Does Apple Need a Bigger iPhone?

Does Apple Need a Bigger iPhone?

The outcry from analysts and investors hoping for a larger iPhone from Apple has been interesting, to say the least. On one hand, Apple's iPhone 5s has been selling like hotcakes -- much better than any competing phone -- and it's not a large phone at all. It's a svelte 4-inch device. At the same time, most will likely agree that Apple's move from its prior 3.5-inch display to its current 4-inch display was unequivocally a good thing. The question, however, is whether a move to a larger phone from here would necessarily be a good thing.

More phones, or a broad shift to larger phones?
If Apple were to make a larger phone as some of the analysts suggest, then it has two potential ways to go about it. First, Apple could outright replace the previous iPhone with a single, larger model. The alternative method would be to broaden the portfolio of iPhone offerings to include multiple sizes of the iPhone. The choice of how to go about this is a nuanced question that Apple is going to have to really weigh.

On one hand, Apple's whole business is built on simplicity. While players like Samsung essentially flood the market with dozens of different phone designs to see what sticks (which likely helps overall sales, but dilutes the brand), Apple's whole spiel has been about introducing the device to have each year. Further, the iPhone 5s is still a much better-selling device than any large phone offered by Apple's competitors. On the other hand, Apple needs to find a way to reignite both revenue growth, which has slowed to mid-single digits, and profitability growth -- Apple is actually on track for a profit decline year over year. More products at the high end and more variety may be the way to go there.

Further, while Samsung really has the scale and the right stuff (in-house processor manufacturing, DRAM, displays, NAND, etc.) to profitably play in cost sensitive markets (and the brand equity to fight in the high end), Apple really does need to play mostly in the high end for its current profitability/business model to really work.

There are pros and cons to each strategy, and while broadening the product portfolio may be contrary to the Jobs-era Apple, it's also important to note that Apple's management team has a much more difficult road ahead of it as far as shareholder return is concerned. It's much easier to grow from a much smaller revenue and profit base than it is to grow to the sky, so to speak, which means that what worked for Apple in the past may not necessarily be what the needs are for Apple moving forward.

Another problem with a large iPhone
Another obvious issue with a larger iPhone is that such a device comes very dangerously close to cannibalizing sales of Apple's smaller tablets. While nobody would argue that a 4.8-inch smartphone offers the same screen real estate and functionality as a 7.9-inch tablet, the "need" for a larger-screen portable device really does diminish to a non-trivial extent when the smartphone that you get every two years on contract fulfills the vast majority of those needs.

With iPad sales already showing signs of exhaustion -- sales were down year over year in the most recent quarter -- in the face of both very intense competition as well as, quite frankly, a stale lineup, Apple is not likely to want to put that device category at any further risk. That being said, Apple's management isn't stupid and likely realizes that if consumers truly want the larger phones, many could simply end up buying them from the likes of HTC, Samsung, or Lenovo . Indeed, while Apple investors continue to wait for the China Mobile deal, Lenovo continues to hit it out of the park in China with its own phones. Further, with the rumor mill abuzz with speculation that Lenovo could buy HTC, which makes great phones, including large ones, the situation for Apple looks even thornier.

Foolish bottom line
Apple is a great company, but the headwinds that it faces are very real and the decisions excruciatingly difficult. While investors would likely be much more confident in Apple's future with Steve Jobs at the helm, it will be interesting to see how Tim Cook manages to maneuver these very tricky waters. At the first sign that Apple has something up its sleeve to drive meaningful growth, this Fool is a buyer. Until then, I'm sticking to the sidelines, but watching very carefully.

Profit from Apple's destruction
Apple has a history of cranking out revolutionary products... and then creatively destroying them with something better. Read about the future of Apple in the free report, "Apple Will Destroy Its Greatest Product." Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.

The article Does Apple Need a Bigger iPhone? originally appeared on

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.