For the first few years, Apple's (NASDAQ:AAPL) iPhone product strategy was as simple as it gets: release one new model per year. To be clear, it's still simple, even as the company has released two separate models in each of the past two years. As Apple broadens its portfolio to target different market segments, the strategic considerations going forward become a little bit more complex.
Apple's move upmarket to larger phones has been anticipated for quite some time, and investors are clearly optimistic about the iPhone 6 and 6 Plus as shares continue to flirt with all-time highs. The company was able to partially resist the trend toward larger phones by "only" releasing the 4-inch iPhone 5 in 2012. It was becoming painfully obvious that 3.5-inch displays wouldn't be sufficient for much longer, especially in flagship high-end smartphones competing with Samsung Galaxies.
Not everyone wants big phones
However, the shift from 4-inch displays to 4.7-inch and 5.5-inch displays is a bit different. The market for 4-inch smartphones will likely sustain itself. The Verge's Ross Miller doesn't need a bigger iPhone. My parents just recently decided to each buy an iPhone 5s, believing that the iPhone 6 is too big for their needs. With all of that in mind, Apple now faces an interesting strategic conundrum.
Each year, Apple shifts older models to successively lower price points. This strategy is beneficial because it effectively extends the useful life of each model to 3 years or more, which is utterly unheard of in the smartphone industry. That also means Apple milks plenty of value out of all the manufacturing gear it installs to produce the devices, getting a lot of bang for its capital expenditure bucks.
Under the current trajectory, the iPhone 6 would fall to the mid-range $100 on contract price in 2015, and subsequently be free on contract in 2016. That would also theoretically include discontinuing all smaller devices at that point, and 4.7-inch displays would be the norm.
A possible alternative
Alternatively, what if Apple were to update each model for each market segment each year? Consumers in the market for 4-inch phones don't want to always be relegated to last year's specs and features. Taking this notion a step farther, Apple could even introduce 3 models per year to target each segment (4-inch, 4.7-inch, and 5.5-inch), and use the waterfall strategy within each. Seeing as how Apple is moving to two models per year, three doesn't seem entirely out of the question.
Of course, product depth has always been a key strength for Apple. The risk would be that Apple's iPhone lineup becomes bloated to the point of distraction, which is a common weakness of rival smartphone OEMs. The aforementioned strategy would eventually expand the portfolio to 9 distinct devices, up from the current 4. The last thing that Apple wants to do is spread itself too thin, but the company could strike a balance.
It could also increase Apple's capital requirements if the company needs to acquire even more manufacturing equipment. That's not to say that Apple can't afford it with its $141 billion in cash, and capital expenditures are currently less than 5% of revenue over the past four quarters.
But the benefit would be a stronger lineup within each discrete market segment, and Apple could exert its typical pricing power and extract a premium for its efforts. That might be worth the trouble.
Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool 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.