Come iPhone 6 launch time, Samsung will lose my business to Apple

August 31, 2014

AAPL has confirmed the next iPhone event will be held on September 9. In eleven days we expect to see a 4.7-inch iPhone 6 and some kind of wearable device. There are rumors of a larger, 5.5-inch iPhone as well, along with rumors that it might cost more than the smaller sizes that came before it. Will anybody want a 5.5-inch iPhone? Can Apple justify a higher price for one? What does it mean to the company's potential profits?

In emerging markets folks who need a phone rely on it as their only computing device. So big phones are more popular. In the western markets people tend to own phones and either tablets, computers or both. So "phablet"-sized phones haven't sold in as large a number.

That said, if you can sell a larger phone to a big enough audience and justify a higher price point such that it produces appropriately higher gross margin, it makes sense to do so. Samsung offers the Galaxy Note series of phablets with a 5.7-inch screen. I don't think Samsung is a dumb company. They're about to introduce the Galaxy Note 4, which we'll easily find on North American shelves. Clearly they believe demand for this form factor is high enough to justify selling. So why not Apple? The anticipated 5.5" iPhone 6 will only be a tiny bit smaller than the Galaxy Note, meaning that Apple will have essentially closed every possible gap when it comes to size.

Historically, Apple has done a good job of making different price points easy to understand. The 15-inch MacBook Pro is not only larger than the 13-inch version, but when comparing the base models you'll find more memory and processing power in the 15-inch version. When it comes to iPhones, Apple has traditionally offered the same product with 3 memory storage size options at different price points. The extra memory is always sold at insanely high gross margin, but it's easy for a layperson to understand why there is a price difference. The iPad Air and the Retina iPad mini are almost identical except for screen size, so it's easy to understand why you're paying more for the Air.

This is what leads me to believe Apple can justify launching a 4.7-inch version of the iPhone 6 followed by a 5.5-inch version at some point in the near future. People who want the larger size will understand that it costs more, and Apple may be able to further justify a higher price (and higher margin) by offering improved camera optics, or something else to add to the larger size's uniqueness.

We should be asking if a 5.5-inch iPhone will help Apple's profits or not.

Some people might ask if a 5.5-inch iPhone would cannibalize the iPad Mini. The way I see it there will always be some (non-zero) cannibalization when you introduce a new product that fits in between two existing products. And that's fine. But when we start to use words like cannabilization we're discussing the business of Apple. If we're going to go down that road we ought to stay focused on what really matters: profitability. We should be asking if a 5.5-inch iPhone will help Apple's profits or not.

It's quite obvious to me that a 5.5-inch iPhone would boost profitability no matter what level of cannibalization were to occur. The existing iPhone 5s is more expensive than an iPad Mini with higher margin. Even if Apple slightly dropped the price of a 4.7-inch iPhone relative to the 5s, and kept the 5.5-inch version at about $600, Apple is better off selling the phablet than the iPad Mini.

Similarly, any sales of the 4.7-inch iPhone that are lost to the 5.5-inch iPhone result in higher revenue and gross margin versus the alternative.

Now let's look at the world outside of Apple. Read comments on any Apple fan site and you'll see that people have been wanting a larger iPhone for quite some time. Some of these people are sticking with Samsung or other Android phone vendors because of screen size, despite believing that iOS is better. Apple is likely to win over some of these customers with a larger form factor (or form factors).

When I pick up my wife's iPhone or our iPad Mini I find them so much simpler and more enjoyable to use.

I'm a good example of this. After being a BlackBerry user for about 13 years I made the switch to Android about one year ago. I currently use the Galaxy S4 as my primary phone. Although I have always hated the complexity of the Android OS, I have fallen in love with the drastically improved app store and built-in Google services. Oh, and I admit I'm a big fan of the 5-inch screen size. But I much prefer iOS to Android. When I pick up my wife's iPhone or our iPad Mini I find them so much simpler and more enjoyable to use.

Come iPhone 6 launch time, Samsung will lose my business to Apple. I'll finally be able to have the large screen, enormous selection of apps and the best of what Apple and Google have to offer in one phone.

Will I go for the 4.7-inch or the 5.5-inch iPhone? Personally I'll probably stick with the smaller version. My Galaxy S4 is already borderline too big to hold comfortably in one hand or put in my pocket. But that's just me. Women who carry a purse might love the 5.5" as might men who wear a suit and can comfortably tuck their phone away in the inside breast pocket.

As a consumer, I think the added choice will be nice. As an investor in Apple, I think the 5.5-inch option can only increase profits. That's win-win.