Pondering Apple’s Big Day

Ben Bajarin / September 9th, 2013

As with all Apple events I have attended, which is every one going back to the launch of the iPod, there are many intriguing questions leading up to the event. Many have been speculating and analyzing every angle possible about what may or may not be announced tomorrow. I’d prefer to leave the speculating to others and focus my efforts on analyzing the impact at large of what does get announced once we have the whole story. That being said there is something in particular that I find interesting about tomorrow’s announcements.

The interest doesn’t seem to be about something ground breaking but something ground gaining

Apple’s Next Big Thing

What strikes me as fascinating is that everyone is making noise not about speculation of some new “innovation” but rather a less expensive and more affordable iPhone. The interest doesn’t seem to be about something ground breaking but something ground gaining. Apple’s next big thing is actually about Apple’s next big market.

I’ve been explaining to many in both our industry presentations and also in my writing that we can not get lost with where we are in the adoption cycle for products like smart phones and tablets. Moves companies make should be focused on driving adoption and addressing market needs. More often than not, the strategy behind this isn’t ground breaking innovation but practical evolution in order to address market needs. There is in fact, the danger of over innovating and thus over-serving the market with where we are at currently in the cycle.

That is not to say we won’t see some innovative things designed to move the market forward. I have speculated that I believe Apple to move the market forward and take a leadership position with regards to security. But whatever is released that is innovative, I doubt will over-serve the market needs. Apple has a tendency to be very calculated in the timing of the market development and readiness to adopt the innovations they bring to market.

Perhaps there will be a few surprises, but perhaps there will not. Whatever is announced should be analyzed within the scope of this question: does this move Apple’s smartphone business forward to address the needs of the global smartphone consumer market. The big deal about tomorrow will be about the ways Apple is addressing the big market.

So What About Big Phones?

I thought Samsung’s proclamation that they have sold 38 million Notes (I and II) in total worldwide was interesting timing. No leaks or real hard speculation has led anyone to think Apple will release a larger screen iPhone at tomorrow’s event. So it seems as though Samsung wants to get some press that hopefully sticks in people’s heads that Samsung has a large screen phone and is selling millions of them and Apple does not. Especially, in light of the fact that the overwhelming majority of those 38 million Note sales have been outside of the US. Large phones, some call them phablets, do well outside of the US but over the next 2-3 years it is doubtful that they ever get about 10% of the overall market in annual sales. What does have the largest part of the market are lower cost phones. Let’s keep that in mind.

So many interesting questions that I will enjoy analyzing post event. The Daily Tech.pinion will be delayed in so that we can focus on analyzing all the news from the day. There will also be a ton of extra content and analysis on Apple this week for Tech.pinions Insiders our subscription service for those who desire more weekly content and analysis from our team. I encourage you to check it out if you haven’t already. And of course follow the team on Twitter for live remarks of the event.

Ben Bajarin @benbajarin
Tim Bajarin @Bajarin
Steve Wildstrom @swildstrom

Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research 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 and he is responsible for studying over 30 countries. Full Bio
  • James King

    I think it is interesting that there still seems to be some underestimation of the “converged” device that is the “phablet” (phone/tablet). It’s one of the reasons I think hybrid and convertible PCs have legs… when done right, it presents a better value proposition than having two devices. The key is finding the right sweet spot re: size; it has to be small enough to be convenient as a phone yet large enough to be useful as a tablet. Apple has an incentive to build a phablet because it could stem the effect of the cannibalization that the iPad mini has had on the big iPad; an iPhablet could command the types of margins Apple normally seeks.

    When I read rumors that Apple is experimenting with larger phone sizes, I don’t read it as being intimidated by Android in any way. The iPad mini is a conundrum that Apple is probably trying very hard to solve. The most difficult part is that Apple has to solve this problem without seeming as if it is copying its competitors. I wouldn’t be surprised if an iPhablet showed up Tuesday. I’m not betting on it, but it would make sense.

    • def4

      What does an iPhablet do much better than both an iPhone AND an iPad?

      • James King

        Cost less 🙂

        • def4

          That’s an argument for Apple to not make one. 😉
          I didn’t mean compared to both devices carried simultaneously.

          Watch the beginning of the first iPad keynote and listen carefully to the test for the relevance of a new category positioned between existing ones.

          • James King

            Considering how many Galaxy Notes are selling, Apple is clearly losing a class of consumers who would rather have or can only afford one versatile device as opposed to two more specific devices.

