Apple’s Huge iPhone Challenge

New iPhone Risks Same Old Same Old. Can the iPhone bring sexy back?

With more than 128 million iPhones sold since 2007, the device’s ubiquity has created a marketing and design challenge for Apple Inc. (Nasdaq: AAPL – News): how to wow consumers in a maturing smartphone market where many alternatives now look and feel like Apple’s gadget.

That’s a challenge Apple will have to address Tuesday, when the company is widely expected to unveil a fifth-generation iPhone.

Apple has been working on an iPhone that is thinner and lighter with an improved eight-megapixel camera but details otherwise are unclear.

Now the question is, what features will be sufficient to dazzle consumers. For years, Apple has won converts in part because of the freshness of the iPhone’s design and software capabilities that didn’t exist elsewhere.

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iphone 5

The company now faces tougher competition from smartphones using Google Inc.’s Android software, which also feature full-screen touch displays and access to thousands of apps. Some phones even out-flank the current iPhone: Motorola Mobility Holdings Inc.’s Droid Bionic has an eight-megapixel camera and access to high-speed, fourth-generation wireless networks. Android accounts for 43% of the U.S. market for smartphone operating systems, while Apple has 28%, according to Nielsen Co.

Apple still is the biggest producer of smartphone handsets.

Some surveys have suggested that consumer demand remains strong for the iPhone, which was last refreshed in June 2010. A survey by ChangeWave Research in July found that 46% of consumers planning to buy smartphones in the next 90 days would choose an iPhone. Demand could be bolstered in the U.S. by the expected agreement by Sprint Nextel Corp., the country’s third-largest mobile carrier by subscribers, to sell the handset.

Even though many consumers expect Apple to keep coming up with new designs, “there has to be a point where the expectations outrun the abilities,” said analyst Roger Kay of Endpoint Technologies Associates.

Unlike in previous years when Chief Executive Steve Jobs unveiled a new iPhone model to a big audience in downtown San Francisco, Apple this time is holding a smaller gathering at its Cupertino, Calif., headquarters. Mr. Jobs resigned as CEO in August, succeeded by Chief Operating Officer Tim Cook.

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Surprising people with design could be particularly tough for the iPhone 5.

“Industrial design is important, but in these small packages we are starting to bump into the laws of physics,” said Tim Bajarin, a consultant with Creative Strategies Inc. “You aren’t going to do anything that I would consider radical in design and still get this feature set and function.”

Software is even more important now to differentiate the iPhone, Mr. Bajarin said.

Apple in 2009 upgraded its 3G model iPhone with a 3G S model by tweaking internal components and emphasizing software enhancements. The company wanted to signal to consumers that software is an important part of the phone’s evolution, according to a person familiar with Apple’s thinking.

But Apple also faces competition in smartphone software. Apple in June previewed the capabilities of its next-generation mobile operating system, including a messaging service called iMessage and wireless storage and music syncing through the iCloud service. Similar features already are offered elsewhere, including through Research In Motion Ltd.’s Blackberry and Amazon.com Inc.’s digital music store.

One potential trick up Apple’s sleeve: software developed at Siri Inc., a start-up Apple bought last year that makes a voice-activated personal assistant, analysts said. Apple has kept mum about its plans for Siri.

Apple has conquered product fatigue before. The company’s iPods in 2001 revolutionized the way people listened to music. By 2004, when the iPod was in its third generation, Apple introduced a smaller version, the iPod Mini. In 2005 Apple reinvented the iPod again, introducing the even smaller Shuffle, with flash memory and no screen.

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Apple’s internal processes are set up to avoid incrementalism in its products, the person familiar with Apple’s thinking said. The company doesn’t interview consumers about what they want in the next generation of products; instead, Apple challenges its designers to come up with dramatic visions for what products can do.

Some designs have missed the mark. The Power Mac G4 Cube personal computer that Apple unveiled in 2001 featured an unusual square design. But many models developed cracks in their cases. Later that year, Apple said the product would be put “on ice.”

Jeremiah Warren, a 19-year-old filmmaking student in Dallas, said he plans to upgrade his iPhone as soon as the new one becomes available.

“Apple has caught me with the ‘magic’ of the phone, not the technical specs,” he said.

But some other gadget lovers will wait and see. “Most of my friends roll their eyes about the constant upgrades they feel pressured to spend money on,” said Guy Burns, a 41-year-old designer in San Francisco, who has no immediate plans to upgrade.

Write to Geoffrey A. Fowler at geoffrey.fowler@wsj.com

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