Should Apple Make A Larger iPhone?

by Ben Bajarin   |   February 11th, 2013

iphone_bigThere has been chatter of late around Apple’s plans for the iPhone. Some suggest they need to make a more affordable version of the iPhone. Notice I didn’t say cheap. The logic for a more affordable iPhone is that it will open the door to new customers, especially in emerging markets, who can’t afford the high price of an unsubsidized iPhone. There is a lot of merit to this argument and if done right it can be a healthy addition to the iPhone product line.

The other speculation as of late is that Apple could make an even larger iPhone than the current 4” iPhone 5. This would fall into the larger phone category (some call it Phablets) and would give Apple a competitive iPhone for those who desire larger screens in the 4.7-5.5” range. Apple making a larger iPhone is a newer element to the discussion but one that is worth some thought for those of us who analyze competitive trends.

No matter how you slice it, I believe the time has come for Apple to expand the current iPhone line. This would mean releasing two or three current generation devices in the same year each targeted at different audiences. Apple does this now with the Mac line where they have 11”, 13”, and 15” products in their lineup. Arguably they also do this with the iPad line offering both the 4th generation larger screen iPad and the iPad Mini. I believe it is time this same thinking comes to the iPhone.

Although I think the idea of a more affordable iPhone is compelling, if I had to choose the strategy for either the more affordable iPhone or a larger screen size version for the first product to expand the lineup, I would choose the larger iPhone.

My reason for this logic is the ecosystem. As we have learned from Android phones, focusing on the low-end lowers engagement and ecosystem investment. Those who have cost constraints simply don’t spend as much in an ecosystem. A large question looms as to whether iOS would lead those in the cost conscious category to higher engagement or ecosystem investment. But the evidence we have so far is that the lower end of the market uses these devices very different than the tiers above them. And not in ways that lead to loyalty or deeper ecosystem investment.

Ecosystem investment is important to Apple. Horace Deidu and analyst at Asymco tweeted out the following data yesterday:

Also in a tweet earlier than that one Horace estimated that gross margin for iTunes is now 15%-17%. This is why for the current growth trend and competitive strategy for Apple, focusing the iPhone lines on segments who can and will invest in the ecosystem is important.

An expanded current generation iPhone line not only gives more customers a path to Apple’s door, it gives more customers an opportunity to invest in Apple’s ecosystem.

Now turning our attention to the topic of Apple making a larger iPhone. I wrote on Friday about my experience thus far with the Galaxy Note II. I made many conclusions in that article and the primary being that larger phones, those above 5” are actually more tablet like than phone like. Yet the value of a pocketable phone/tablet is apparent. The question that needs answering is whether or not the market for larger phones (Phablets) is big enough for a company looking for mass market products—like Apple— to care about. I believe the answer to that question is yes.

Is The Market Large Enough for Large Phones?

The Galaxy Note I sold about 10 million devices world wide in 2012. They will most likely sell at least 20 million this year and most well reasoned analysis I have seen project a steady growth trend for these larger size smart phones. The reasons are simple.

For many markets people can’t afford a smart phone and a tablet. For many markets, especially emerging ones, a product that can merge the benefits of a phone and a tablet is a compelling value proposition. We all know that the phone capabilities of any device is simply just an app, but the portability or pocket-ability is important for a device that is with us 24/7. This is what makes the larger phones a legitimate category. Just how big a percentage of the overall smartphone market large phones are, is a project I am still undergoing. I believe it is larger than 10% but how much larger I am not yet sure. Even if it is only 10% of the overall growing smartphone base of the next few years, it would be in the hundreds of millions.

For more analysis on the value this form factor brings to market read my column on the Galaxy Note II.

Room to Innovate For Larger Devices

Using the Note II, and for that matter the iPad Mini, has led me to think about those form factors as unique sizes to solve challenges for one-handed operation. 5-7” devices, whether phone or tablet, are still manageable to hold and do some operation with one hand. Samsung included some software around the keyboard and keypad to make one-handed operation easy but the device is still to large for full ease of one-handed operation. I genuinely believe this form factor presents some unique opportunities for innovation.

One way could be by using voice, and in Apple’s case Siri. Our research has continually returned many of the primary use cases for Siri not just being search but also automation. Set reminder, add a calendar event, post to Facebook, send a tweet, set an alarm, etc., are all examples of common automation tasks from heavy Siri users. One simple way to address some of the issues with one-handed operation on larger screen devices will be around voice.

