Apple’s Big iPhone Could Defuse the Samsung Threat

Apple (NASDAQ: AAPL  ) wasn't the first to build a smaller tablet, but when it finally released its iPad Mini, it was an overnight hit. Unfortunately due to a lower-than-corporate-average gross margin on these devices, Apple's overall gross margin took a hit -- and stopped Apple's monstrous bull-run right in its tracks.

That being said, there is an important lesson to be taken away from the iPad Mini launch, and it's a simple one: when Apple does something, it does it better than anybody else and sells a lot of that new product. The same principle is very likely to apply to Apple's rumored "big" iPhone, which could turn the tide against Samsung's (NASDAQOTH: SSNLF  ) high-end smartphone efforts and, at the same time, solve Apple's China problem.

Apple still has a China problem
It is very likely that many would-be iPhone buyers have been buying competing "phablet" products simply because Apple doesn't have a hat in the ring today. While the smaller iPhone is well-loved by many users, there are those who simply prefer a bigger phone. Here in the United States, LG, Samsung, HTC, Nokia, and Motorola serve those customers looking for larger phones. Samsung has the largest marketing budget by far and tends to pack a lot of whiz-bang features into its devices, so it snatches up the majority of the market.

The bigger issue is overseas. While Apple's market share in the U.S. is quite high, the same can't be said for, say, China -- one of the largest global markets for smartphones. Here, Samsung is the clear leader with the likes of Lenovo, Coolpad, ZTE, and Huawei on Samsung's tail. Apple is struggling to breach the 5% share mark in China. This is a problem that Tim Cook and his team absolutely need to address as soon as possible.

The big iPhone could kill two birds with one stone
There is little doubt in this Fool's mind that a larger iPhone would allow Apple to capture a non-trivial part of Samsung's high-end smartphone share in the U.S., which makes next year's iPhone launch particularly important. However, the bigger iPhone is probably going to be more instrumental in winning over share overseas, particularly in the Asia-Pacific region where larger phones are what's in.

Apple's ultimate goal shouldn't be to compete on price -- that's a race to the bottom as far as the bottom line goes, and nobody's going to want a crazy top-line growth story with a flat or lower bottom line. What Apple needs to do, however, is to lock down the portions of the high-end handset market that it doesn't already own.

China Mobile deal could really help
It seems that the Apple-China Mobile (NYSE: CHL  ) deal is always just on the verge of happening with each iPhone release -- and yet it still hasn't materialized. China Mobile has a subscriber base of about 700 million users. To put this in perspective, Apple's current subsidy deals with China Unicom and China Telecom combined only give it exposure to about 35% of the Chinese subscriber base. A deal with China Mobile could seriously amp up Apple's top and bottom lines.

It seems likely that if Apple expands its iPhone lineup with a larger phone -- perhaps an iPhone Air? -- and signs a subsidy agreement with China Mobile early in 2014, then all bets are off with respect to current Street estimates. The 7.70% top-line growth expected in 2014 could simply prove to be too low, and the shares would have substantial upside from current levels. Although nothing is certain when it comes to predicting consumer tastes, it's tough to ignore how powerful Apple's brand and products are.

This could defuse the Samsung threat
A larger iPhone is probably enough to make things difficult for Samsung at the high end across the world. But such a phone coupled with a China Mobile deal would help secure the high end while Apple attacks the mainstream segments with iPhone 5c. That could not only do great things for Apple investors, but could lay to rest many of the worries that Samsung will eat Apple's lunch. In this case, Apple would likely be rewarded with a meaningfully higher multiple. 

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Read/Post Comments (8) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 20, 2013, at 10:53 AM, DanManners wrote:

    You know in baseball when they say "Throw the bum out"? Reminds me of Tim Cook. How the heck could a top CEO let the following happen.

    1. No big phone. This guy is an idiot. How the heck can he not have a big phone? You know why? He is always supply constrained even with 1 phone. You would bet every thing that next year when the next phone comes out it will be supply constrained. Yet their sales and earnings will drop.

    2. No China Mobile Deal ever. Never ever

    3. Always next year.

    4. No tv, watch, etc etc.

    5. Always problems. Maps, Sensor, Burnin, Colors.

    6. He hates shareholders

    I could go on. Mr. Casey at the bat is doing what he does best. Seeing the stock down. Now if the mkt tanks Apple will lead the way. Doesnt go up with the market but it sure the heck will go down with it and go down a much greater percentage. Back to 385. Mark this post.

  • Report this Comment On November 20, 2013, at 12:53 PM, vernr75 wrote:

    Don't kid yourself. Apple has declared itself a high priced device producer. That has inevitable consequences as the market becomes global, with irreversible market share decline being just one of them.

    A larger iPhone screen will only help Apple reduce iPhone abandonment in a few Western countries where iPhone usage is fairly high and the high end smartphone landscape is saturated. But it will have no effect whatsoever in more than 200 countries including China where the iPhone's extreme price, not its small screen size, is the reason why the vast majority of today's smartphone buyers are ignoring it. The iPhone was losing market share long before there was such a thing as a phablet, so stop pretending that their market share woes have anything to do with that. The iPhone gets its user base mainly from places where it is a $0 - $200 device after subsidy...and that's primarily the US market. Samsung now gets its market share mostly from the more than 200 countries where subsidies for phones practically don't exist....aka the globe. China Mobile's 700+ million subscribers are among the poorest people in the world. And those among them who can afford an iPhone already have one. Who did you think the Chinese iPhone black market was supplying all this time?

