Apple’s Real Advantage Is What's Inside the New iPhones and Watch

When Apple Inc. unveiled a trio of new iPhones, an Apple Watch and TV set-top box on Tuesday, much was made of the products’ elegance, new features and luxury-level prices.

But perhaps the more important story is what’s under the hood: semiconductor technology that could keep Apple ahead of rivals and force people with older phones to upgrade.

Consider the Watch Series 3.

It has a new Apple-designed processor that lets Siri talk rather than just provide a written answer.

The new Watch can also connect directly to cellular networks but remains about the same size as its predecessor, a significant engineering feat.

In an interview, Andreessen Horowitz partner Benedict Evans noted that “if you look at the Android smartwatches that have cellular, they are literally twice the size.”

The iPhone 8 and X have the new A11 Bionic chip, which enables all sorts of clever image processing, augmented reality and artificial intelligence tasks. That gives Apple a big advantage in the AR market, which Morgan Stanley estimates could be worth $404 billion over the next three years.

By making better processors and pairing them with increasingly advanced software, Apple makes it ever harder for older iPhones to handle iOS upgrades.

A five-year-old iPhone can’t operate iOS 11, the latest iteration. Owners of older phones are then forced to upgrade to run the latest software.

The chip innovations seem to answer a question that has been consistently bugging investors: why Apple’s research spending has more than doubled since 2013, to $11 billion over the past year.

Some analysts had suggested that the autonomous driving project was sucking up the cash, but much of it is likely funding Apple’s chip division, the most capital-intensive part of tech research and development.

Apple’s investment seems to be paying dividends, giving it an edge in key markets: wearables, augmented reality and artificial intelligence. Samsung has an impressive semiconductor business as well, but everyone else will struggle to chip away at Apple’s lead.


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