Apple: Thinking Critically About iPhone 7 Rumors

| About: Apple Inc. (AAPL)
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I've stated I think it's premature to conclude that iPhone 7 will be a failure on the basis of current rumors.

The lack of reliable information about iPhone 7 is indicative of better security surrounding its release.

Investors need to be patient, trusting in Apple's ability to innovate in processors and mobile operating systems.

An article by SA contributor Paulo Santos argues that current rumors about the Apple (NASDAQ:AAPL) iPhone 7 are not rumors at all. They have been transmuted from the lead of rumor to the gold of fact by a simple mechanism, time. I've heard that time heals all wounds, but I haven't heard that it has the power to transform myth into reality.

Source: MacRumors

Timing is Everything

Santos starts off his article by misrepresenting the gist of my article Nikkei Declares iPhone 7 Dead Before Arrival. My point was simply that I thought it was premature of the Nikkei to project the failure of iPhone 7 before it hits the market.

Santos states:

Nikkei comes to this conclusion because of the iPhone's lack of novelty. Mark Hibben challenges this conclusion because he thinks that the present iPhone 7 rumors are not to be believed.

In the article, I made no such sweeping generalization about Apple rumors. Some rumors have turned out to be true, some haven't. I don't dismiss a rumor automatically as untrue.

What I try to do is apply a little critical thought to the huge number of rumors that circulate about Apple at any given time. In numerous "Sifting the Apple Rumors. . ." articles, I have tried to do precisely that.

In that vein, Santos presents an interesting thesis about Apple iPhone rumors. He claims that they get more accurate as we get closer to the iPhone launch. He points to a bunch of photos released in early May 2014 that turned out to be fairly accurate depictions of the iPhone 6.

In the case of the photos from sites that I could still visit (9to5Mac, BGR, and, the photos are not claimed to be actual iPhones, but only mockups. The mockups look pretty good however, indicating that some time in early May, information leaked concerning the basic shape and appearance of iPhone 6.

A couple of months earlier, in March 2014, there was less to go on, and MacRumors was showing an iPhone 6 that was basically just an enlarged iPhone 5s. You can see this through the wonders of the Internet Archive Wayback Machine:

Note that MacRumors is showing what amounts to an enlarged iPhone 5s. It has exactly the same narrow-edged frame and diamond chamfered edge as the iPhone 5s. The major change from the 5s is a much narrower bezel, which in fact, the iPhone 6 did not have, as can be seen in the image below.

Source: Apple

The early MacRumors image is illustrative of the process of rumor formation in its early stages. There's a natural tendency to extrapolate from the current model.

If we accept the observation that leaked images originating in May are probably more accurate, there's still a problem with the image that Santos seems to offer as a sort of smoking gun for rumor veracity. This is one of the images I showed in the previous article:

The problem with this image is that it originated in March, as described by Macrumors on March 15. Too early to be considered factual, even by the logic of Mr. Santos. My impression from the image is that it illustrates that same process of early rumor formation that we saw in 2014. What is shown looks almost exactly like an iPhone 6s, with minor cosmetic changes and a different camera.

By the way, the camera really looks pasted in. There's a very definite boundary around the camera bezel that is slightly different in color than the silver-gray of the case.

I doubt there were any assembled working units extant in March, except for hand made prototypes under tight security in Cupertino. Certainly nothing that would be coming off the factory floor at Foxconn.

It was probably lax security at Foxconn that led to the leak and the subsequent mockups based on it in May 2014. The fact that there have been no additional leaked updates suggests to me that security has gotten tighter at Foxconn, probably at Apple's behest.

This is what led me to be a little disparaging of the current crop of rumors. There doesn't seem to be anything like the flood of accurate rumors that we saw in May 2014.

Other Breakage

Besides the timing issue, I think there are all sorts of flaws in Mr. Santos's reasoning. Even if leaked images happen to be accurate in the May time frame, it doesn't follow that all rumors floating around in that time frame must also be accurate.

Recall that 2014 was the year of the great GT Advanced Technologies sapphire fiasco. There were any number of rumors floating around that iPhone 6 would use a sapphire screen. The rumors persisted up to the day iPhone 6 was launched. I was one of the few voices in the wilderness saying "I don't think so."

There's also a very fundamental flaw in Santos's view of innovation. He concludes that iPhone 7 will not be innovative if it doesn't have a unique external design. This ignores all of the internal innovation that Apple has pioneered, especially in its systems on chip (SOCs). It also ignores Apple's innovation in mobile operating system design. Santos believes, as do almost all Apple bears, that Apple is just a pretty face.

Investor Takeaway

The fundamental problem with the current iPhone 7 rumors is that they've gotten pretty stale. Without a current refresh, I'm not persuaded that they offer much guidance to the real iPhone 7. The lack of fresh data suggests that Apple has successfully clamped down on the leaks that plagued the iPhone 6 launch.

This is probably a good thing for Apple, but it does leave us investors wondering what to expect. The best clues as to what to expect in iPhone 7 will probably be at World Wide Developer Conference, where the next version of iOS (10) will be launched. The capabilities embedded in iOS 10 will be indicative of what to expect in iPhone 7. Until the iPhone 7 launch, I'm open minded about rumors. I just want to see some rumors that pass muster. I remain long Apple and recommend it as a buy for investors with a 3-5 year investment horizon.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.