    Apple's fate is that of any company who dares to only sell high priced smartphones in today's maturing smartphone environment. It is part of the natural order of things that a high priced device will reach much lower usage plateau, shrink in relevance among global consumers and remain part of a niche category that most consumers driving growth in the market will ignore once the market is mature. Apple either has to accept this, make their billions from their geographically limited ecosystem of users, hide their taxable billions offshore from the tax collectors and realize that iOS is not going to be globally important in the future because it will lack significant market share in over 200 countries...or they can drop their prices to ensure that they can somehow retain the second place spot in the market ahead of Microsoft. If they choose to continue with ultra high profit margins, their eventual third place spot and single digit market share in most countries guarantees that future foreign app development trends are going to ensure that the iPhone becomes the smartphone platform that each foreign market ignores when pushing out their local apps for local services.

  • Report this Comment On November 20, 2013, at 12:56 PM, eidsonb wrote:

    This is what I really do not understand about the cult of Apple....really no innovation at all since the original came out in 2007. Sure there have been upgrades to the base software, however for the most part its has been just rearranging the furniture on deck. Yet people stand in line to buy old technology becasue of a new whistle or its a half inch larger. Heck they will even hire homeless people to stand in line for them to get it.

    Apple is a marketing company that makes fairly good electronics.

    I really enjoy telling my Apple friends that little ole Blackberry beat apple to the punch with a phablet. Really gets them going. Gives us Crackheads something to gloat about even for a fleeting minute. And yes I still love my Z10...cant wait to get a Z30 when it comes to the states.

  • Report this Comment On November 20, 2013, at 4:51 PM, ckgod wrote:

    Let me answer the two questions of high price and lack of innovation with one question. What innovations companies like Louis Vuitton or Rolex have come out with recently to justify the high price they charge? Yes these are not tech companies but you don't understand the market if you think Apply is 100% a tech company. It's as much as a design house as a tech company even compares to those companies I mentioned.

  • Report this Comment On November 21, 2013, at 2:46 PM, johnestromjr wrote:

    "....China -- one of the largest global markets for smartphones..."

    Huh? "One of"? Can you name a larger market? I'll bet you can't. China Mobile has over 750 million subscribers.

  • Report this Comment On November 21, 2013, at 6:16 PM, iSheep101 wrote:

    SSSSOOOOOOOOO Apple is going to COPY Android by offering a bigger size screen? If Jobs was still alive it's questionable if the iPhone would have ever gone above a 3.5" one cause he was adamantly opposed to any increase in the size of the phone.

  • Report this Comment On November 22, 2013, at 9:14 AM, durask wrote:

    Apple could not release large screen iPhone because iOs is still very much resolution dependent, any big screen iphone will need to be exactly double the iPhone 5 height and width 1136 x 640 = 2272 x 1280 = which is bigger than the usual 1920 x 1080 screens on other phones, larger display means a) more expensive to make b) uses more power = less battery life. With current battery tech they should finally be able to release something a year from now. So the answer to why they did not release a large screen iphone is because they could not, not without a massive iOs overhaul.

    Of course they are not going to compete with cheap Android headsets, same as Retina Macbook does not compete with a $350 Acer or Dell. At the same time note that even though Apple's market share of laptops and desktops is small, their computers are very profitable in comparison to PC makers who are barely making ends meet.

    Speaking of TVs and watches, I hope they never touch any of that stuff. TVs are products with tiny, nearly non-existent margins and customers are used to relatively cheap TVs. A TV with Apple's profit margin will cost ridiculously high. The question to ask- what will an Apple TV give me over a nice cheap Samsung or Sony or, hey, Vizio - 70 inch for $2000, can't beat that. Why would I buy an Apple TV for twice the price? For a cute bezel?

    Watches - these days they are either expensive jewelry (think Rolex and above) or throwaway novelty gadgets. So...the question to ask about an Apple watch - will it be useful and stylish enough for a businessman to give up his Rolex - if the answer is "no" then they should not jump the shark with watches, toasters, etc.

    So, in summary

    a) good article

    b) their management seems quite competent even without Jobs. Now once they start releasing random iJunk like iToaster and iMicrowave and iDishwasher then it would be time to dump them and fast...

  • Report this Comment On November 22, 2013, at 10:45 AM, wildeweasel wrote:

    That is a lot of supposition for a rumor and " when Apple does something, it does it better than anybody else" this statement is so very wrong. Apple is done innovating so now all we can say is they make the best products. in 3-6 months every major phone manufacturer will have one phone that is better than an iphone 5s if they don't all ready have one. There will be no large screen, Apple tv, or iwatch because Apple is to scared to innovate and to proud to follow so they will just sit on a big pile of cash until Carl Icahn convinces them to give it to him.

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