Another is sensors. As sensor technology evolves we will be able to embed these sensors into the bezel of the larger devices. The Galaxy Note II was almost impossible for me to reach the back button with just one hand. The back button is a key function of Android and is needed throughout much of its UI. A sensor solution could allow me to have a back button function by simply taping the side of the device. Scrolling was feasible but not ideal on the Note II. This is also a use case I found was capable with the iPad Mini but not as much with the iPad. Sensors could be embed into the sides of the device and allow a slide of the finger down the side to act as the scroll function. There are many more opportunities for sensor control than I can get into here, but I believe this is an area for innovation and improvement. By Apple innovating to solve some one-handed operation problems for a larger iPhone, they can leverage those innovations for iPad as well.

In a market the size of smartphones, staying competitive will mean offering a range of devices. The smartphone market is mature enough that it has begun to segment. An iPhone designed to serve the market that wants a larger screen, which can add to more productive and more media rich experiences in a pocketable form factor, is a good move in my opinion. One that Apple could do right and again put them years ahead of the competition.

Ben Bajarin

Ben Bajarin is a Principal Analyst at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research. He is a husband, father, gadget enthusiast, trend spotter, early adopter and hobby farmer. Full Bio
  • Naofumi

    Whereas I agree that a large phone would appeal to some users, I think there are a couple technical trends that favor smaller phones. One is that smaller phones are getting better battery life. Battery life has been the main complaint against current smartphones and huge phablets have had an advantage here. Another is that mobile optimized websites are rapidly increasing, and have font sizes that can comfortably be read without a 5-inch screen. These trends could blunt the appeal of phablets in the next year.

    I would also add that due to the lack of quality in software optimizations, Android tends to need a larger screen to be as comfortable as the iPhone, especially in web browsing. I would expect Apple to use their expertise to enable use on smaller devices and not the other way around.

  • Defendor

    As I said every time this is brought up. Without any doubt they should do a bigger phone.

    I have yet to see a solid argument against it. One handed operation is an overplayed argument. As long as you can answer the phone with one hand, that is likely fine for many and if it isn’t they can always buy a smaller phone.

    A 5″ iPhone makes much more sense than the often bandied about Apple Television.

    • benbajarin

      I agree, obviously. I think this makes much more sense than the low-end and lets Apple continue to rule the high end of the market. This is a strategy that can keep margins where they need to be.

      One interesting thing I thought about but didn’t bring up was whether or not a 5″ or so phone would cannibalize the iPad Mini. I think its possible but this device would get higher margins than the mini so its not bad if it did. My own personal observation is that since using the Note 2, I haven’t used the mini as much but use my iPad 4th gen more. I still want the tablet I just want the bigger one.

      • jfutral

        I’m not sure how you figure a phablet would have higher margins than the mini. Once you throw cellular hardware in the device the cost sky rockets. If cost is a deciding factor for people who can’t afford both a tablet and a phone (which begs the question of how do they afford a data/phone cellular package to begin with), how do margins stay within Apple’s scale? The mini is already being accused of causing Apple’s margins to drop last quarter.

        Your point in the podcast about usage maturation driving a perceived need for a larger screen was the first compelling argument I’ve heard for a phablet. Otherwise I haven’t heard anything that offered true value for a larger phone. I think that the 4 and 4s _continue_ to sell well shows that larger is not as desirable as people think, at least regarding Apple phones.

        Joe

        • benbajarin

          Phones margins and ASP is simply higher due to the carrier structure. Apple sells the iPhone at a higher cost to the carriers than the Mini and most iPad’s. Yet it cost less to make.

          • jfutral

            So, you would anticipate that the Apple phablet would be carrier subsidized and not really target emerging markets where carriers don’t subsidize devices, such as your point about low end devices?

            Joe

          • benbajarin

            It would have to be subsidized. For the low-end Apple is already starting to put payment plans in place that seem to be gaining traction. See the Allthings D piece today on their growth in India.

            So it must be subsidized or put on payment plan for emerging markets. NA, EU, etc all needs to be subsidized.

          • benbajarin

            No my point wasn’t that it needed to be cheaper to cater to emerging markets, just that those markets could more easily justify whatever the model is because they are getting a two for one, and in this case a two for one from Apple.

