Apple’s Most Important Product of 2014

If you believe Apple's (NASDAQ: AAPL  ) management, 2014 will be a big year for the company product-wise. An Apple-made smartwatch, a big iPad, maybe even a full-featured TV set could debut at Apple stores later this year.

But while these products could all add to Apple's bottom-line, none will be as important as a larger-screen iPhone. To its detriment, Apple has ceded the phablet market to Google (NASDAQ: GOOGL  ) and Samsung (NASDAQOTH: SSNLF  ) . But based on numerous reports, Apple has its own phablet in the works -- and if it's released this year, it will quickly become Apple's most important product of 2014.

TVs and smartwatches remain unproven
Should they also go on sale in 2014, I would expect both an Apple-made smartwatch and TV set to draw more attention from both consumers and investors. Indeed, as radical new product categories, they would be far more exciting.

But how much they would affect Apple in the near term, if at all, remains completely unknown. Despite Samsung's best efforts, the smartwatch remains a niche product. Samsung said it had shipped just 800,000 Galaxy Gears (its own smartwatch) two months after its release. Samsung claimed that figure exceeded its expectations, but compared to the 20 million Galaxy S4s Samsung shipped over a comparable amount of time, it's clear that the smartwatch has not yet caught on.

Smart TV, too, is an area of intense interest for Samsung, but its smart TVs haven't exactly captivated the minds of consumers. Samsung's built-in apps offer an experience that's about the same as Apple's own set-top box or Google's Chromecast -- it serves as a gateway to apps like HBO Go and Netflix, but doesn't radically transform the TV viewing experience.

Perhaps that's why Samsung, despite being one of the world's biggest TV makers, gets about two-thirds of its profits from its mobile devices. Other companies, notably Sony, have struggled to profitably sell TVs in recent quarters.

Many investors may assume that Apple's efforts will be different; that the company will deliver transformative products that will bring iPhone-like success. Perhaps, but that's a large assumption.

The market for phablets is huge
In contrast, the market for phablets is well-established, and the potential for profitability is clearly defined. Samsung has released three Galaxy Note smartphones, each one more popular than the last. The first Galaxy Note was openly mocked by reviewers, but Samsung's most recent Galaxy Note III was favorably received and shipped 10 million units within its first two months on sale -- the Galaxy Note II took twice as long.

Google's other hardware partners have all followed Samsung's lead, with similarly sized superphones. Although Samsung's Notes are high-end handsets outside the price range of most consumers in developing economies, phablets have seen the strongest demand in Asia.

In fact, according to IDC, phablets actually outsold both tablets and laptops combined in the second quarter of last year. Virtually all of these devices run some form of Google's Android operating system.

Gross margins and ASPs
Many of these phablets are cheap devices (around $200) manufactured by Chinese companies. I doubt that Apple will release a cheap phablet -- its unwillingness to release a low-cost iPhone in 2013 suggests that it will maintain its premium pricing -- giving Google's operating system the edge in terms of raw market share.

But a high-quality Apple-made phablet on-par with Samsung's Note line should be a boon to Apple shareholders. An unlocked Galaxy Note III retails for $900 at Best Buy -- about $100 more than a Galaxy S4 with comparable storage.

Assuming Apple does something similar with its own phablet, it should help the company to raise its gross margin, and average iPhone selling price. Both figures have fallen dramatically in recent quarters, much to the detriment of Apple shareholders. In fact, on Thursday, Wells Fargo downgraded Apple shares partially on gross margin concerns.

The iPhone remains king
The iPhone remains Apple's most important product, accounting for about two-thirds of the company's profit. It's been somewhat alarming, then, to see the average iPhone price plummet from well over $650 in 2012 to just $557 last quarter. Apple's overall gross margin has been affected by other things, including the iPad Mini and lower-priced MacBooks, but has fallen alongside the iPhone's ASP, from over 47% in the second quarter of 2012, to just 37% last quarter.

I would expect a larger, more expensive iPhone to do much to reverse these trends, affecting Apple's underlying fundamentals nearly immediately. In the long-run, an Apple-made TV or smartwatch could be more consequential to the company, but going into 2014, Apple investors should anticipate Apple's phablet more-so than anything else.

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Read/Post Comments (8) | Recommend This Article (3)

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 January 04, 2014, at 10:01 AM, jdmeck wrote:

    Wrong, wrong, wrong. They do not need, nor should they make a larger screen I phone. Two many form factors will kill profits for no good reason. It's what almost killed the Mac before Jobs came back.

  • Report this Comment On January 04, 2014, at 4:19 PM, WineHouse wrote:

    I have a better idea. Market an iPad (or Mini) with full cell phone capability! Include appropriate headset with earphones + mic & answering capability (Bluetooth of course) and you've got yourself a convenient device -- ESPECIALLY if the Carrier allows you to use it as an "extension" of your regular pocket-sized iPhone -- i.e., same phone number. Especially useful if your carrier allows you to talk and surf at the same time. That should catch the attention of enterprise users for sure.

  • Report this Comment On January 04, 2014, at 6:04 PM, normgarry wrote:

    Apple's most important product is a big screened iphone!

  • Report this Comment On January 04, 2014, at 7:25 PM, djtetsu wrote:

    I remember Robin Li of Baidu saying that Tim Cook seems to understand the Chinese market and the need for larger screens.

    They are this time, copying Samsung, and they have proven and defined the needs in that space. All they need to do is do it better. 64 bit processing/finger print scanners are good ways to just crack open this jackpot.

  • Report this Comment On January 04, 2014, at 9:42 PM, VSargoor wrote:

    The dying of the PC might be inevitable, but it is a great tragedy. We are moving from powerful, multi-capability machines to these weak powerless tablets. This is another case of power being taken away from the regular folks.

    the fools however will never realize the loss.

  • Report this Comment On January 04, 2014, at 10:55 PM, Kisorchand wrote:

    Apple's arrogant management has led to its downfall by not listening to its aspiring end users where many eexpected to change its itnerfaces like high speed USB 3.0 etc not included in the phone as well as tablets and it was limited to its sync and cloud storage which is not safe and never so easy all the time. Most importantly, many expected to go for phablet style big screen for proper browsing but it didn't pay any attention to people's needs. Finally what happened, we have to buy Samsung Galaxy Note and in the end, Samsung is awefully successful now. I personally waited for a big screen from Apple but I found out Apple is not interested going big screen. Many people were frustrated simply because the price is high and costly but the screen size is so small. Idiotic Apple management doesn't understand the need of bigger screen in case of touch functions. So they were very stupid so to say . Thats why they got punished but now its a little late to follow Samsung and It will become a shame going for a phablet iPhone after critising Samsung for its copying earlier because Apple has to copy again and follow Samsung again. Its a big shame on it.

  • Report this Comment On January 05, 2014, at 10:26 AM, fwe43 wrote:

    You know what would have been innovative:

    A tablet that could run full applications (if done years ago)

    A laptop OS that is touchscreen

    A pair of glasses that can map the world

    A car that can drive itself

    etc.

    What's not innovative:

    A gold iphone

    A big screen iphone

    An ipad "pro" that is a rip off of the surface pro.

    An iwatch (boring, sorry controlling the thermostat fro my wrist is not going to change the world.)

  • Report this Comment On January 06, 2014, at 1:57 AM, ericday wrote:

    If Apple does anything remotely close to a phablet, it will be to make a high end version of the iPad Mini that's phone call capable. This will save them tons of R & D costs and still fill the desired niche.

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