Why 'device exhaustion' spells trouble for Apple

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With innovation waning and saturation climbing, the ability of Apple and other smartphone makers to make a big market splash anymore could be limited.

So as rumors ran rampant about what the next big thing will be for the iPhone maker, the reality could be something far less sexy.

Citigroup sees "device exhaustion" in the smartphone market, a condition in which it's getting harder and harder both to find people who don't own smartphones and who are impressed with marginal improvements in new devices.

(Read more: On eve of iPhone event, rumors reach fever pitch)

Before Apple unveiled its latest iPhones on Tuesday, analyst Glen Yeung explained in a note to clients:

(Read more: Here comes the iPhone 5S)

Device Exhaustion suggests that demand growth for high-end smartphones is noticeably decelerating as global saturation is achieved and hardware innovation is increasingly elusive. Today, this is already evident in developed markets, but it stands to reason that developing markets will follow suit.

The implications are substantial.

Apple's new iPhone 5S and iPhone 5C do not represent major design changes, but rather are geared to provide attractive price points for customers in China and other developing markets.

(Read more: It's on! Wal-Mart ratchets up smartphone turf war)

Yeung, though, said the success is likely to be limited:

To be sure, emerging markets represent a better opportunity, particularly in smartphones (89 percent cellular penetration, 30 percent smartphone penetration). But historical precedent in other hardware, supported by common product lifecycle theory, suggests global ASPs (average selling prices) will need to fall. With markets reaching saturation, ASPs poised to fall, and growth from innovation increasingly elusive, it would seem reasonable to expect margin degradation for high-end handset makers.

For Apple, that could mean disappointing sales.

For shareholders, who have bid up the Cupertino, Calif.-based company's shares nearly 10 percent over the past month, it could mean a similar letdown.

Indeed, shares slid after the unveiling, dropping about 3 percent in afternoon trading.

Said Yeung:

The lofty margins for Apple have already fallen 874 (basis points, or 8.74 percentage points) from their high over the past year. But historically, margins for hardware going through maturation tend to erode on average, leaving risk ahead. No surprise that as margins erode, share prices follow suit.

By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.