Though recent rumors and leaks around the upcoming Apple (NASDAQ:AAPL) iPhone 6 have centered on the 4.7-inch model, rumors continue to persist that there is indeed a 5.5-inch model in the works and that it'll launch at some point -- probably several months -- following the 4.7-inch model. In the dark as we are about this alleged 5.5-inch iPhone 6, a research note from Cowen's Timothy Arcuri suggests that this larger iPhone could improve on the 4.7-inch model in one key way.
Two variants of the A8 processor
According to Arcuri, the 5.5-inch variant of the iPhone 6 will sport a distinct and more powerful variant of the A8 system on a chip that's slated to make its debut in the 4.7-inch iPhone 6. Though Arcuri lacked specific details (it would be surprising if detailed specifications of this processor were to leak), he did claim that the chip slated to go into the 5.5-inch iPhone would be larger than the variant in the 4.7-inch version.
This is a question of economics
Typically speaking, the cost of a chip is very directly correlated to the size of the chip. Why? Well, semiconductor products are baked onto what are known as semiconductor wafers. These wafers generally have a fixed diameter of 300 millimeters (though smaller wafer sizes are possible), and as a result, the smaller the die, the more chips a company like Apple can get per wafer.
Further, the yield of a given chip product -- that is, the percentage of the chips produced per wafer that turn out to be usable -- is dependent on die size. Why? Well, it all comes down to the notion of defect density. The idea is that a given wafer will have some number of defects on average per unit of area. With larger die sizes, more chips as a percentage of the total number of chips on the wafer will be affected, lowering the percentage of chips that come out usable.
To illustrate, look at the following images. On the top is a wafer with chips that weigh in at 12 by 12 millimeters, while on the bottom we have a wafer of identical size but with chips that come in at 10 by 10 millimeters. See the black marks? Those represent "defects" on the wafer. Any chip that is touched by a defect is unusable.
On the bottom, of the 600 chips in the wafer, eight chips are hit with defects – meaning that only 98.5% of the chips are usable. On the top, eight chips are hit with defects, but the wafer produced 410 chips, meaning 98.04% of the chips are good to go.
Now, if you suppose that the cost for the wafer is $3,200, then the implied per-chip price for the "large" chip is $3,200 divided by 402, or $7.96. For the smaller chip, the per-chip price comes out to $3,200 divided by 591, or just $5.42.
What does this all have to do with iPhone 6?
Given this discussion, the rumor from the Cowen analyst makes perfect sense. Apple is almost certainly going to price the 4.7-inch iPhone at roughly the same price points that the current 4-inch iPhone 5s comes in at, but the 5.5-inch model is likely to be more expensive -- commensurate with higher material costs.
Under the supposition that the 5.5-inch iPhone will be at least $100 more expensive than its 4.7-inch counterparts (in line with how Samsung prices its Galaxy Note series versus its Galaxy S series), Apple can afford to put in a larger, more powerful chip into its larger iPhone while keeping gross margin percentage intact. In fact, by doing so, Apple gives customers yet another reason to buy up the iPhone stack beyond just screen-size preference.
One more thing
One final thing to note is that if Apple is indeed set to release a 5.5-inch iPhone, it's likely to increase the resolution (that is, the number of pixels on the screen) of the display on the 5.5-inch version relative to the 4.7-inch model to maintain the same pixels per inch (or, in other words, the sharpness). To play the latest games at these higher resolutions, Apple will need a faster graphics processor to drive that increased pixel count without seeing a negative performance impact.
It therefore stands to reason that if Apple is going to do a separate variant of its A8 for the larger-screen iPhone, it will probably use the additional chip real estate to bolster the graphics processor.
Foolish bottom line
Though almost everything pertaining to the next-generation iPhone models is rumor and speculation, the note from Cowen makes sense in context of the economic and technological trends and factors I've discussed here. Further, if the note is correct in that Apple will be putting together a beefed-up version of the A8 for a larger iPhone, such a chip need not be restricted to a larger-screened iPhone -- it could be used in the next iPad Air with the less powerful variant used in the iPad mini with Retina Display to further differentiate the former.