iPhone 'Math': The Bigger Screen Adds Up
This blog was highly skeptical last week the iPhone is at the end of its road (Why The WSJ Got The ‘iPhone Demand Is Crashing’ Story All Wrong). But that doesn’t mean Apple isn’t at a crossroads. Witness this weekend report out of Taiwan, translated from the Chinese, that claims a June release date for a larger screen Apple smartphone called the “iPhone Math” of all ridiculous names. The specifics are almost besides the point, but the basic argument isn’t. A truly larger iPhone is something millions of people want and the iPhone 5 wasn’t it. As things stand today, Apple is not only missing out on a great deal of money, but missing a product many iPhone users would find superior to the lone current model for a number of reasons.
With the arguments in favor around economics and customer happiness and the arguments against limited to a bit of an issue around pixels and the downsides of size, Apple seems likely to fill the hole in the product line sometime this year, and perhaps the June date is a real one.
Money and margins
First, let’s talk about what a larger-screen iPhone most certainly is not: The much rumored and perhaps ultimately important, lower-cost iPhone Apple will need to offer if it wants to capture more market share in the emerging economies of Asia, Africa and South America. With an unsubsidized price north of $600, iPhone can’t compete for many of the “next billion” smartphone users and Apple will have to make a strategic decision over the coming year or two whether it will offer a somewhat less robust iPhone in terms of build quality and perhaps features to hit some price target less than half the current iPhone’s number. Even former CEO John Sculley joined the chorus calling for Apple to produce such a device.
There are legitimate questions about whether Apple needs, wants or ought to try to do such a thing: chase volume, while making much less per device sold. But none of those apply to the large-screen phone. It would retail for every bit as much as the current iPhone – perhaps even a bit more (it’s not hard to imagine a 4.8-inch iPhone selling for $249 next to the $199 iPhone 5 with it’s 4-inch screen). The chassis would be larger on the bigger iPhone and there’d be a strong opportunity to add a bit more battery in that larger chassis, which, of course, would make the phone have better battery life.
In addition, it might even be possible to use the larger “footprint” to build in a more elaborate set of antennas to the iPhone 5X, as I’ll call it. That could allow for fewer SKUs of the model, simplifying the supply chain and global logistics a bit. (It’s not especially well known, but Apple actually builds three models of iPhone 5 and no, we’re not talking Sprint, AT&T and Verizon here, but three different models worldwide, each that works on somewhat different frequencies of 4G LTE. The limiting factor is mostly a function of the amount of external space available for antennas. But even if some more internal space is required, the 5X will have plenty of that too.) It also means that anyone buying the 5X would get a better “world phone” that works on 4G in more countries than any one of today’s iPhone models.
As to which such a display might cost Apple, “full HD” screens with 1920 x 1080 pixels are already becoming common in the Android smartphone universe, so high-pixel density isn’t itself proving especially expensive. It’s therefore reasonable to conclude that altogether, the iPhone 5X would net out to have very similar margins to iPhone 5, possibly slightly higher if SKU simplification and higher retail selling prices offset the bigger battery and more complex internals. The screen might end up cheaper, given the larger customer base for display makers if Apple went for a “standard” size versus the unusual iPhone 5 screen.
How many people would care?
Today, people who want a larger-screen iPhone do one of two things: accept a smaller-screen iPhone or buy a larger-screen Android phone. Clearly, if this putative iPhone 5X came on the market, Apple would move some customers from the iPhone 5 to it (which is a wash), but would also capture some portion of the people they are losing to big-screen Android phones. In the U.S., where Apple is managing to hold onto a huge chunk of the smartphone market, this would be especially interesting. And globally, where Apple’s share is seen peaking at less than one-fourth overall, SKU diversification is about the only way to increase that slice of the pie.
