Oct. 5 (Bloomberg) -- Apple Inc. this holiday season will have to prove it's what's on the inside that matters most.

With its latest iPhone 4S, Apple didn't tinker with the outside of the device, focusing instead on improving the processor, camera and software interface. The challenge will be persuading shoppers to upgrade to a new product that looks exactly like their old one.

Chief Executive Officer Tim Cook, in his first major product release since taking over for Steve Jobs, is counting on faster speed, voice recognition and the iCloud storage service to make the iPhone a success. The device, Apple's best-selling product, will face off against an army of fresh smartphones running Google Inc.'s Android, including Samsung Electronics Co.'s Galaxy S II and LG Electronics Inc.'s Thrill 4G.

Apple “didn't quite understand how revved up expectations had gotten,” said Frank Gillett, an analyst at Cambridge, Massachusetts-based Forrester Research Inc. Some users were looking for a more revolutionary iPhone 5, rather than just a faster iPhone 4, he said. Instead, “Apple is asking people to appreciate and give them credit for a highly engineered and integrated set of products and services.”

Jobs Absent

Cook also has to promote the new iPhone without as much day-to-day assistance from Jobs, whose expertise in marketing and design helped turn Apple into the world's most valuable technology company. Jobs, who switched from CEO to chairman on Aug. 24, didn't appear at the unveiling of the iPhone 4S yesterday. The 56-year-old has taken three medical leaves over the past seven years amid a battle with a rare form of cancer.

The success of the iPhone has helped Apple weather market turmoil and the resignation of Jobs, with the shares gaining 17 percent this year. Apple rose $5.75, or 1.5 percent, to $378.25 at 4 p.m. New York time on the Nasdaq Stock Market.

Apple touted the inside changes to the iPhone 4S at yesterday's event, held at its headquarters in Cupertino, California. The A5 chip will make graphics seven times speedier and deliver twice the processing power. The model will cost $199, $299 and $399, depending on features, and will be available from Sprint Nextel Corp. for the first time. Apple already had agreements with AT&T Inc. and Verizon Wireless.

Motorola Deal

“Inside, it is all new,” said Phil Schiller, a senior vice president in charge of product marketing.

At stake is leadership in the market for smartphones, which is projected to double by 2015, according to IDC. A billion of the handsets will be sold that year, the research firm estimates. While the iPhone is the world's most popular smartphone, the Android operating system is more widely used by the industry.

Google aims to bolster that position by purchasing its own mobile-phone manufacturer, Motorola Mobility Holdings Inc. A full redesign under the iPhone 5 banner, along with a revamped iPhone 4, would have given Apple more ammunition to use against Google and its Android partners.

Even so, Apple benefits from more efficient manufacturing by keeping the same body design, Gillett said.

“One thing people don't understand about Apple is they don't just change the look for the heck of it,” he said. “They think about it for a very long time.”

Camera Replacement

The iPhone 4S, available Oct. 14, will have a camera that has 60 percent more pixels and can shoot high-definition video. The device also relies on an “intelligent antenna system” that's designed to improve call quality and works with both CDMA and GSM wireless standards. Users will have up to 8 hours of talk time on one charge.

“For many customers, the iPhone 4S will be the best still camera they've ever owned, the best video camera they've ever owned, and it's with them all the time,” Schiller said.

The new voice-recognition system will turn the device into a hands-free personal assistant. The technology lets users check weather, get directions or surf the Web using speech commands. Apple already had basic voice-control abilities on the iPhone for placing a call or accessing a song.

Apple acquired a speech-recognition software company last year called Siri, which helped it develop the new features. The system relies on artificial intelligence to handle users' questions. The features, combined with the more aggressive prices, will give Apple an edge, said Andy Hargreaves, an analyst at Pacific Crest Securities in Portland, Oregon.

ICloud Release

“Siri is very unique from what I've seen and should continue to differentiate them at the high end,” he said.

The older iPhone 4 model will now cost $99, and the iPhone 3GS will be free with a wireless contract.

The company also is preparing to release iCloud, which stores pictures, music and other files on Apple's remote servers. The content can be accessed through iPads, iPhones and Macs via the Internet, and mobile devices no longer have to sync up to a computer. ICloud will debut on Oct. 12.

Voice recognition is emerging as the latest arena for Apple's rivalry with Google, which has spent years promoting speech technology. Current Google features let users transcribe voice messages to text, ask for turn-by-turn driving directions and perform Web searches based on verbal commands.

Apple's iPod, meanwhile, remains an important business, Cook said -- even as the iPhone cannibalizes some of its sales. As it prepares for the year-end shopping season, the company introduced a new $129 version of the iPod Nano and a range of iPod Touch models starting at $199.

The iPod, which made its debut 10 years ago, has reached sales of 300 million units globally.

“It took Sony 30 years to sell 220 million Walkman cassette players,” Cook said.

Source: news.businessweek