            The lure of this device from emerging markets is the two in one. These markets are desiring larger screens due to their using it as their primary computing device. So even if it costs the same, the point is that its more justifiable due to the value.

            The key for emerging markets is the payment plans that are going in place.

          • jfutral

            To be fair, I didn’t say “cheaper”. I just questioned your point about maintaining margins juxtaposed to your comment about affordability and how you framed affordability here:

            “For many markets people can’t afford a smart phone and a tablet. For many markets, especially emerging ones, a product that can merge the benefits of a phone and a tablet is a compelling value proposition.”

            And you did address that with payment plans. The thread is just sort of jumping back and forth so the linearity is being lost somewhat, plus how Disqus threads the responses is not always chronological.

            Joe

          • benbajarin

            I didn’t address payment plans in the article just in the thread. My point was that emerging markets are showing interest in these devices regardless of the price. Not all markets in the emerging markets are price sensitive.

        • Defendor

          iPad mini price = $329 and it has bigger screen/battery/case.

          Big iPhone price = $650+ with smaller screen/battery/case.

          Obviously there is more margin in phones.

          • jfutral

            Not so obviously if part of B. Bajarin’s platform is affordability. And that 329.00 mini does not include cellular.

            Joe

          • Defendor

            But that is the starting price. Lots of people buy in at the entry level, which lowers ASP. So anyone buying a big iPhone instead of an iPad Mini would be increasing ASP and margins.

            Not sure what your point about affordability is. If there is a big iPhone it is going to priced higher than the small iPhone without a doubt.

          • jfutral

            It wasn’t my point it was B.B.’s–people in emerging markets can’t afford both a tablet and a phone, so a convergent device should be compelling. But if it has to command a higher price point to maintain margins, either subsidized or not, on the basis of affordability that will affect demand. To keep it affordably compelling for a supposed price sensitive market is going to affect margins.

            Joe

          • Defendor

            He also said earlier in the article that in the choice between more affordable and larger, he would go with larger first.

            There is no indication that he thinks the larger phone would also be more affordable.

            I don’t think the larger phone will sell better in emerging markets, because it will almost certainly be more expensive. People in Emerging markets can buy a cheap android phone and cheap android tablet for less than the cheapest iPhone alone.

            So make no mistake, the big iPhone if it comes to be will sell primarily to affluent customers, it will command a higher price tag that the current phone and it will have high margins and good ASP. Both much better than the iPad mini.

          • jfutral

            After re-reading this, this is actually a pertinent question, especially after Cook talked about how they approached the iPod line.

            If this is branded as an iPad mini with a phone, margins are going to be affected down. I would say based on Samsung’s commercials, the Note is not really being targeted as a phone with other capabilities. Other than LeBron James (which phone did Shaq promote?), I haven’t seen any commercial using it as a phone, at least not so much that I can remember. But I don’t know how well iPad is doing, if at all, as a carrier contracted, subsidized device. That would be a split in the product line. Doable, but seemingly somewhat awkward.

            If this is branded as a larger iPhone, then margins could be safe. But this would be somewhat counter intuitive to how B. Bajarin has framed the draw of a Note-type device market, i.e., the phone part is lowered in priority more inline with or even less than the web device leg (referencing how Jobs introduced the first iPhone). The people who want a larger phone don’t want a larger phone to have a larger phone. They (from what I can tell by how this has been discussed here) want a larger screen device that is smaller than typical tablets, but has phone capabilities. That is not the iPhone in any of its branding.

            If Apple were to introduce such a product, where would it fit in their line up? iPhad, with carrier contract?

            Joe

          • steve_wildstrom

            The iPad is not sold subsidized on contract, at least not in any market that I know of.

          • jfutral

            I just very vaguely recall maybe Verizon testing a subsidized iPad in some geographic or industry market somewhere. Apparently it never caught on. Or I’m remembering all that incorrectly.

            Joe

          • steve_wildstrom

            I don’t think they’ve done it with the iPad. Carriers have experimented with subsidized on contract sales of Android tablets, but it wasn’t any more successful than subsidized netbooks and I think they have pretty much given up. The fact is no subsidy and a $20 a month data plan is a pretty attractive deal.

