FAQ for that cheap, big, new rumored iPhone

In a column for Unwired View late last year, I predicted that Apple will release a “phablet” in 2013:

Apple will release two new iPhones next year. One will be the iPhone 5S. The other will be a much larger device, like the Samsung Galaxy Note or “phablet”.

I’m going to go further this time. Here is what I expect from this iPhone phablet:

  • It will be priced at an amazingly low US $499 (unlocked).
  • It will be offered in multiple colors (black, white and red)
  • There will be no Retina Display
  • The base model will have 16gb storage
  • 8MP rear camera, 2MP front-facing camera
  • 4G LTE (and 3G)
  • A5 chip (CPU clock rate of 1GHz)
  • 5.5” screen

Why would Apple build this device? Because the market has spoken. The market wants large-display smartphones. As I also wrote in Unwired View last November:

Display trumps usability, build quality, ease of use and ecosystem.

If the user can hold the device in one hand, they want the biggest screen possible, period. All the usability studies in the world, it seems, can’t change the fact that us mere mortals are drawn to big and bright like moths to a flame.

The Samsung Galaxy Note II is on track to sell at least 2 million units every month, probably much more. Asia-centric brands are rushing out large display smartphones, including the Huawei Ascend Mate, with a massive 6.1 screen. Apple won’t let this market go un-served.

Is this a wise move on Apple’s part? Will such a “cheap” new iPhone, one with lesser hardware than the iPhone 5, diminish the brand? Will it cannibalize sales of iPhone 5? Of the iPad and iPad Mini?

Those are not relevant questions.

Apple is the global smartphone wars leader. A large display smartphone is a rational move to grow its user base – and increase its already massive profits. The iPhone is a metaphorical piggy bank for Apple, helping make the company easily the world’s richest, most valuable, most popular. As much as Apple has revolutionized the smartphone market, they cannot always be ahead on every aspect. The iPhone 5 was a reaction to the market’s demand for a larger iPhone. Millions want larger still. More importantly, tens of millions in China and throughout Asia, where “phablets” are extremely popular, aspire to have an Apple Mac or iPad or iPhone. Such a purchase must be within their reach and meet their needs. An iPhone “phablet”, smartly priced, makes this happen.

This past week, with Apple’s CEO, Tim Cook, and SVP Worldwide Marketing, Phil Schiller, both in China, rumors abounded that Apple was working on a “cheap” iPhone. The device I am expecting is not cheap. It will be an amazing mobile personal computer, one that will continue to deliver solid profits to Apple and undercut chief rival, Samsung, just like the iPad Mini capped Nexus and Kindle tablets at the knees.

I realize my predictions for a lower-priced, iPhone “phablet” are controversial. Let me answer what I expect to be persistent questions.

There are sub-$100 Android phones in China. Is a $499 iPhone truly affordable?

Yes. The price I predict is less than the current iPhone 5, probably the world’s most popular smartphone. It is cheaper than the popular Samsung Galaxy Note II. It is cheaper than the iPad 2 (with Wi-Fi and 3G).

Don’t the existing App Store apps limit Apple’s options regarding display size?

I do not think so. Aspect ratio, app and display compatibility are certainly important considerations. However, I think most users interested in a larger display value that far more than app compatibility. Apple will have no problems attracting developers for such a device. Moreover, at Apple, design reigns supreme, not apps.

Also, I think the ‘lock in’ value of apps is overstated. No one offers an ecosystem as deep and intuitive as Apple. But, Apple trumps the competition first and foremost because of the ubiquitous iTunes and Apple’s amazingly simple payments platform. Additional value is then delivered through what may be the world’s best digital media platform: movies, television shows, magazines, books, music you can buy through Apple, all available across all Apple devices thanks to iCloud. Apps, per se, while important, seem to me less important as a feature than Apple design, iTunes, media and payments. There will be no shortage of apps for this device.  A big display, one that offers a 16:9 aspect ratio – ideal for HD videos – should assuage any doubters.

