Apple's Big iPhone Is a Big Deal

Despite the fact that Apple's (NASDAQ: AAPL  ) new iPhone 5s has just been released to the world, the rumor mill (Bloomberg) is already buzzing with claims that Apple is planning to launch two larger iPhones -- one with a 4.7" screen and one with a 5.5" screen.

While Apple's move to larger iPhone models is inevitable, the company must be extremely careful about how it manages its suite of smartphone models going forward. Releasing a new, larger iPhone will help address more of the market, but there's a risk that if Apple simply kills the smaller iPhone, it may alienate a substantial number of its customers.

Notice something interesting?
When the large Android phone craze began to take hold, driven by models like the Samsung (NASDAQOTH: SSNLF  )  Galaxy series, it seemed that Apple eventually needed to get on board to keep its share in the high-end. Apparently, sales of Samsung's high-end Galaxy S4 and Galaxy Note III are sputtering, while the iPhone 5s continues to see demand that dominates supply. Sure, there's a market for larger phones, but high-end buyers have voted loudly with their wallets and have signaled that the current iPhone form factor is still a top choice.

Will Apple mess with its winning formula?
There's certainly nothing stopping Apple from introducing a whole family of iPhones to cater to a wide variety of tastes. Since Apple puts the bulk of its engineering effort into a few device launches per year, the company needs to be careful not to introduce too many variants to try to appease every little niche.

The smaller 4" iPhone should certainly be allowed to continue (as many simply prefer that form factor), but a slightly larger phone to capture more of the market would be a great move. As long as it's tastefully done and the product lineup makes sense (similarly to how the iPad Air and iPad Mini Retina are positioned), then there will be no problem.

Companies like Lenovo (NASDAQOTH: LNVGY  ) and Samsung have seen robust market share in the Asia-Pacific region, precisely because larger phones are simply the preferred form factor there. Apple can, and should, aggressively move to take share in this region. While Apple's brand isn't quite as strong there as it is in the U.S., there's very little to stop Apple from making an even more aggressive push with the right products.

How about the low end?
While it would be in Apple's best interest to cover as much of the high end as possible (since this is where much of the profitability in this space lies), there is the ever-present question of whether Apple should try to attack the low end of the market. In this Fool's humble opinion, this would be a mistake. While this would help raw market share numbers and drive incremental revenue, it's not clear how profitable such a venture would be for a company like Apple, which is well known for refusing to cut corners for the sake of cost savings.

In fact, in this space, the majority of the profits go to Samsung. While Samsung isn't an innovator in the same vein as Apple, it has a great cost structure since it can source almost any component that it wants in-house. This allows Samsung to build "good enough" phones at a great cost structure and flood the market with them. This just isn't Apple's style, nor should investors expect it to be.

Foolish bottom line
Apple expanding the iPhone family to include a larger phone to satisfy that portion of the market currently satisfied by Android would be a good move. However, replacing the current, smaller iPhone may be a mistake. A low-end iPhone, while great for market share and ecosystem lock-in, is also not a great idea since it's unclear if Apple could participate in this market and still generate meaningful profit.

Apple's past, present, and future are based on ownership of the highest end, most lucrative segments of the computing market. Management's job now is to find a way to grow sales domestically, and a good place to start would be by taking share away from the high-end Android players. After that, the company can worry about its next revenue expansion opportunity.


Read/Post Comments (7) | Recommend This Article (0)

Comments from our Foolish Readers

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  • Report this Comment On November 11, 2013, at 12:19 PM, zippero wrote:

    Ashraf, you have redeemed yourself somewhat with this article. You noted correctly that both Samsung's Galaxy S4 and Note 3 are sputtering and that Apple's pursuing the low-end would be the wrong move. But you're wrong about Apple having no strong brand power in Asia and especially China. They would buy Apple if they could afford it. And many Asian can: China is Apple's 2nd-biggest market after the U.S. after all. Not only that, with only 5% market share in China, Apple makes more revenue in China every quarter than Samsung, who is the market share leader there with 3-4 times as much market share as Apple.

  • Report this Comment On November 11, 2013, at 12:28 PM, zippero wrote:

    You also correctly noted that the high-end of the smartphone market is where the profits are. This is the 80-20 rule where 80% of a business's profits come from its top 20% generally wealthier customers.

    On a larger iPhone, it appears Apple will reduce bezels as much as possible to maintain one-handed usability, so a large-screen iPhone may not entail the sacrifice in one-handed usability you imagined.

  • Report this Comment On November 11, 2013, at 12:57 PM, twolf2919 wrote:

    You say "While Apple's move to larger iPhone models is inevitable..." - but give no evidence of why it is INEVITABLE. As a matter of fact, you give more reasons why Apple shouldn't move to a larger device than it does for why it should!

    Like the other poster, I think Apple will not move to a larger form factor in order to retain one-handed ease of operation. Rather, I see them eliminating the current bezel completely and making the device yet thinner (thus preserving the thumb's ability to reach the far end of the screen). I think this approach will let them get to 4.3 or 4.5".

  • Report this Comment On November 11, 2013, at 1:42 PM, johnestromjr wrote:

    What is with the new "buzz" word [phrase] Form Factor. Wouldn't it be easier and quicker to say "design" which is exactly what Form Factor means.

    It reminds me of all the politicos a few years back ALL discovering "gravitas" nearly simultaneously. Most of the world had seldom heard the word and suddenly it's THE word of the day/week/month. AlGore had "gravitas" but George Bush didn't.

    We've a very good language but some try to impress us with new words/phrases they invent to make us think they're smarter than they are. They aren't and "design" is far better than "form factor" and says unambiguously.

  • Report this Comment On November 11, 2013, at 2:07 PM, Mathman6577 wrote:

    Apple does not care about market share (especially in the very low end -- they are perfectly willing to let Samsung and others make junk for that market)). Tim Cook has said this a million times. They care about making a good product and profits. The iPhone is worth > $30B every year for them.

  • Report this Comment On November 11, 2013, at 3:44 PM, bknees wrote:

    All they need to do is introduce the iPhone 6 & 6G. (G for Gaming). Then they can add peripheral gaming attachments etc for a mobile phone/gaming device. Of course the G would have the 5+" screen. Voila! Problem solved!

  • Report this Comment On November 11, 2013, at 5:00 PM, CrazyDocAl wrote:

    Sorry but this sounded more like an Apple fan boy logic than sound investing advice. Of course Samsung sales are dropping off, the S5 is going to be released in a few months. I bet if you looked at iPhone 5 sales in June youw ould seen their sales dropping off as well.

    What's really telling is that the majority of 5s & 5c sales are to previous iPhone owners. That's because Apple's phone line is not attracting new customers. Apple needs a phone the same size as the competition.

    But unlike years ago Apple seams to follow the pack in important innovations. They lagged when it came to 4g LTE and now they are lagging behind with screen size. Think about this, the 5s, it's current flagship, was less than a month old when the talk about the next model, almost a year off started up. That's proof that the current line up is still lagging behind.

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