Can Apple Afford to Wait On a Larger iPhone?

There are two things that Apple (AAPL 0.27%) needs to do in order to satisfy investors craving continued iPhone growth: launch a mid-range iPhone as well as a larger iPhone. The company has waited much longer to expand the iPhone into a broader product family than it has with other devices like the iPod and iPad, and this expansion is now overdue.

Numerous reports have now speculated that while Apple is indeed planning to launch a more affordable model this year, the larger one may not see the light of day until next year. Can Apple afford to wait?

Wait for it
Yesterday, Japanese blog Macotakara reported that the mid-range iPhone made out of polycarbonate is still on track for a 2013 launch, and will retail for $330 -- the same starting price point as the iPad Mini. The polycarbonate model will likely be thicker to increase durability and save costs.

Following that report, Chinese site EMSOne separately speculated that the more affordable iPhone would launch in August alongside the iPhone 5S that will feature incremental upgrades in line with the tick-tock strategy that Apple repurposed from Intel. Only the flagship iPhone 5S is said to include compatibility with China Mobile's (CHL +0.00%) unique network and the mid-range model will not be supported on the largest wireless carrier in the world. There's notably no mention of a larger iPhone.

These rumblings corroborate with the 2013 product roadmap that KGI Securities analyst Ming-Chi Kuo laid out in January. The analyst adds that the flagship should see the inclusion of a fingerprint sensor to increase security and leverage Apple's $356 million acquisition of AuthenTec last year. Kuo has a solid track record with accuracy, so his predictions carry more weight than others'.

It just so happens that Jefferies analyst Peter Misek also released a research note in February saying that Apple has been running into manufacturing challenges in scaling up its display size from 4-inch to 4.8-inch. This is because Apple recently adopted the relatively new in-cell touch technology in its displays that integrates the touch sensors directly into the LCD panel in order to make the iPhone so thin.

Yields on the larger in-cell panels are proving to be low and Apple has extremely high quality standards. The difficulties are compounded since Apple also has very high volume requirements due to the popularity of its devices. An alternative would be to switch back to on-cell displays or other technologies with better yields. Either way, Misek similarly thinks the larger iPhone is being pushed out to 2014.

Long live the Phablet King
The phablet trend is getting stronger with no signs of abating, at least among OEMs. Not one to be shown up, Samsung's latest attempt at overcompensation is the Galaxy Note 8.0 that features an 8-inch display.

The South Korean conglomerate was at risk of losing its title as the Phablet King when Huawei unveiled its 6.1-inch Ascend Mate, topping the 5.5-inch Galaxy Note 2. Fortunately, Samsung's title is now safe, even as the Galaxy Note 8.0 brushes up on the edge of what the human body can do, to say nothing of how absurd it looks holding up an 8-inch tablet to your face to make phone calls.

Using the Galaxy Note 8.0 as a phone. Source: Android Central.

While I would never expect Apple to add phone capabilities to the iPad Mini (which is still slightly smaller than the Note 8.0), there is a growing addressable market for those wanting larger devices. If you look at sales data, though, there doesn't seem to be any imminent threat, contrary to investor perception at this stage.

In the fourth quarter, the iPhone 4S outsold the Galaxy S III by 2 million units worldwide. The Galaxy S III is more of a mainstream device with its 4.8-inch display, and the device launched in Q2 2012. If you look at the figures for Q2 2012 through Q4 2012, the 3.5-inch smartphone still outsold the larger rival flagship.

Source: Strategy Analytics.