My Phablet Skepticism Thesis

I have been publicly doubting the existence of the 5.5 inch iPhone for some time. I promised many on Twitter I would share my overall thesis on the category so here it is.

Starting from the data points, we know several things. In the USA, phablet sales are quite small. Our estimates have the active installed base of all Galaxy Notes in the US at under 10m units. Phablets, or smartphones with screen sizes above 5.3″, have tended to not sell well at any price point in the US market. However, the US market is not the only one that matters.

Phablets are successful in some parts of Europe but much more so in Asia, so we will focus there. You could argue Apple needs to make a 5.5″ phone primarily to serve the Asian market and you may be right. But let’s focus on the data at hand.

Here is a chart Guardian journalist Charles Arthur made of active screen size of Android device according to Google’s data.


As you can see, the vast majority of Android devices in use are not phablets. Now, it is entirely possible Google is not tracking or including China’s AOSP Android ecosystem in this chart. If they did, it could certainly bump the active use of phablets a bit higher but it would not be by much.

Another data point is IDC’s own projection of the phablet market which is, somewhat conveniently for my thesis, hot off the presses. This statement can be found in their latest press release.

The other widely discussed trend has been the shift towards large screen smartphones. IDC expects “phablets” (smartphones with 5.5″—7″ screens) to grow from 14.0% of the market in 2014 to 32.2% of the market in 2018. With the expected entry of Apple into this market segment, and the pent-up demand for a larger screen iPhone, Apple has the ability to drive replacement cycles in mature markets despite the slower growth seen in recent quarters.

IDC is stating 14% of smartphone shipments this year will be phablets, growing to 32% in 2018. In raw numbers, based on consensus of smartphone forecasts, that equates to approximately 165m phablets in 2014 and approximately 576m in 2018. In neither case are those small volumes. However, of the vast majority of phablets being sold in Asia, more than 80% cost less than $350. An interesting question is, where do premium phablets, like the Galaxy Note series, sell in volume in high prices points? The answer is South Korea. Good estimates of the Galaxy Note installed base in total is around 60 million. Nearly half of those can be found in South Korea. ((This estimate comes from network data I have on the region as well as some publicly stated numbers of Notes by Samsung. Notes appear to have the greatest concentration in South Korea. However, since Samsung uses shipment numbers not sell through numbers, it is entirely possible millions of Notes are sitting in a warehouse somewhere collecting dust. Perhaps if this is true it helps my thesis even more.))

What we know today is:

  1. Phablets are not the majority of form factor sales.
  2. The price points they do move at in volume are not price points Apple seemingly would want to play at with an iPhone.
  3. Where phablets do sell at high price points, and where Apple would seemingly play, are in Samsung and LG’s home country of South Korea. A market Apple has very little share in today.

When I share my skepticism, it is due to the nature of what we see regarding phablets today. However, there are always other ways to look at this data.

Firstly, perhaps the large screen phones have not sold well in the US because Apple does not offer one? Possibly yes. However, if I had to place a bet on which of the two larger screen models Apple offered would do better in the US, I would bet the 4.7″ would be the better seller.

The real question to dig into around the necessity of an Apple 5.5″ iPhone is to address a market that may be choosing Android instead of the iPhone specifically due to that sized phone. Apple will address many people’s desire for a larger phone with the 4.7″ and, in many markets, particularly the US market, it will likely bring users back to the iPhone who may have left and bought a Samsung Galaxy S series because it had a larger screen. But ultimately, Apple already dominates the US market and has an extremely loyal customer base. I don’t believe the argument for a 5.5″ has anything to do with the US.

So — back to Asia. The affluent audience who purchases iPhones in that market due so because of the status that accompanies buying an iPhone. It is entirely possible there are more iPhones in active use in Asia than in the US thanks largely to the secondary market. A 4.7″ iPhone alone will be a huge hit in Asia and break sales records at whatever price. So why offer a 5.5″ also? Is there evidence that those in Asia who can afford a $650 iPhone (not the majority) are choosing to buy an Android phablet for $350 just because Apple doesn’t offer one in that screen size? I see no evidence of this and it is the primary source of my skepticism. The decision to release two new flagship models, at the same time, and possibly causing some difficulty deciding between the two by Apple’s core customers, has to be to appeal to new customers who don’t just want a bigger iPhone (the 4.7″ will do this already) but want one specifically at the increased size of 5.5.”

Bottom line, phablets move in volume at lower ASPs than iPhones in Asia. Those who can afford iPhones in Asia will buy whatever Apple makes due to status. I’m not convinced Apple is or would lose customers in Asia if they did not make a phablet. That being said, and looking at the data I have, there are always times to forget data and go with your gut. It will be exciting to see what Apple’s gut has told them to do.

Why Apple’s New Designed in California Ads are Strategic for the USA

There was a recent report that Apple’s current “Designed in California” ads were not a hit with consumers and various writers who reported on this urged Apple to change them and to start bringing out cool ads again.
While the ads may not seem cool to some, for Apple these ads are very strategic and will run as long as it takes for Apple to hit home the message that the fruit of Apple’s labor starts here and regardless of where they are manufactured, these are American bred products.

Apple has always been proud of the fact that they are an American company and more specifically, a major force in the growth of Silicon Valley that for decades has been and still remains the epicenter of all things tech. This ad helps reinforce the idea that Silicon Valley is not going away and in fact will continue to be a major tech design center well into the future.

But I also believe that Apple has been reading the tea leaves and has seen how Congress and many of the American people are going down a track to try and bring more manufacturing back to the US. They also understand that creating US designed products will be more strategic to the USA’s long term vision of making the US much more relevant in a time of globalization.

You may think that I am crazy suggesting this, but even Apple’s competitors are seeing that if the products are designed and manufactured over here that they may be seen more favorably by consumers. More importantly, it could give them favor with the US government and the American people who are getting more and more concerned that the US is loosing its edge, especially to S. Korea and China.

The Japanese car makers have been doing this for years. Besides doing a lot of actual manufacturing in US cities, a lot of the actual design work is being done here as well. They just don’t tout it like Apple is doing with the “designed in California” campaign.

Interestingly, Samsung, who is Apple’s biggest competitor these days, is moving more and more development to California. They are adding a huge extension to their San Jose Campus and building up their research center in Palo Alto. They are expected to hire more than 2000 hardware and software engineers in Silicon Valley to populate these new facilities over the next two years.

If US consumers, the US government, and US companies start emphasizing the new battle cry “designed in the USA” to bolster their position in the face of the globalization challenge, Samsung could soon say that their products too are “designed in California.” But this is where Apple has a gotcha for Samsung.

Not only is Samsung a S. Korean company, but as a S. Korean company they are very nationalistic. Can you imagine Samsung US trying to convince their top corporate execs to launch a Samsung ad campaign stating “Designed in the US or CA” and getting their OK for this ad? Not happening.

Google is also following Apple’s lead and taking it a step further and through their Motorola division, just started running ads that say that your smartphone can even be designed by you and will be made in the USA.

Neither of these companies are doing this because they recently caught some nationalistic fever. Both realize that globalization is a much bigger threat to the US and their own markets and that is time to be very clear that the USA is still top dog when it comes to its role in the tech market and that people from around the world need to value this fact. Apple is also leading the charge to bring at least some of their manufacturing back to the US and will make the new Mac Pro in Austin, Texas.

With these ads, Apple is positioning themselves as a leader in this “USA Designed” category of products that I am hearing Washington is quite fond of. I also expect these ads to influence more US based companies who design products in the US to soon emphasize this fact too. Apple is just ahead of this trend and leading the charge.