            Also consider that the iPad mini is doing a number on the big iPad when it comes to profit margin. Apple has to find a way to justify selling a smaller device at the same premium it sells the larger device if it doesn’t want too much contraction in its profit margins. Making a phablet is the logical step. Apple could create a pretty compelling solution using older components and less materials. If Apple packaged hand-writing and/or drawing functionality as a “Newton” app on a Newton-branded phablet, it pretty much sells itself.

            That being said, I highly doubt this is the way Apple will go. If it introduces something new, it will probably be something great that no one considered but will seem pretty obvious in hindsight.

          • def4

            Considering how many netbooks were selling, Apple was clearly losing a class of consumers […] who would rather have a poor experience.

            Apple doesn’t make products to make money. Apple doesn’t design products to maximize margins. That’s Microsoft.

            Forget the money argument. It’s irrelevant. iPhablet will come if and only if it is better at significant daily tasks.

            Read the interview Jony Ive gave and trust that he said the truth.
            Apple works very hard to make great products. Great products competently built, distributed and marketed can command high margins, sell in large volumes and yield massive profits.

            Class dismissed.

          • James King

            1) Every time, Apple sells an iPad mini, it loses money relative to selling a big iPad. Apple sales weren’t being cannibalized by netbooks, Apple probably made more profit on one MacBook than PC OEMs made selling 10 netbooks. Apples and oranges (pun intended).

            2) I guess it is a coincidence that Apple is the most profitable hardware maker in tech. Don’t confuse marketing with business.

            3) What Apple won’t do is create a COMPROMISED experience to make
            money. That has nothing to do with creating new products that maximize its profits provided the products are actually GOOD.

            You seem to be engaging in a non sequitur fallacy: phablet =/= “good product.”

            Apple could make a GREAT phablet. There is absolutely nothing inherently wrong with the product class.

            4) Read the numerous interviews given by Steve Jobs stating Apple wouldn’t create a particular class of product and then DID.

            5) If Apple were interested simply in creating great products, why not
            sell them at cost? Didn’t you just state that “Apple doesn’t design
            products to maximize margins”? Here’s the correction:

            Apple doesn’t design MEDIOCRE products to maximize margins.

            I’m sure that if Apple designed a phablet, it would be fantastic.

            5) Too bad class is dismissed. I think you still have a lot to learn.

          • def4

            Don’t they still teach basic economics in high school any more?
            Go read about the price elasticity of demand to understand why Apple gains from iPad mini.

            I asked for clear specific reasons for which iPhablet would be great. Apple doesn’t waste time, energy and effort on “not bad”.

            Class is dismissed because you never ****ing listen. You just like to argue and repeat the same poorly supported ideas.

          • James King

            You:

            “Apple doesn’t make products to make money. Apple doesn’t design products to maximize margins. That’s Microsoft.” – def4

            Now you want to wave around “price elasticity” as some catch-all argument. By all means DO provide the mathematics for your argument.

            “Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis.” – from definition of “price elasticity of demand” – Wikipedia

            PED isn’t a factor that can be determined with absolute accuracy ahead of the release of a product because you can’t know absolute demand for a product until you attempt to sell it for a given price.

            In other words, your statement presents as intelligent but it is really bunk. Even with historical data, there was no way for Apple to know if its pricing for the iPad mini would be effective until it actually attempted to sell it.

            “In most situations, revenue-maximizing prices are not profit-maximizing prices.”- from definition of “price elasticity of demand” – Wikipedia

            Unless you can show me the math that shows the iPad mini covering the difference in profits lost by the contraction of revenues and profits of the larger iPad, your argument is moot.

            As for “clear, specific reasons” why an Apple phablet would be “great,” your ACTUAL question was:

            “What does an iPhablet do much better than both an iPhone AND an iPad?” – def4

            My answer: “Cost less.”

            Question asked, question answered.

            I’m going to reiterate for you: I am not SPECIFICALLY lobbying for an Apple tablet, only that the creation of such a device makes sense. The people who are buying Galaxy Notes generally are neither buying iPhones NOR iPads. They are purchasing a converged device. Apple is making ZERO percent of the revenue from this market because it doesn’t have a competing product. There would be little correlation of lost iPhone or iPad sales in relation to iPhablet sales because there is no evidence that Apple can or will sell an iPhone or iPad to people who desire converged devices. The only way Apple runs a risk is if it has sales data that shows that a very large portion of its customers own BOTH an iPhone and iPad and that sales of an iPhablet would further cannibalize its profit margins.

            Do YOU have that data?

            As for “****ing listening,” your entire position is a strawman argument.

            School’s back in session. As I stated before, you have a lot to learn.

