Is a New 4-Inch Apple Inc. iPhone Coming Next Year?

Rumors of an upcoming 4-inch Apple (AAPL 1.27%) iPhone hitting the shelves next year are hardly new. A subset of the iPhone customer base simply prefers the smaller 4-inch form factor, which remains ideal for one-handed use.

Today that customer base is well served by the popular, and still quite powerful, iPhone 5s. But to keep those customers upgrading, many Apple followers -- including yours truly -- believe the company should refresh the smaller iPhone alongside the newer, larger devices. According to Cowen's Timothy Arcuri (via Apple Insider), Apple plans to do just that.

Same phone, different shell?
According to Arcuri, the specifications of the new 4-inch iPhone could closely mirror those of the iPhone 5s. However, he also claimed the device might sport an industrial design very similar to that of the iPhone 6 and iPhone 6 Plus. If true, Apple would essentially be taking the iPhone 5s and putting it into a new, sleeker shell.

While I buy the premise that the new 4-inch iPhone will be a lower-end compared to the 4.7-inch iPhone 6 and 5.5-inch 6 Plus models, I'm not convinced Apple would make minimal improvements to the device specifications. If the company is really preparing a new iPhone offering, I'd expect a number of upgrades that I'll discuss below.

What does "low end" mean?
In the table below are Apple's product offerings at various price points (with a two-year contract):

Source: Apple.

Next year, many expect the iPhone 5c to be phased out with the base model of the 5s to become free with a two-year contract. However, the interesting question here is what Apple plans to sell at the $99 price point.

I'm skeptical Apple will waterfall the iPhone 6 and 6 Plus into lower price points, so a purpose-built device makes a lot of sense here. At $99 with a two-year contract, Apple still takes home a pretty penny, but the company is likely to want to keep the cost structure on this device as low as possible.

What should Apple do, then?
Keeping the new device small should keep costs down from a raw materials perspective, so going with a 4-inch screen sounds like a good plan. It would also be wise for Apple to offer a performance and specification boost from the 5s. With that in mind, the larger 2015 iPhone releases should stay at least a step or two ahead of the new offering in terms of performance and features.

It's tricky to guess what sorts of components would be included in this rumored 4-inch phone, given that it's not clear what Apple will upgrade in next year's flagship models. However, I'd be surprised if Apple just took the insides of the 5s and stuck them into a slicker chassis, as Arcuri suggested -- I expect at least some improvements.

What I do know is that Apple runs a fantastic business and will deliver a compelling product lineup, from devices that are free with contract all the way to the priciest configuration of 5.5-inch iPhone. The company isn't perfect, but it is the best in the smartphone business at delivering products that are both very profitable for the company and well loved by its customers.