So let’s take a look at just how big it is. Samsung alone sold 23 million Galaxy S phones last quarter (mostly the S3). Based on mid-year data, Samsung was selling a bit more than half of all the Android smartphones sold period. In the premium category, it was probably doing better than that, so let’s estimate the large-screen sales at 35 million in fourth quarter. That matches the lowest estimate around for iPhone 5 sales in the same time period, incidentally. Oh, there were also 4.4 million Nokia Lumias sold. So the total large-screen smartphone is approximately the same size as Apple’s market, give or take a few million units. (And, yes, the final iPhone and Android numbers will mean this calculation isn’t precise; by rough magnitude they are fairly equivalent.)
With the arguments in favor around economics and customer happiness and the arguments against limited to a bit of an issue around pixels and the downsides of size, Apple seems likely to fill the hole in the product line sometime this year, and perhaps the June date is a real one.
Money and margins
First, let’s talk about what a larger-screen iPhone most certainly is not: The much rumored and perhaps ultimately important, lower-cost iPhone Apple will need to offer if it wants to capture more market share in the emerging economies of Asia, Africa and South America. With an unsubsidized price north of $600, iPhone can’t compete for many of the “next billion” smartphone users and Apple will have to make a strategic decision over the coming year or two whether it will offer a somewhat less robust iPhone in terms of build quality and perhaps features to hit some price target less than half the current iPhone’s number. Even former CEO John Sculley joined the chorus calling for Apple to produce such a device.
There are legitimate questions about whether Apple needs, wants or ought to try to do such a thing: chase volume, while making much less per device sold. But none of those apply to the large-screen phone. It would retail for every bit as much as the current iPhone – perhaps even a bit more (it’s not hard to imagine a 4.8-inch iPhone selling for $249 next to the $199 iPhone 5 with it’s 4-inch screen). The chassis would be larger on the bigger iPhone and there’d be a strong opportunity to add a bit more battery in that larger chassis, which, of course, would make the phone have better battery life.
In addition, it might even be possible to use the larger “footprint” to build in a more elaborate set of antennas to the iPhone 5X, as I’ll call it. That could allow for fewer SKUs of the model, simplifying the supply chain and global logistics a bit. (It’s not especially well known, but Apple actually builds three models of iPhone 5 and no, we’re not talking Sprint, AT&T and Verizon here, but three different models worldwide, each that works on somewhat different frequencies of 4G LTE. The limiting factor is mostly a function of the amount of external space available for antennas. But even if some more internal space is required, the 5X will have plenty of that too.) It also means that anyone buying the 5X would get a better “world phone” that works on 4G in more countries than any one of today’s iPhone models.
As to which such a display might cost Apple, “full HD” screens with 1920 x 1080 pixels are already becoming common in the Android smartphone universe, so high-pixel density isn’t itself proving especially expensive. It’s therefore reasonable to conclude that altogether, the iPhone 5X would net out to have very similar margins to iPhone 5, possibly slightly higher if SKU simplification and higher retail selling prices offset the bigger battery and more complex internals. The screen might end up cheaper, given the larger customer base for display makers if Apple went for a “standard” size versus the unusual iPhone 5 screen.
How many people would care?
Today, people who want a larger-screen iPhone do one of two things: accept a smaller-screen iPhone or buy a larger-screen Android phone. Clearly, if this putative iPhone 5X came on the market, Apple would move some customers from the iPhone 5 to it (which is a wash), but would also capture some portion of the people they are losing to big-screen Android phones. In the U.S., where Apple is managing to hold onto a huge chunk of the smartphone market, this would be especially interesting. And globally, where Apple’s share is seen peaking at less than one-fourth overall, SKU diversification is about the only way to increase that slice of the pie.
So let’s take a look at just how big it is. Samsung alone sold 23 million Galaxy S phones last quarter (mostly the S3). Based on mid-year data, Samsung was selling a bit more than half of all the Android smartphones sold period. In the premium category, it was probably doing better than that, so let’s estimate the large-screen sales at 35 million in fourth quarter. That matches the lowest estimate around for iPhone 5 sales in the same time period, incidentally. Oh, there were also 4.4 million Nokia Lumias sold. So the total large-screen smartphone is approximately the same size as Apple’s market, give or take a few million units. (And, yes, the final iPhone and Android numbers will mean this calculation isn’t precise; by rough magnitude they are fairly equivalent.)
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