Apple's iPhone, 10 years old Monday, faces big headwinds going forward

iPhone celebrates its 10th anniversary

Ten years ago, Steve Jobs introduced a touchscreen minicomputer that wrapped in a digital music player, email, maps and web browsing.

The original iPhone had 4 to 8 gigabytes of storage. There was not yet an App Store. The company was valued at under $75 billion.

To say that Apple's iconic co-founder, who died in 2011, ushered in a new era of innovation would be the understatement of the device's dominant decade.

Apple has sold some $650 billion worth of iPhones, with well over half snapped up in the past three years. In fiscal 2016, iPhones generated revenue of $136.7 billion, making that single product bigger than all but 35 companies — in the world.

"It's hard to think of a product that's more important," said Kevin Landis, chief investment officer of Silicon Valley investment firm Firsthand Capital Management, which owns Apple shares among its $300 million in assets under management. The iPhone represents "just an amazing fundamental shift that only happens a couple times in a lifetime," he said.

In addition to the hundreds of billions of dollars of stock market value the iPhone has contributed to Apple, the device has enabled the staggering growth of mobile-first upstarts like Uber, Snap and Spotify, while pushing Facebook and Twitter headfirst into the smartphone age.

Meanwhile, the iPhone helped take down a swath of former tech giants. Nokia, Motorola, BlackBerry and Palm, we all remember, got to the mobile phone market years before Apple.

Unable to keep pace with innovation, they eventually collapsed. BlackBerry is valued at about 94 percent below its peak in 2008, and the other brands were forced to sell.

Peter Karazeris, an analyst covering Apple at Thrivent Financial, specialized in semiconductor stocks a decade ago. Like many of his peers, Karazeris was at the Consumer Electronics Show, or CES, in Las Vegas when Jobs made his announcement on stage at San Francisco's Moscone Center.

Over 400 miles away, the iPhone instantly became the talk of CES, though not everyone was bullish.

"There was a group that was fascinated by it and a group of the growth momentum investors that really felt like this was going to change the way things happen," said Karazeris, whose firm is a longtime Apple shareholder. "There was another group who was still defending traditional players like Nokia and Ericsson."

Regardless of your position, "everyone had all of the sudden something new to focus on," he said.

The 10-year anniversary of the iPhone arrives at a time of dramatic change for the Cupertino, California-based company. IPhone sales are coming off their first year of decline, and analysts are projecting meager growth from here.

The latest device, the iPhone 7, has up to 256 gigabytes of storage, or 64 times the amount of the original 4 GB version, and chipmakers have packed as much power into microprocessors as physics will allow. With smartphones at near peak performance and owned ubiquitously in much of the world, some analysts say the iPhone has just about hit its ceiling.

Since reaching a record in February 2015, Apple shares have lost 11 percent of their value.

Looking into the next 10 years, CEO Tim Cook is casting Apple as a much different kind of company.

With more than 1 billion devices active across the globe, Cook is focusing on the entertainment, e-commerce and productivity tools he can pile on to keep consumers opening their wallets. The App Store, iTunes, Apple Music and payments are among the ways Apple makes money from software.

Jobs introduced the App Store in March 2008, more than a year after the iPhone unveiling. In his signature black turtleneck, Jobs told an audience of Apple enthusiasts that "our developers are going to be able to reach every iPhone user through the App Store." He said developers would pick the price and keep 70 percent of the revenue. Of course, free apps would be equally welcome.

"The developer and us have the exact same interest, which is to get as many apps out in front of as many iPhone users as possible," Jobs said.

Apple said in July 2008 that 800 apps were available on the iPhone. That number has since ballooned to more than 2 million.

Thanks to a surge in downloads of games, music and health apps, services made up 11 percent of revenue in 2016. The iPhone accounted for 63 percent of sales.

Gene Munster, the longtime Apple analyst who just started a venture capital firm, wrote in his farewell research note last month that investors need to see 30 percent of revenue coming from services to start judging Apple as a higher-margin services company. For Apple to truly evolve from being a device maker, it would need to generate half of revenue from services, according to Munster.

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"It will be a tough road to get investors to accept Apple as a services business instead of hardware," Munster wrote.

Apple said last week that developers raked in $20 billion in the App Store in 2016, a 40 percent jump from the prior year.

That translates into about $8 billion in sales for Apple. The bigger that number becomes relative to the company's overall revenue, the more Apple's profit margin grows.

There's no shortage of potential. Having built a massive global developer base, the iPhone has turned into much more than just a phone, computer and entertainment hub.

Consumers use iPhones for music and video editing, as a remote control to lock their doors and alter the temperature in their homes, and as a way to track their workouts, pay bills and buy physical goods. And we're just entering the era of virtual reality and augmented reality, where Apple hardware plus apps can enable entirely new experiences.

Munster expects the number of Apple devices on the market to reach 1.5 billion in the next five years. Eventually, he predicts the company will lower the prices and accept reduced margins in order to lure a bigger base of consumers, who will turn around and spend money on more profitable services.

But that starts to mimic Google's playbook.

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Q1 201683.5%15.4%0.8%0.4%
Q2 201687.6%11.7%0.4%0.3%
Q3 201686.8%12.5%0.3%0.4%

For years, Google has given away the Android operating system to manufacturers with the goal of getting search, maps, Gmail and YouTube in the hands of consumers on the move. Thanks to a multitude of low-cost phones, Android has now captured 87 percent of the global market with the iPhone controlling 13 percent, according to IDC.

Meanwhile, the face of competition is changing. As voice assistance gains popularity, consumers are turning to new devices in their homes. In their first two years on the market, sold 5.1 million voice-controlled Echo speakers, according to a November report from Consumer Intelligence Research Partners. The company said Echo sales were nine times higher this past holiday season over 2015, and the smaller Echo Dot was the best-selling item on

Google entered the market more recently with the Google Home.

Apple has its own rival on the way that will be "designed to control appliances, locks, lights and curtains via voice activation," Bloomberg reported in September, citing people familiar with the matter. The project was in the works for two years before entering the prototype testing phase, Bloomberg said.

Still, it's hard to envision a new type of Apple device moving the needle anytime soon. The company sold 212 million phones in the year ended in September, and analysts are projecting another 224 million this year, according to FactSet. Blogs are predicting a major redesign for the iPhone 8 in 2017, including a glass body, wireless charging and the absence of a home button.

Apple continues upgrading its flagship device every year and is committed to staying out of the hardware graveyard that houses so many of its predecessors.

But with a market capitalization of close to $630 billion, the largest in the world and more than eight times above its value when the iPhone was announced, investors are asking how much more they can reasonably expect.

For money managers that look for cash payouts above revenue growth, Apple has a $175 billion stock buyback program in place and is paying a quarterly dividend of 57 cents a share.

"The next iPhone is a chance for Apple to regain some of the excitement that the company had in the past," said Walter Price, an Apple investor and managing director at Allianz Global Investors in San Francisco. "I hate to say it's the last chance, but it could be a really important turning point for the company. If they do not execute on the opportunity, then they may just be relegated to a slow growth, annuity type company."

— CNBC's Josh Lipton contributed to this report.