Apple (AAPL +1.96%) might launch a smaller and cheaper iPhone 6 soon, according to Wall Street analysts.
Last February, Morgan Stanley's Katy Huberty claimed that it "makes sense" for Apple to launch a cheaper "iPhone Mini" for emerging markets. Last month, Zacks Equity Research claimed Apple could sell 10 million smaller iPhones in 2015. Meanwhile, supply chain rumors claim the Mini will sport a 4-inch display similar to the iPhone 5s and 5c, instead of a larger screen akin to the 4.7-inch iPhone 6 and 5.5-inch iPhone 6 Plus.
Apple's iPhone 6 Plus. Source: Apple.
Let's look at why Apple might launch an iPhone Mini, and why it might not make much sense at all.
Why Apple might launch an iPhone Mini
Launching an iPhone Mini would continue the size and price variation strategy Apple adopted with the iPod, iPad, and iPhone 6.
The iPhone Mini might appeal to consumers who prefer the smaller iPhone 5s and 5c, or those who think the iPhone 6 and 6 Plus are overpriced. It might help Apple compete against Google's (GOOG +3.44%) (GOOGL +3.71%) Android One and Microsoft's (MSFT +0.48%) low-end Lumia devices in emerging markets such as China, India, and Brazil, where unlocked smartphones cost as little as $100.
Strength in those areas is important, since mature markets like the U.S. are quickly becoming saturated. Research firm eMarketer estimates that U.S. smartphone usership will climb 11.4% from 2014 to 2015, to 182.6 million. By comparison, IDC expects nearly half a billion smartphones to be sold in China this year, while Brazilian smartphone shipments could soar by triple-digits to 66 million by 2017. eMarketer also forecasts that 200 million smartphones will be sold in India by 2016.
Although Apple dominates 42% of the U.S. smartphone market (per comScore), it controls much lower shares in developing and emerging markets:
|
China |
India |
Brazil | |
|
iPhone Market Share |
5% |
2% |
4%-9% |
Sources: Canalys, Economic Times, Gartner, Kantar.
That disparity suggests Apple needs cheaper smartphones to claim a piece of these large and growing markets.
Why Apple shouldn't launch an iPhone Mini
The core problem with launching a cheaper and smaller iPhone is that it would cheapen Apple's premium appeal. For example, BMW (to which Steve Jobs frequently compared Apple) doesn't need to manufacture low-end vehicles to steal market share from India's Tata Motors or China's BYD.
Apple's main rivals all lack this discipline, which values brand appeal over market share. Samsung (NASDAQOTH: SSNLF) previously launched high-end devices (the Galaxy Note 4), low-end ones (the Galaxy S Duos 3), gimmicky ones (the Note Edge), and dozens of phones in between. Sony (SNE +2.40%) and HTC (NASDAQOTH: HTCCY) employed strategies similar to Samsung's, but all three have been crushed between Apple in the high-end market and Chinese rivals including Xiaomi and Lenovo in the low-end market.
Samsung's low-end Galaxy S Duos 3. Source: Samsung.
More importantly, Samsung's scattergun strategy in the low-end market has not prevented its market share from plunging. IDC reported that Samsung controlled 23.7% of the global smartphone market in the third quarter of 2014, down from 32.2% in the prior-year quarter, due to the increased fragmentation of the Android market. Apple's market share only inched down from 12.8% to 11.7% as it launched just two new smartphones per year.
Meanwhile, demand for phablets (phones between 5.5 and 7 inches wide) is climbing. IDC forecasts global phablet shipments will soar from 175 million units in 2014 to 318 million units in 2015. Therefore, it seems counterproductive to launch a 4-inch phone when the market clearly favors larger devices.
The 5c reference point
A good reference point for the "iPhone Mini" would be the iPhone 5c. Contrary to popular belief, the 5c didn't flop. Forbes estimated Apple sold at least 24 million 5c units by last June, and the device actually has higher margins than the 5s.
The problem is that the media portrayed the 5c as a "low-end" iPhone, when it was only moderately cheaper than the 5s. If the 5c's purpose was to steal market share from cheaper Android phones, it probably failed. But if it was simply meant to be an entry-level iPhone, it succeeded.
Apple's iPhone 5c. Source: Apple.
By that measure, Zacks' prediction for sales of 10 million 4-inch iPhone Minis sold is quite conservative compared to past 5c sales. And if the Mini follows in the footsteps of the 5c, it will probably only be slightly cheaper than the iPhone 6.
What Apple investors should expect
iPhone sales accounted for over half of Apple's revenue last quarter, so expanding that line's appeal with new products would be a positive catalyst for the company.
Yet I doubt Apple will launch a cheaper iPhone for $100 to $200 unlocked, since it would tarnish the company's premium branding. It also makes no sense for Apple to launch a 4-inch device -- even an Apple-branded one -- into a phablet-dominated market.
Therefore, investors should take all the iPhone Mini buzz with a grain of salt. But considering Apple's love of "mini" devices and its prior launch of the 5c, a smaller iPhone could still be in the cards.
