The Hidden Upside to Apple's iPhone 6

Apple's current iPhone lineup. Source: Apple.

Apple (NASDAQ: AAPL  ) is likely to unveil a new, bigger iPhone in the coming months, and investors are obviously enthusiastic about it. But aside from the benefits of a faster and rumored larger-screen iPhone 6, there's also the added benefit that Apple could improve sales of its older devices when the next iPhone launches.

How to make new money from old devices
A recent article by AppleInsider pointed out the following March quarter iPhone 4S stats, determined by Charlie Wolf of Needham & Company:

  • The device made up about 25% of iPhone sales;
  • An estimated 10 million iPhone 4S units were sold;
  • 85% of iPhone 4S customers weren't previous iPhone users; and
  • The 4S contributed to the iPhone's better-than-expected March quarter.

The 4S helped boost iPhone sales in the March quarter. Source: Apple.

So why does this matter? Because the device is nearly three years old, runs a much slower processor than Apple's current offerings, and has a screen size of just 3.5 inches -- the same size of the original iPhone that launched back in 2007.

Nearly everything about the iPhone 4S' specs should make it unappealing to smartphone buyers. It's not cheap if you buy it unlocked, still coming in at $450, and there are far more powerful and feature-rich Android devices at a better price.

And that's why a new iPhone 6 could be great for Apple's lower-priced iPhones. Because when the device debuts, Apple will either drop the price of the 4S and make it even more appealing or push the current iPhone 5c -- or even the previous iPhone 5 -- into the lowest-priced slot, giving customers a bigger and better phone for the same money.

Let's think about this for a minute. Apple's small, old iPhone 4S is still selling like gangbusters and a newer, faster, and bigger screen device -- let's just say the current 5c -- is about to take its place. Add to all that the fact that the 4S doesn't even have LTE, and any device that takes its place in the iPhone lineup will. It's clearly within the realm of possibility for the 4S' replacement device to perform just as well as the 4S has, and possibly even better.

But what if it doesn't?

Still big potential for the smaller screen
Let's play devil's advocate for a moment and assume that the iPhone 5 or 5c doesn't sell as well as the 4S has for Apple, after a new and bigger iPhone launches. If that happens, or hopefully before, Apple could keep the 4S around for a while, as it did the iPhone 4 in China, to keep low-end sales going. The iPhone 4 was always one of Apple's secret sales weapons, and the 4S could be the same.

If Apple releases a (rumored) 5.5-inch and 4.7-inch iPhone, it will extend the company's reach in price points and screen size. While it's still unclear exactly which screen sizes and iPhone models Apple will release this fall, any change to a larger display should help sales at the bottom of its iPhone lineup. The iPhone 4S helped boost this past quarter's device sales, and the next model up being faster, bigger, and LTE-equipped could help do the same for Apple. 

This is much bigger than the iPhone 6
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Read/Post Comments (6) | Recommend This Article (18)

Comments from our Foolish Readers

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  • Report this Comment On May 17, 2014, at 6:02 PM, twolf2919 wrote:

    You fail to consider that, for some people, a larger and faster device isn't the end-all-be-all. Have you ever thought that *some* prefer the diminutive iPhone?

    Also ,your hardware-centric view shows when you state that there are lots of Android devices that are cheaper, with larger screens and with more features....but none of those offer access to the Apple ecosystem - maybe some iPhone 4s owners bought the device because it integrates seemlessly with their other Apple devices - and still fits into their designer bags?

    I think Apple should continue selling a 3.5" device - everyone is swooning over ever larger smartphones - and in the process forgetting that many continue to want a more pocket friendly phone.

  • Report this Comment On May 17, 2014, at 6:53 PM, vernr75 wrote:

    Sounds kind of sad, actually. After all the years of free press and all that silly online hyping of the 'latest' and 'greatest' by their loyal fan base, they can't even get the majority of the small portion of new users they draw to buy their latest model or even last year's model. Instead, it's the 3 year old museum piece that draws their tiny newbie crowd. And that becomes the phone that the ecosystem experience of most newbies is now based on...Yikes! Apple pundits boast about the weirdest things...

    The thing the author is forgetting is that Apple is trying to find ways to get users of old phone models to dump them for new ones even as they continue to sell these old phone models. Selling more devices to current iPhone users in a shorter time frame is now the only dependable way that Apple has to increases their sales year over year. The new buyers they now pull in are less than what they used to get in previous years and the trend has generally been downward. That's why their sales growth rate is decelerating annually.

