Apple Can’t Afford to Wait Until September

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We are just on the verge of the launch of Samsung's (NASDAQOTH: SSNLF  ) next generation Galaxy S5 flagship phone. The rumors are running rampant and it's hard to get a good read on exactly what this smartphone will feature or what it even looks like, but it's pretty clear that it will be a state-of-the-art design from a hardware perspective. On the software front, Samsung is still well behind Apple, but could dramatically improve its "TouchWiz" interface for the S5. At any rate, the key takeaway is that Apple (NASDAQ: AAPL  ) can't afford to wait until September to counter.

The big iPhone – sooner is better than later
It's clear that a fairly large portion of the smartphone market (no pun intended) is moving toward these larger smartphone form factors. While many users prefer the svelte 4-inch iPhone, Apple certainly has the capability to expand its iPhone product stack. Given the company's willingness to release something like the iPhone 5c to address lower price points, it stands to reason that larger phones (perhaps a 4.7-inch and a 5.5-inch as rumored) would form a pretty compelling product stack.

That being said, Apple probably needs to move quickly if it is to truly capitalize on this opportunity. Samsung's next generation Galaxy S5 is the poster child for popular, large phones, but the competition from the likes of Motorola/Lenovo, HTC, LG, and others is intensifying. Now, the obvious reason that Apple may not be so excited to pursue such phones is that it would likely take a gross margin hit, but the company really has no choice if it wants to maintain/expand share in the premium segment of the market.

Gross margin hit?
While Apple's CEO has a strong background in supply chain management, and while the company is likely to be able to squeeze the component vendors for lower prices (after all, it's Apple), there are some harsh realities from a component cost perspective that Apple is going to have to deal with, including:

  • Increased cost of a 20-nanometer applications processor (which is rumored to be built exclusively by TSMC as Samsung hits yield problems with its 20-nanometer process)
  • Larger/higher resolution display (this will hike up the display cost)
  • More RAM, particularly given how reluctant the DRAM industry is to increase capacity (to keep ASPs/margins nice and fat)

The offset, however, is that while Apple would probably take a gross margin hit on the "smaller" of the new iPhones (i.e. the 4.5-inch-4.7-inch one) since it would need to come in at roughly the same price point as the current one. However, the incremental cost adder to go from a 4.7-inch design to – say – a 5.5-inch design is likely less than the additional $100 or so that Apple would be able to charge for the base 16GB model (given the Galaxy Note 3's $299 baseline price on-contract). This could help offset a potential margin hit on the hypothetical 4.7-inch model, depending on, of course, the unit volumes Apple is able to push.

At any rate, Apple can't afford to wait
The innovation engine across the industry at large is already moving extremely quickly (even if the rest of the market is bludgeoning its margins in order to compete in this increasingly crowded market), so Apple is unlikely to be able to wait until September before it has to pretty aggressively cut prices on the iPhone 5s in order to maintain its market share at the high end.

Apple is going to need to "wow" consumers with a next generation iPhone in order to fend off the Android hordes from eating into its outsized portion of the smartphone industry's profits. There's no question that Apple can do it – it's proven itself time and again as the designer of the world's best smartphones – but the question is whether Apple would rather milk the current design for all its worth or move quickly to a next generation design more quickly.

As always, time will tell.

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Read/Post Comments (9) | Recommend This Article (8)

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 February 19, 2014, at 12:24 PM, yragsapo wrote:

    Ashraf, you are obviously a panic-monger.

  • Report this Comment On February 19, 2014, at 12:28 PM, bobbydig wrote:

    Samsung can't not afford to fail, again. The Galaxy 4s never came close to expectations and what the press called innovative features, were only gimmicks. The same is going to happen for the Galaxy 5s. It will be an iPhone look a like, but it won't be an iPhone.

    Motley Fool needs to stop thinking Apple is a one product company unlike Google.

    I think the Galaxy 5s will be the latest Android phone Samsung makes. The fact that Kit Kat is a patch and not an upgrade, Android is too far behind to compete with Apple.

  • Report this Comment On February 19, 2014, at 12:30 PM, jdmeck wrote:

    I don't agree. Apple should not rush for anyone. I prefer the best, not the fastest.

