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As new iPhone surges, Apple slips

David Zuber of Switzerland was first in line at the Apple Store on Boylston Street for the debut of the new iPhones Friday.

Yoon S. Byun/Globe Staff

David Zuber of Switzerland was first in line at the Apple Store on Boylston Street for the debut of the new iPhones Friday.

Somehow, Apple Inc. did it again.

The technology giant on Friday released the latest versions of its hallmark smartphone, the iPhone 5s, which contained few advances over its predecessor, and a cheaper version, the 5c, that’s still more expensive than many rival phones.

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And yet, in Boston and cities around the world, crowds lined up outside retailers, proving that Apple still enjoys a level of customer loyalty that virtually no other company commands.

“There is an incredibly loyal bunch who at all costs must be the first to have it,” said Ramon Llamas, a research manager at IDC in Framingham. “You don’t see that happen very often in the world of consumer electronics. These are the folks who are going to get up at 5 in the morning, and they wear that with pride.”

Despite all the excitement Friday, Apple’s status as the world’s most profitable maker of smartphones is under serious threat. The iPhone is the most popular brand in the United States, with about 40 percent of the market. But globally, the iPhone is lagging badly. Phones running on the rival

Yoon S. Byun/Globe Staff

Consumers lined up for the new iPhones in Boston. With a two-year contract, the 5s costs $199 and the 5c is $99.

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Android operating system by Google Inc. hold 77 percent of the smartphone market, five times more than Apple’s 15 percent share, according to tech research company IDC.

Industry analysts say Apple’s only hope to grow its market share is to offer cheaper phones, but that would mean eroding the company’s lavish profit margins.

Moreover, Samsung Corp. and other competitors now offer products that match the technical sophistication of the iPhone. It hasn’t helped that Apple’s recent upgrades to the iPhone have been criticized as relatively minor technology tweaks, without enough new features to outpace the competition.

Apple has even become a target of mockery, as humorous TV ads from Samsung and Microsoft Corp. portray Apple products as out of date, and its customer as out of touch.

“In the last year in particular, Apple’s reputation for delivering breakthrough products has suffered,” said David Yoffie, a professor at the Harvard Business School. “I think part of the reason people are making fun of Apple is that they can get a lot broader choices, in some cases better choices, from the competition.”

The iPhone 5s, priced at $199 with a two-year service contract, includes a powerful new 64-bit processor that should run software apps more efficiently, as well as a fingerprint sensor to prevent unauthorized use of the phone, and an upgraded camera. The iPhone 5c, which costs $99 with a two-year contract, is largely identical to Apple’s previous flagship product, the iPhone 5. But the 5c features a plastic case that’s available in five colors.

Llamas predicted the iPhone 5s will sell well, but believes the lower-cost 5c may not appeal to many consumers, because it’s only $100 cheaper.

Yoffie warned Apple’s phones are still too costly to lure low-income American buyers or the rapidly growing markets of the developing world.

“Ultimately their success is going to depend on bringing out cheaper and cheaper phones,” Yoffie said. “If they don’t find a way to penetrate those markets with lower priced phones, they’re going to continue to lose market share.”

Apple makes huge profits even with a relatively small share of the market. For instance, the company earned $6.9 billion in the quarter ended June 29. But Yoffie said that if the iPhone’s market share falls far enough, software developers will produce more apps for Android devices and fewer for the iPhone, which would reduce the iPhone’s popularity even further.

Apple’s stock, which was trading above $705 a year ago, has since lost a third of its value. It closed at $467.41 Friday, falling 1 percent on the day its new phones went on sale.

Michael A. Cusumano, a professor at the Massachusetts Institute of Technology’s Sloan School of Management, said Apple must boost its investments in research and development to develop a new generation of hot products.

Despite Apple’s reputation for technical excellence, “they spend the least money on R&D, relative to their sales, of any technology company in the world,” Cusumano said.

Otherwise, he warned, Apple could end up like Microsoft — “stagnant in terms of market value for a decade or more, even if they’re making lots of money.”

Hiawatha Bray can be reached at bray@globe.com.
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