    IF they expand their old phone line up by keeping the 4S, they'll have to make the next version of iOS support it. And that means that iOS users in mature Western markets will have an excuse to hang on to their old 4S phones even longer...which works against Apple's plans for these buyers. Keep the old 4S phones on sale another year and what you end up with is increasing fragmentation and a widening distortion of the iOS user experience. You'll have 64bit devices and 32bit devices. You'll have 4 different screen sizes - 2 new iPhone 6 screen sizes and 2 old screen sizes. You'll have 2 upcoming devices with 2GB and old devices still running with 1GB. You'll have even more features and apps that can't be used by all devices.

    Those extremely old devices that Apple is depending on for new users have only 8GB storage. The last iOS 7 update needed up to 3.3GB of free space just to be installed and folks who had newer 16GB devices were complaining about space issues. With no expandable memory, less than 8GB of available space and increasing numbers of updates to be installed, those new folks on Apple's low end hardware are going to have quite a unique "experience". The 16GB+ iPhone is so expensive in most countries that the majority entering the iPhone ecosystem at the current 8GB 4S price point are not going to spend more for larger capacity the next time because they just don't have that kind of money. They'll buy at the same price point if there's a next time..but that will likely only get them another 8GB device. Meanwhile, iOS updates are going to keep increasing in size and available space on ancient iPhones will go down even faster as Apple adds and fixes features used in its newer products; those new iOS features are not going to be seen by most of their new adopters but they still pay the penalty in storage.

    What I just described is the fundamental flaw in this whole idea of using increasingly outdated phones to populate the low end price points and then expecting that mess to grow user adoption.

    Low end hardware increases adoption by becoming better with time in all the important areas...not by becoming worse with time. Apple's pretend game when it come to charging premium price for dirt cheap storage memory is its emerging Achilles heel. The trend right now is for increasing use of storage memory at the low end in developing markets as data plans get cheaper and faster and hardware capabilities improve. By the end of the year, the newest low end handsets will come with at least 32GB microSD card support by default. At the top end, Samsung, Sony and even HTC are now pushing 128GB microSD storage. So Apple's playing a losing game because soon everyone everywhere is going to know that storage memory is actually cheap now and not having enough of it is going to become less tolerated globally.

  • Report this Comment On May 18, 2014, at 1:15 AM, JokerJoey wrote:

    @vernr75: Here is some bad news: Your arguments are completely without merit, and you're just eating yourself alive by obsessing over the success of iPhones both from Apple directly and from "secondary" sources. You also miss the point that Apple is not necessarily interested in the phone sales so much as it is in the entry to the Apple ecosystem which each phone opens up to each new user, which then builds further revenues for the company.

    Anyone doubting this should read the following articles which comes directly "from the horse's mouth" as an example of whist is going on in just one out of many countries:

  • Report this Comment On May 18, 2014, at 2:00 AM, MalibuWalk wrote:

    "... Apple is playing a losing game..."

    The only losers I see are all the players in the fragmented Android ecosystem! all indications are pointing to iOS attracting more and more first time buyers and a large number of Android defectors...

  • Report this Comment On May 18, 2014, at 10:44 AM, bshamblin wrote:

    The job of the 4s is to capture new iPhone buyers - and from the numbers is a great piece of Apple's strategy. It will be interesting to see what Apple will do with the 5c when it rolls out the 6. It seems to be in a pricing "no man's land". On contract: 4s free, 5s $99 so would you make the 5c $49 on contract? I guess we'll see

  • Report this Comment On May 18, 2014, at 12:33 PM, vernr75 wrote:

    @JokerJoey - Thanks for the joke link...I got quite a good laugh.

    The author of that article in the link you provided talks about the lucrative black/shadow market business of selling used iPhones at high prices into the developing world...and he makes the assumption that this will lead to record sales of the iPhone 6. Of course, 'record sales' in the iPhone world are now just a few million more than the last time, so who really cares if it's a 'record' or not when it's mostly just the same folks lining up every year? iPhone sales are now determined by iPhone user turnout just like Sunday collections at churches are determined by member turnout.

    He spent a lot of time talking about how high the resale value of the iPhone is and how much money the black market was making selling these used phones at high prices, but there's a whole bunch of data missing from the picture he's trying to paint. And that's just for starters.

