Will Apple Inc.’s iPhone 6 Kill the iPad?

As Apple reportedly eyes a screen-size increase (or two) with its coming iPhone 6, could this spell disaster for Apple’s iPad shipments?

Jun 2, 2014 at 3:50PM

The second half of the year is finally upon us, and it's second half that should prove transformative for tech giant Apple (NASDAQ:AAPL).

Today, Apple kicked off its World Wide Developer conference, and in the months ahead Apple is expected to release at least one entirely new product as well as refresh its current product lines to boot.

Apple Wwdc

Source: Apple

As has historically been the case, Apple is expected to overhaul the form factor for its upcoming iPhone 6. And as cacophony of rumors surrounding Apple's key financial driver have grown in the past months, the most commonly agreed upon theme is that the iPhone 6 is going to be a lot bigger than its predecessors.

As I'll enumerate below, a larger iPhone would most likely present some pretty compelling benefits for Apple's smartphone shipments. But the possible downside that could come with a larger iPhone is that Apple could inadvertently shoot its iPad shipments in the foot in doing so.

iPhone eats iPad?
According to a number of sources, Apple plans to increase the screen size of the iPhone 6 to 4.7 inches for the standard model, while also introducing a larger 5.5 inch model.

Much of the early analysis of this possible move argues that Apple could trigger a massive upgrade cycle with the new iPhone, creating as many as 15 million new iPhone sales by one analyst's arithmetic. But this larger iPhone lineup has also given rise to concerns that Apple might also cannibalize shipments of its iPad in the process.

In a recent research note, IDC cited the growth of smartphones with screen sizes around 5.5 inches, often called "phablets," are eating into tablets sales, especially for smaller tablets like Apple's iPad Mini. As IDC sees it, "[T]he rise of phablets ... are causing many people to second-guess tablet purchases as the larger screens on these phones are often adequate for tasks once reserved for tablets," and intuitively this makes sense. Why should consumers spend the money on two premium devices if they can accomplish the vast majority of their daily usage on one "tweener" device?

Like it or not, the value proposition of a larger iPhone makes perfect strategic sense for Apple, even if the end result means slightly fewer iPad Mini shipments. But this might be as bad a thing for Apple investors as the storyline might have you think. 

A blessing in disguise for Apple investors?
The key point many investors appear to be overlooking in all this is that Apple's iPhones tend to be significantly more profitable than its iPads, especially at the intersection of Apple's iPhone 5s and iPad Mini, which seem most likely to cannibalize one another.

By some estimates, the 16GB versions of Apple's iPhone 5s and iPad

Ipad Mini

Source: Apple

Mini carry almost identical bills of materials. According to research IHS, it costs Apple $198.70 for the parts and assembly required to produce the 16GB iPhone 5s and $198 to produce its iPad Mini.

But the margin profile between the two devices is absolutely gigantic. Backing out carrier subsidies, Apple charges $649.00 for its cheapest iPhone 5s, giving the smartphone an implied gross margin of about 69%. With the original wi-fi only 16GB iPad Mini, Apple charged $329, which gave the smaller tablet a gross margin in the ballpark of 40% . And even as the margin profile for the iPad Mini might have skewed somewhat with the new pricing scheme Apple charges for the more expensive iPad Mini with Retina and the now-cheaper price for the non-Retina iPad Mini, there's just no getting around the fact that selling iPhones is vastly more profitable than selling smaller iPads for Apple. 

Apple's never been afraid to cannibalize itself. Apple disrupted the iPod with the iPhone, and that's been arguably the best financial move Apple's ever made. So as Apple plots the future course of its product pipeline, investors should know that selling more iPhones at the expense of iPads could ultimately prove a boon for its shareholders, not a detriment.

Breaking down Apple's next homerun device
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Andrew Tonner owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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