Apple (AAPL +1.15%) is working on not just one but two new iPhones, both with larger screens, according to The Wall Street Journal. Other publications, notably Bloomberg and Digitimes, have made similar claims in recent months.
Although I've been a longtime critic of Apple, there's nothing negative that can be said about larger iPhones. Assuming these reports prove true, bigger iPhones should be a boon to Apple shareholders, allowing Apple to cash in on a market that's been dominated by Google (GOOG +1.37%) and Samsung (NASDAQOTH: SSNLF).
Apple could take a larger share of the market
Apple's share of the U.S. smartphone market was a bit more than 40% last quarter, according to the most recent data from Kantar Worldpanel. Worldwide, it's even less -- nearly 13%. Google's Android operating system is more popular, accounting for about half of smartphone sales in the U.S. and more than 80% across the globe.
Much of the demand for Android smartphones comes from the low end, with phones like Samsung's $100 Galaxy Rush appealing to pre-paid subscribers. But not all phones running Google's Android are cheap -- Samsung's flagship Galaxy S4 costs just as much Apple's iPhone 5s, while its Galaxy Note III is even more expensive.
There are a number of reasons why consumers might choose these high-end Android phones over Apple's handsets: Google's Android operating system is more customizable and provides far more integration with Google's services. But the most significant selling point could be their larger screens -- the Galaxy S4 has a screen size of about 5 inches, while Galaxy Note III sports a 5.7-inch screen; both phones absolutely dwarf Apple's 4-inch iPhone 5s.
Anecdotally, I've met a number of people who either have, or considered, switching over to an Android-powered phone based on nothing more than the screen size. Firsthand accounts of such Android converts consistently mention the larger screen as a key advantage.
But that advantage vanishes once Apple joins its competitors in offering larger handsets. Buyers of Samsung's expensive handsets could be enticed to switch to Apple, knowing that they won't have to sacrifice their larger screen in the process. Given the popularity of Samsung's flagships -- the company shipped 40 million Galaxy S4s in the first six months and 10 million Galaxy Note IIIs in the first two months -- Apple has a large opportunity.
Apple's gross margin should increase
At the same time, the iPhone's average selling price should be expected to increase. An unlocked version of Samsung's Galaxy Note III retails for roughly $900 at Best Buy, making it 20% more expensive than an iPhone 5s with the same amount of internal storage.
Apple could charge a similar premium for its larger iPhone -- in the process, leading to a higher average selling price. Unfortunately for Apple shareholders, the iPhone's average selling price has been falling in recent quarters as buyers have snapped up less expensive, older models. Apple's overall gross margin has declined in tandem.
A bigger, more expensive iPhone could help reverse this troubling trend, boosting both the iPhone's average selling price and Apple's overall gross margin.
Apple's most important product
Apple CEO Tim Cook has said the company plans to release several new products this year. If one of them is a phablet -- and it seems that will be the case, given the growing number of reports indicating as much -- it will emerge as Apple's most important product.
An iOS-powered phablet and a flagship iPhone with a larger screen could grow Apple's share of the smartphone market at the expense of larger competing devices powered by Android. At the same time, if Apple adopts a pricing policy similar to Samsung's, it should raise Apple's gross margin as well as the iPhone's average selling price.