    He doesn't look at smartphone adoption rates or the current levels of smartphone penetration in each of the developing markets. He doesn't look at the trends in the mobile OS usage rates over the last year to show that this used iPhone market was actually significant in size. He doesn't even provide any evidence to show that the used iPhone market can grow any further at the current price points or even maintain its current activity level in these markets in the future (more on that last point below). He doesn't notice that high iPhone resale value in the US actually raises the price of used iPhone to the point where the majority in the developing markets are still ignoring them and are buying new Androids more than ever instead.

    When you actually look at that data, it shows a completely different picture of reality on the ground in developing markets. Instead, he simply uses his focused observations in the Philippines of the iPhone black market there to make the unsupported claim that this type of activity is equal in size and importance across the entire developing world market without ever attempting to show any evidence of impact on the markets beyond the financial gains of those who import the used phones and sell them at high prices to those poor people are willing to use their smartphone as a fake status symbol. In the Philippines, the last year saw Android usage grow so much that the additional year on year growth alone was about the same size as the entire usage share of iOS in that market. A similar picture can be seen in every other developing market. That's the reality.

    The fact is that these used iPhone sales, small as they may be compared to the overall smartphone market, are actually hurting Apple more than it's helping it. While it's helping to curb the decline in iOS usage in developing markets (as can be directly observed from OS usage stats for these countries), it's hurting sales of new iOS devices by legitimate distributors (carriers) who have signed contracts with Apple for distribution rights. Apple doesn't make money from these used hardware sales and many of these devices (especially those used iPhones in China) are used jailbroken. In fact, the black market folks offer jailbreaking services too, which is why there were millions of jailbroken iPhones in use by China Mobile customers for years before China Mobile signed up with Apple late last year.

    So when a customer in a poor country chooses to buy a used iPhone from the black market to save money on the hardware cost of the same handset sold new by their local carrier, the legitimate iPhone carriers in those countries lose money and Apple loses money and risks eventually losing some of those carriers as customers if they refuse to renew their contracts. These developing market carriers are stocking new iPhones and, like everyone else who sells new iPhones, they have a contract agreement that punishes them financially if they sell below a certain predetermined quota set by Apple. The folks buying the used iPhones are not using the more expensive data plans that come bundled with new iPhones that help finance the repurchasing cost of these expensive new iPhones. Instead, they're reusing the less expensive data plans bundled with the sim cards that came with the cheaper phone plans they had before.

    Apple's not happy about this black market...and they know it can't be allowed to grow unchecked much more than it has without hurting their overseas business further. That's why they're trying as hard as possible to get more folks to choose to upgrade their iPhones by showing up at their Apple stores to perform the trade in. Are any of you guys naive enough not to have noticed that the most recent trade in scheme is now talking about destroying old iPhones under the banner of recycling? That's no environmental concern pitch; it's a strategic move against the sale of used iPhones by third parties into the developing market. With Apple now moving to take used iPhones in the Western markets out of circulation before they can get into the hands of black market dealers and putting them into the scrap heap for precious metal recycling, the used iPhone market will have limited ability to compete with carriers selling the new iPhones that Apple actually makes money from.

    That's why when I see some clueless analyst talking about using black market iPhones as a metric for predicting future iPhone 6 sales, I laugh. Clearly, he didn't get the new recycling initiative memo.

    This line in the previous post also gave me a good laugh.

    "You also miss the point that Apple is not necessarily interested in the phone sales so much as it is in the entry to the Apple ecosystem which each phone opens up to each new user, which then builds further revenues for the company."

    That's hilarious. That's stuff from an alternate universe. The average app store user spends under $50 per year on that service. The App store is effectively an online dollar store; it's just something there to keep you guys busy until the next iPhone upgrade. Apple charges $650-$850 for hardware that only costs $200 to make. That's why they have so much money to hide overseas. You don't price your devices to remain unattainable to well over 90% of the global population if what you're really trying to build and expand is use of your services. And as I pointed out in my previous post above, you don't introduce your newbies to the market by providing them with the oldest, slowest phones and the lowest amounts of storage capacity on the planet while everyone else is reshaping the storage limits at the lower end and high end. Those used phones with their aged non-removable batteries will not ever gain any real traction beyond the insignificant niche of people who just want to flash an iPhone as a fashion symbol. Stop making my sides hurt.

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Chris Neiger

Chris has covered Tech and Telecom companies for The Motley Fool since 2012. Follow him on Twitter for the latest tech stock coverage.

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