Apple does not make “cheap” products! Phil Schiller said so!

Schiller gave a recent interview while in China. That interview was mis-interpreted, wrongly reported, revised, mis-translated, then incorrectly parsed by bloggers. Bottom-line: Apple has no intentions of sacrificing its brand name or its margins. An iPhone phablet will do neither.

Apple will leverage available manufacturing capacity and existing hardware, I predict. Think: iPhone 4S specs in a 5.5inch display.  This less expensive device won’t incorporate Apple’s latest, most innovative hardware. It will still be amazing, nonetheless.

Consider also that the iPad Mini put clear downward pressure on Apple/iPad margins. The market opportunity for 7-inch tablets, however, was simply too great for Apple to cede to the competition. Apple was able to use its design skill, global supply chain mastery, and effectively source from its existing hardware stocks. I expect the same for an iPhone phablet.

Do not discount Apple’s manufacturing prowess. Despite the fears of a huge drop in margins with the low-priced iPad Mini, for example, market analysts discovered to their surprise that gross profit margins on the base Mini model were over 40%. An iSuppli teardown revealed that the BOM for iPad Mini was a mere $180. According to AllThingsD, the 32GB and 64GB Wi-Fi-only versions of iPad Mini delivered gross profit margins of 52% and 56% respectively.  By way of comparison, it’s estimated that the base iPhone 5 delivers a gross margin nearer 70%.

When other costs are factored in, including volume discounts, marketing, etc., iPad margins are in fact closer to 30% and iPhone at just over 50%. I expect this large-display iPhone then, built with iPhone 4S hardware, to allow Apple to maintain these margin ranges.

When can I get one?

Not until Fall 2013, I suspect

Will it come with a stylus?

Of course not. That means they did it wrong. There will also be no microSD slot, and no replaceable battery.

Why should Apple care about a large-display smartphone?

A fair question. The iPhone’s ASP (average sales price) has shown a remarkable resiliency. Apple continues to command a premium price for the latest iPhone.  A case can be made that only supply and manufacturing constraints are preventing them from selling even more. That said, there is obviously room still in the market for a lower-priced device, especially one that has a special appeal to markets that Apple does not currently dominate, such as China and Southeast Asia.

If Apple only sold 2 million of these, every month, current Samsung Galaxy Note II numbers, that could drive $12 billion in revenue. While it’s true that there would be some cannibalization of other products, it’s also true that the purchase of one Apple product leads many to purchase additional Apple products. The iPhone phablet becomes another entry into the Apple-sphere. This is an overall win.

That said, I do not believe this device will cause much cannibalization. Apple is transitioning from simply selling smartphones to selling an entirely new device to replace feature phones and land lines for the billions still using these old world products. The iPhone phablet can be a replacement for a landline, a feature phone, and a netbook, all in one.

Any surprises? Any ‘one more thing’?

Yes! Last week, Tim Cook promised that China would soon be on Apple’s ‘initial’ launch schedule. Thus, when the iPhone 5S, as an example, gets released, China will be among the first to have this device.

Surprise – I think for the iPhone phablet, China receive it first, getting it even before the US. Indeed, I would not be surprised if China Mobile is the first of any carrier in the world to sell this device.

But wait. Still one more thing. Another surprise. Apple may change the name of this device. I suspect there is a small, albeit very real chance it will not carry the iPhone nor iPad nor iPod brand names.

Apple is determined to rule the smartphone market just as they rule the tablet market. A large-display “iPhone” helps the company on its inexorable path to become the world’s first trillion-dollar enterprise.

 

Author: Brian S Hall

Brian S Hall writes about technology, immortality and food for ReadWrite, Techpinions, Unwired View and other publications. His thoughts on the 'smartphone wars' and how these are rapidly de-constructing markets, industries, business models and relationships around the world can be found on his personal site at www.brianshall.com.

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