’s Dawson said. “So as long as what Apple produces this fall is a measurable upgrade over the iPhone 6, then it really shouldn’t be a problem for them,” he added.

One problem that doesn’t appear to be an issue for Apple at the moment is losing out to Chinese smartphone brands amid a slowing market. The opposite is actually true, with the company growing its mobile-operating-system share 26.0 percent year-over-year in China to 27.1 percent in the final quarter of 2015. Android’s market share fell 7.3 percent over the same period, to 71.4 percent, according to Kantar Worldpanel ComTech.

Despite signs of economic weakness in China, Apple isn’t expected to be hit as hard as low-end smartphone vendors, as it focuses on high-end customers who aren’t as sensitive to economic downturns. “There is inside competition within Android that is impacting Samsung, but the up-and-coming Chinese vendors — even in China — are not going for the kind of customer Apple is targeting or appealing to,” said Carolina Milanesi, chief of research and head of Kantar Worldpanel ComTech U.S. business. “The economic environment in China should also impact Apple less than other vendors given the income level they mainly penetrate.”

Still, Apple is making a big bet on iPhone 7 — and if it doesn’t pay off, the erosion of the company’s market cap seen in the latter part of 2015 may become a landslide.