          • def4

            I already knew you were an entitled little brat. There was no need for you to spend so much time and energy to illustrate that point.
            You are demanding me to educate you for free by loudly flaunting your ignorance and challenging established theory with irrelevant points.

            It is similar to the climate change denier stance of using simplistic facts and ideas to combat an argument they are not informed enough to understand let alone challange.

            A toughening of the tone is not a strawman.
            I have a lot to learn indeed. Not from you, but from handling people like you effectively.

          • DarwinPhish

            “Every time, Apple sells an iPad mini, it loses money relative to selling a big iPad.”

            This is very likely false, or at the very lease, unprovable. You can not assume every iPad mini sale would have been a fuill-sized iPad sale if the mini were not available. The real issue is whether Apple’s total revenue and profits from iPads has gone up since the launch of the mini, something which is pretty easy to see. The mini is growing the market.

          • James King

            It’s very much provable.

            If I sell 100 of an item with a 35% profit margin, what is my overall profit margin?

            35%

            Now if I sell 40 of an item with a profit margin of 35% and 60 of an item for 30%, what is my profit margin?

            LESS than 35% (32.5% to be exact)

            It doesn’t matter how many units are sold or what the overall revenue or profit is. The margin will always be less than the initial margin of 35%.

            Now, if you want to increase your overall MARGIN, it’s simple: increase the margin on either item. But what if the market doesn’t support that strategy? Then you can introduce a new item with a margin higher than 35% or attempt to cannibalize one of the items with a higher margin product.
            My premise was that an iPhablet would be a sensible move as it is likely it could be offered at a higher premium than an iPad mini because it would be a high-end mobile phone with tablet capability. The BoM on an iPhablet likely would be that much more than an iPad mini and it could be priced at a high premium like most high-end mobile phones.

            It’s simple mathematics. Don’t know why it became controversial.

          • DarwinPhish

            Re-read everything you wrote and hopefully you will see your error: you are assuming customers are going to buy an iPad mini or a regular iPad or your proposed iPhablet. The problem is some people just want a tablet or just want a phone. Sure, Apple would rather sell the more expensive/more profitable device, that is obvious. But selling a less expensive, less profitable device is better than selling no device at all.

            Also, you may want to check your math.

          • James King

            Ummm… yeah… I’ll do that. /s

    • Herding_sheep

      I think Bill Gates himself said it best (ironically enough). He predicted we would have an assortment of different sized devices, each one suitable for their own purposes, rather than a one-size-fits-all. Each device would do their own functions better than the other.

      Apple seems to be the only one giving this any thought. I’m not saying they won’t eventually increase the display (again), but not tomorrow.

      If they were going to, I’m sure it would have been leaked (seeing as everything else already did). But that’s besides the point. Apple isn’t going to flood the market at once. We have a new mid-range iPhone, and a new high-end iPhone 5S. That’s enough for one event. Any more, and it goes against all of Apples principals. There would be an abundance of choice for iPhone owners, which can lead to buyer confusion (which one should I get), which eventually could lead to buyers remorse (dang it I knew I should have gotten X over Y). Apple doesn’t do things like that.

    • DarwinPhish

      I don’t think the success of the Note and other phablets is because they allow users to replace one device with two. It could just be some people like have a larger phone. The older I get and the worse my eyesight gets, the more I want a bigger phone! Apple will one day release a much larger sized phone. When they do so, there will be a video of Jony Ive explaining how they made a phone optimized for two handed use.

      Apple is not going to relaunch the Newton brand nor is it going to launch something that uses a stylus. The more likely scenario is that they release a 6″ iPod Touch.

      • James King

        Just spitballing on the Newton stuff. I’d love to see it but I don’t actually think it is going to happen.

  • Defendor

    It isn’t just the Galaxy Note type market that Apple is missing the boat on. That is a significant niche, but it is still a niche.

    The standard Galaxy S4 might be the best selling Android phone out there and it has a 5″ screen. That is a mainstream sized market.

    Combine the sales of all the >4.7″ Android top tier phones and Apple is simply giving away a huge swath of the market uncontested.

    Rolling around various forums after the announcement, by far the biggest reason (nearly the only stated reason) I saw for people not getting an iPhone was screen size. Almost everyone wanted a 4.5″+ sized screen.

    Apple should do a 5″ model. That would likely cover the majority of Big screen buyers.

    Apple is never going to cover a dozen different sizes like the competition, but they should easily be able to handle TWO.

    With a 4″ and a 5″ phone, that will likely satisfactorily cover the desires of most buyers.

    Right now, they are simply giving away uncontested market share.

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