Apple looks at AI to end iPhone slump

That question looms over the tech giant Monday as it holds its annual fall product event, where it is set to unveil a new generation of iPhones.

The iPhone 16 lineup isn’t expected to have many new hardware features—beyond the usual faster chips and improved cameras. Instead, Apple is expected to promote its new AI feature, called Apple Intelligence, as a main selling point.

So far, consumers have yet to embrace AI capabilities as a primary reason to upgrade. Apple’s leading smartphone rival, Samsung, has heavily promoted its latest devices’ AI capabilities. AI was only a minor selling point for carriers after the initial batch of sales, according to surveys BayStreet Research conducted at U.S. carrier stores.

Another recent survey showed that only 7% of consumers had a very high inclination to buy a smartphone based on AI features, according to research firm Canalys.

“AI hasn’t resonated yet with the masses," said Cliff Maldonado, principal analyst at BayStreet Research, which studies the smartphone market.

Some investors expect Apple’s phone sales to surge regardless, as many iPhone consumers are due for an upgrade. Analysts, on average, expect iPhone revenue for its coming fiscal 2025 year that ends in September next year to grow nearly 5%, according to FactSet.

Demand for Apple’s AI-enabled phones will offer another test of market appetite for the technology. The company’s rivals have spent billions investing in models that can chat and interact with users in humanlike ways, write and produce images and animations. Yet investors have grown wary of AI spending this year as many companies have yet to show a clear path to profitability.

In contrast to its rivals, Apple hasn’t poured giant piles of cash into its AI efforts. The company, instead, is hoping external partnerships with the most advanced AI players will help it participate in the market.

“Apple is doing partnerships instead of having to reinvent the wheel," said Trip Miller, managing partner at Gullane Capital Partners, an Apple shareholder. “They’ve already got the platform and the user base that wants to consume this revolutionary technology."

Apple already announced many of its new AI features at its June developer conference. Apple Intelligence is the company’s system for infusing generative AI capabilities throughout every app on the iPhone.

The new AI system—which will be compatible with the latest phones and the previous generation iPhone 15 Pro—features an improved Siri voice assistant and the ability to create custom emojis and generate text messages.

With Apple Intelligence, Apple is also joining up with AI startup OpenAI—which is helmed by CEO Sam Altman—to embed ChatGPT, which it sees as the current leader in generative artificial intelligence. The iPhone maker plans to join up with other AI developers. Apple is currently in talks to invest in OpenAI, The Wall Street Journal recently reported.

Many of Apple’s new AI capabilities won’t be available with the launch of the phones, and some of the flashier features won’t be available until an unspecified time next year. Initially, English is expected to be the only language in which the new capabilities will be offered. Those limitations and delays could further hinder any potential word-of-mouth excitement for the new AI features.

The company has yet to announce an AI partner in China, one of its largest markets and an area where sales have stagnated as it faced new competition from homegrown smartphone brands.

Apple’s last big iPhone hit was in 2021, when sales rose 39% compared with the prior year. Sales have fallen in the past two quarters compared with the same period a year earlier, and revenue fell by more than 2% in the 12 months that ended in September 2023, its most recent fiscal year.

The 2021 sales cycle was propelled by promotions and upgrade subsidies from wireless carriers. Those companies helped pay for new, speedier 5G phones to land new users or retain existing ones after spending billions on new network infrastructure upgrades.

Carriers play a huge role in new phone purchases in the U.S., accounting for around three-quarters of all new iPhones sales in the country, according to Consumer Intelligence Research Partners. While deals for upgrades are still available, some iPhone customers have delayed upgrades in recent years, when new-generation iPhones had less-significant redesigns or feature additions.

“People are holding on to their phones for longer and longer periods of time," said Michael Levin, co-founder of Consumer Intelligence Research Partners. “Apple is swimming upstream that way."

Some analysts expect a stronger return to iPhone growth to happen in the following iPhone 17 generation, where a new thinner phone design is expected along with an updated camera design. More consumers might be willing to embrace AI features by then as well, analysts said.

Write to Aaron Tilley at aaron.tilley@wsj.com