  • Report this Comment On February 19, 2014, at 12:46 PM, twolf2919 wrote:

    Blah, blah, blah....the sky is falling. What is different from last year, right before the Galaxy S4 announcement? Nothing, as far as I can tell! The S4, too, had a big screen and, arguably, better hardware than the iPhone 5 (it's not like this phenomenon of some people wanting bigger phones is new this year - that's been going on for 1-2 years!) Anyway, did iPhone sales go down the toilet as a result of the GS4 introduction? Of course not. Yes, there was a decline - a normal occurrence when the competition comes out with a new model - but nothing drastic.

    The author paints such a dire picture - with no data to back it up: are there mind-blowing new features in the S5? He doesn't know. Any mind-boggling new features in TouchWiz? No idea! The only "new" argument is some vague threat of "increased competition" from HTC, Lenovo, etc (despite the fact that their share of the high-end smartphone market is a rounding error compared to Apple's and Samsung's).

  • Report this Comment On February 19, 2014, at 3:57 PM, duuude1 wrote:

    "Apple ... can't afford to wait until September"


    Maybe you can't wait until September.

    Maybe a lot of investors, most of whom have never run a project team or a development group or a company...can't wait until September.

    But then again, most folks who have run design/development teams or companies, and who are not very good, and whose one note they can sing is "hurry hurry, launch launch, we can't wait for that..." also can't wait for September.

    Apple was always different by NOT listening to folks who can't wait, by NOT listening to wall st and to investors who are in general clueless about design and about product development and about taking the time to make the right decisions and making sure the product is baked to perfection and meanwhile damn the yapping masses outside those walls...

    I believe that Cook took those key lessons from Jobs to heart and will NOT listen to the yapping masses barking "hurry hurry...."

    So far so good...


    (better to disappoint on schedule than disappoint on performance)

  • Report this Comment On February 20, 2014, at 10:47 AM, noochy1 wrote:

    Duuude1's final comment is probably one of the best I've ever heard regarding this whole matter (hardware and software in general, not just Apple or iPhone products). Better to disappoint on schedule than disappoint on performance! Very well said. If only more tech companies hung that on their wall somewhere.

    This entire "bigger phone" thing is a little over the top anyway. Not everyone wants a phone the size of a fire hydrant.

  • Report this Comment On February 21, 2014, at 7:46 PM, cmalek wrote:

    Whether Apple waits or not is immaterial. Their era of innovation ended when Steve Jobs died. Yes, Apple will continue to sell iStuff because of inertia and just because it is from Fruitco but their won't be any new revolutionary features forthcoming from Cupertino. One of these days the inertia will run out. Fruitco needs a new visionary. Tim Cook is a bean counter, not an innovator.

  • Report this Comment On February 22, 2014, at 10:26 AM, KTrimbach wrote:

    Did you just cut and paste this article from last year? This is the same story we hear every year from the financial pundits. "Apple will be in trouble if it doesn't hurry up and ..."

    "Now, the obvious reason that Apple may not be so excited to pursue such phones is that it would likely take a gross margin hit, but the company really has no choice if it wants to maintain/expand share in the premium segment of the market."

    OMG, did you just start following Apple last week? Apple has *always* sold products at their target profit margins and could give a flying <> about what their market share is as long as they're selling.

    "Apple is going to need to "wow" consumers with a next generation iPhone in order to fend off the Android hordes from eating into its outsized portion of the smartphone industry's profits. "

    Ashraf! Get a grip! The only Android smartphone maker who's making any money is Samsung. If you'll notice, all of the Android players are also trying to develop their own operating systems as well (Tizen from Samsung, both Sony and HTC are working on their own.) Plus, the others are hedging their bets with Windows Phone and the new Firefox OS.

  • Report this Comment On February 22, 2014, at 9:09 PM, Burnedbrownie wrote:

    We can probably find an article from last year, one day before the unveiling of the S4, saying the exact same thing.

    And how did it work for Samsung? Oh right, they sold less S4s than expected, and the iPhone sold more than ever.

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Ashraf Eassa

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter:

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