          • Defendor

            Not sure, why you are making the simple more complicated than it needs to be. With a ~5″ screen this will be called an iPhone, it will be subsidized like an iPhone. It is just an iPhone with a bigger screen. It isn’t complicated.

          • jfutral

            Because this is Apple. It is never that simple. That is the mistake everyone else keeps making, thinking it is simple.

            Joe

          • jfutral

            P.S. You should hear me challenging artists to think through their art making. JF

  • mhikl

    Maybe Apple should stick with the three things it does best: innovation, quality, profit and leave the low end to the others. The time for a large iPhone computer has come. A moderate, but not cheap phone for the newly aspiring tossed into the mix and Apple rules the fields that matter.

    The article by Ms Richards on ‘Sony’s Decline’ got me thinking. I bought my mum a Sony TV, in the middle eighties. Twenty-seven inch was a good sized television for the time and it came in shy of a thousand dollars. Two years later I bought one for myself and this time it was around six hundred dollars. A year later it had dropped to around three-fifty. Toshiba and all the others were catching-up and the competition was fierce.

    Apple needs to stick with what it knows best and its name is the ticket to ride out the era of pocket computers as long as innovation and its name enables. And if the smart pocket computer has a similar trail to hike as the computer had in its early and mid seasons of growth in power, speed, capability and evolving potential, Apple may be able to rule the high-end and middle profits on the draw of its admired name and proven strategies.

    Let Samsung rule the low end and massive numbers and Apple rule the hearts, dreams and profits that count.

    • benbajarin

      Yeah, that is exactly what I think. I think this approach allows Apple to continue to rule the high end and keep solid margins. Even if a device like this eats into the sales of the Mini, it will give higher margins than the mini making it a sound strategy.

    • Rich

      This is really good, especially the last sentence.

  • mhikl

    Here’s a crazy thought. What if a Dick Tracy like wristwatch phone, tying into a phablet somehow works as some sort of ‘symbiotic entity’. I could never figure out why Apple dropped the little iPod that could pose as a watch. Maybe a card was being removed from the table (and view).

  • FalKirk

    “The logic for a more affordable iPhone is that it will open the door to new customers, especially in emerging markets…”

    It is a mistake to garner new customers just for the sake of getting new customers. The goal, as always, is to make more profit.

    Apple’s ecosystem is self-sustaining. They have over 500 million iOS devices on the market and every aspect of their platform (developer payments, developer app creation, consumer app, content and advertising spending) are all strong.

    There’s nothing wrong with increasing market share and accepting lower margins if it leads to higher profits. But to sacrifice profits on the alter of market share is as foolish as killing the golden goose – and just as counterproductive.

    • jfutral

      Never mind that no one else doesn’t seem to be making a defensive go of the low end. If Samsung is doing well there, I have no doubt it is their high-end that is subsidizing the low-end.

      Joe

      • mhikl

        Exactly, Joe. A perk in the flavour of a lesser profit iPhone is the ecosystem draw. Once in, more likely to stay and the next step up might further the interest with that first nibble taken. It wouldn’t have to have all the Apple blossoms. iTunes, some apps and the Apple brand might be enough, eh?

        As well, bruising FacsimileSam’s high-end might be one powerful squeeze to the gonads of the beast.

        • jfutral

          I think B. Bajarin’s point about low engagement in the low end is well made, though. I agree that there isn’t much compelling to compete in that space. Besides, just because all I could afford at one time was a Chevette, didn’t mean I didn’t want a better, more expensive car and immediately made the jump when I could afford it. Or, in another industry, just because all I could afford was a Mr. Coffee drip coffee maker at one time didn’t mean I didn’t want nor would buy a Technivorm when I could. Sometimes we buy something to get us by until we get what we want. But what I don’t want is a compromised product. Cadillac tried that once and it didn’t work well for them. They didn’t just suffer in the low end, it hurt them overall.

          Joe

          • mhikl

            Good points all;
            Anecdotal: I taught in Sarawak early eighties and one of my students from a longhouse wanted me to pick him up a cassette player ?? and I got him an inexpensive rugged little box that played music pretty well; but he was disappointed. The slim line Sony was out and he would have preferred that. He had scraped and saved. How many such characters might there be in emerging markets?

    • Defendor

      I think that is a point he already makes when he wrote:

      “focusing on the low-end lowers engagement and ecosystem investment.”

      on his way to explaining why he would prefer a bigger phone over a lower cost one.

