Apple Inc's iPhone 6 Could Hurt Its Second-Biggest Business

Apple's bigger iPhone could result in some collateral damage.

Jun 12, 2014 at 3:03PM

Apple's (NASDAQ:AAPL) iPhone 6 is widely expected to have a larger screen. Reports from various media outlets, including The Wall Street Journal, Bloomberg, and the Nikkei have said that Apple plans to unveil a 4.7-inch iPhone 6 sometime this fall, and is likely to offer a 5.5-inch variant in the near future.

If that's the case, it could have a devastating effect on Apple's second-largest business.

IDC warns phablets are cannibalizing tablets
Late last month, research firm IDC cut its estimate for 2014 tablet sales, warning that the surging popularity of phablets -- large-screen smartphones -- was having a negative effect on the tablet market.

IDC's conclusion was largely intuitive. Noting that phablets have screens large enough to accomplish most of the tasks that make tablets useful, IDC anticipates less demand for tablets from phablet owners, a category that continues to grow, particularly in Asia.

That make sense, but there's little data to back it up, at least for now. It's possible that Asian buyers may be forsaking tablets simply because they lack adequate funds to purchase them, instead going for the more economical phablet. In time, buyers in more wealthy markets may prove to have different habits.

Apple's second-biggest business
Nevertheless, it's a possibility that can't be discounted. A consumer who purchases a 5.5-inch iPhone 6 may find that their iPad has become superfluous. In the past, they may have bought a 4-inch iPhone and an 8-inch iPad Mini, but a device in between could prove be good enough to replace both.

That's a problem for Apple, as it continues to depend on device sales. The iPad is Apple's second-largest business -- it generated roughly 16% of Apple's revenue last quarter.

The iPhone business is, of course, far more important, directly generating more than half of Apple's revenue (more if you include iTunes sales, which are largely a byproduct of iPhone ownership). Moreover, by Apple's own admission, the lack of a larger iPhone is having a negative effect on its smartphone sales growth. Sacrificing some tablet revenue to protect the iPhone appears to be the intelligent move.

Not just a big iPhone
Apple could also keep the iPad relevant by adding new features to differentiate it from the iPhone. Critics have long characterized the iPad as being but a larger iPhone -- and to some extent, that's true.

But maybe not for much longer. According to 9to5Mac, Apple plans to add split screen multitasking to iOS 8, set to launch this fall. However, the feature could be limited to just a few devices iOS -- namely, full-size iPads.

Apple has also been rumored to be developing a keyboard cover for the iPad, one that would be similar in form and function to the Surface's type cover. It's far from substantiated, but Apple has filed patents for such a device, and various analysts, including those at Evercore Partners, believe that the company plans to offer an iPad that would be more of a laptop hybrid.

A market in decline
Although it was once heralded as Apple's fastest-growing business and the future of the company, the iPad has run into significant hurdles in recent months. Last quarter, for example, sales contracted by more than 16% on an annual basis.

Analysts and investors are cheering on the potential of the iPhone 6, predicting a massive upgrade cycle that could see Apple sell a record number of new iPhones. As Apple's largest and most important business, that's great for the company as a whole, though its iPad could suffer. Unless Apple can convince owners of the larger iPhone to continue to buy its tablets, the iPad could continue to disappoint.

Leaked: Apple's next smart device (warning: it may shock you)
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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends and 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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