      This is a Pro Big iPhone article, not a Pro Cheap iPhone article.

      Are there really any solid anti-Big iPhone arguments?

      • jfutral

        I would prefer to hear solid pro arguments. Ben has done the best out of all I’ve read so far. But I’m still unconvinced it is a solid market for Apple to pursue. But what do I know? I don’t have to make money making or selling them.

        Joe

        • Defendor

          We have Samsung Galaxy Note sales reports, from various sources. Most companies are afraid to report sales. But Samsung was reporting 5 millions sales back in November for the G-Note II alone.

          Also factor in that Samsungs flagship mainstream phone is still 4.8″, and that sells in the 10′s of millions.

          I doubt Apple would challenge anyone for the biggest phone. But 4.8″ to 5.5″ has a very healthy market and Apple would be likely to come in closer to 5″. There is a strong market there.

          What I have beyond that is my own gut and anecdotes from friends. None of them want a new phone smaller than 4.5″ again. They are buying Samsung GIII for the 4.8″ screen. Mind you they are kind of Anti-Apple, but still I have no argument against 5″ screen phones that I think plausible.

          They aren’t for everyone, but they are for a significant chunk of the market. When Apple designed the first iPhone, they didn’t even envision allowing it to run 3rd party applications. Thus use as a phone was primary.

          Now these are really pocket computers and some people hardly ever use them for voice. As a pocket computer the big screen is what many want.

          There is a Market. I refer not just the Galaxy note 5.5″ but things like the 4.8″ Samsung GIII which is AFAIK, the best selling non iPhone, smartphone on the market.

          Not only is there a market, but it is at the premium “superphone” end of the market. Apple should not simply give that market to the competition as a gift.

      • FalKirk

        “Are there really any solid anti-Big iPhone arguments?” – defendor

        Traditional arguments against a different form factor would be better production, easier marketing, the fact that Apple is already selling product near capacity and Apple’s philosophy of only releasing products that Apple feels truly meet the needs of the majority of their customers.

        • Rich

          I like those arguments. They seem right.

          I think a company like Apple needs to be wary of *trying to grab too much of the market.* I’ve seen greed destroy quality countless times.

  • jfutral

    I’m curious where the 10 million Note I figure comes from? Did Samsung release real numbers finally?

    And I am not convinced it is driven by costs, i.e. someone not able to afford both a tablet and a phone. There isn’t anything cheap about a cellular data/phone plan in any country. I could be convinced it is driven by convenience and probably a personal understanding of use leading to experimenting—the thought going something like this “I don’t use it as a phone as much as I use it for web/social media/media stuff, but I need a phone occasionally so I can deal with the awkward phone size, so let’s see how this goes”. In that case having something more phone oriented is more a waste than unaffordable.

    So then the question becomes is this a sustainable market or is it simply curiosity?

    Joe

    • benbajarin

      the 10 million comes from credible estimates I have seen from supply chain. I also have seen how well its doing from a carrier standpoint to know its on a strong growth trend.

      • jfutral

        How many other devices are in that segment? Are they seeing similar demand? Or is this a Samsung only phenomenon at this point?

        Joe

        • benbajarin

          Samsung is the only one with a device on the market in that size. But I have a sense others like HTC, etc, are going in that direction. Huwaei’s is 6.3 but that is too big and not yet in the market.

  • Dan

    Fine as long as the apps look fine blown up. If apps are going to need rewritten or whatever then people might as well get an Android and join that Fragmentation.

  • boristhefrog

    Tend to agree…. low priced iPhone’s don’t seen to be the way forward unless you are also taking away functionality aka the cheaper vs more expensive iPods….

    Be interested on your thoughts about how Apple is tackling India with what appears to be a different business model to other parts of the world… Typical Apple… learn the market… don’t rush… see how others are doing it…. find new out how to make it work and make $$…. Then pounce!

  • Jun Hyeon Mun

    I can understand your points very clearly… I see where you are coming from. However, the most important aspect of a larger iPhone is forgotten. The ultimate question is this: can a larger iPhone be a great iPhone? I am pretty sure Apple has considered larger screen sizes since a long time ago… There are obviously compromises to be made. It’s not just about maintaining market share and all that… I have no idea why so many people still have not realised that Apple prioritises making great products over anything else.