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Why Apple's iPhone 6 Will be a Record Breaker

June 23, 2014 | About:
FinanceGuru

FinanceGuru

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Let's be real -- Apple's (AAPL) iPhone launches aren't any ordinary product launches. These launches are once-per-year extravaganzas that garner investor, consumer, and media interest in a way that is quite unlike any product that has ever come before it.Samsung (SSNLF) brags about selling in 10 million Galaxy S5 phones within 25 days, but Apple's iPhone 6 is likely to blow away even that number on "opening weekend" -- breaking Apple's own enviable record.

iPhone 6 will be the perfect compromise
While many harp on Apple for not releasing a large iPhone sooner, the financials don't lie – people are absolutely loving their 4-inch iPhones. If Apple has product that generates more profit than any of its competitors, and continues to defy the rather pessimistic expectations out there, why should Apple be in any rush to change it?

The iPhone 5 brought a new chassis that really propelled iPhone forward, and iPhone 5s refined and tuned that chassis, brought Touch ID and the world's fastest mobile processor, and led Apple to post record revenues, yet again. With the upcoming iPhone 6, Apple will most likely build upon this base of loyal customers and, in the process, likely gain share against large-screened competitors. If the rumors of a 4.7-inch iPhone are true, then this could very well strike a near-perfect compromise to win over those who enjoy the current 4-inch form factor, and those who want increased screen real-estate (but not too much).

What about the iPad? Won't this cannibalize iPad sales?
There is an argument out there that goes a little something like this:

  • People who buy large phones are less likely to buy tablets
  • If Apple releases a large iPhone, customers will be less likely to buy iPads
  • Therefore, Apple should avoid releasing a large iPhone

Now, hold up a second. First of all, if the above argument were true, then Samsung certainly hasn't gotten the memo; it sells many tablets and smartphones across all screen sizes and price points and both its smartphone and tablet sales continue to climb to new highs.

Applying this to Apple will likely yield the same results, except Apple is, if anything, furtherinsulated from that cannibalization impact. iPad has significant market share in enterprise and in schools, and the usage models that drive that are unlikely to be satisfied by a 4.7-inch smartphone. Further, in settings such as education, getting each student (or classroom) a $650+ iPhone coupled with a cellular plan certainly isn't viable. The 7.9-inch and 9.7-inch iPads serve a different purpose than a 4.7-inch phone.

The cannibalization argument, while perhaps valid for a small subset of the population, just doesn't really hold water.

Market share opportunity is larger than cannibalization risk
More to the point on the cannibalization argument is simply that there is a very large market of Samsung Galaxy S/Note type products that Apple can begin to take share away from. Each win of a $650+, 40%-50% gross margin iPhone away from a Galaxy S or a Galaxy Note is worth about two to three iPad Mini with Retina Display gross margin dollars.

So, if Apple grows iPhone sales by 20 million-30 million units per year as a result of the larger iPhone, it would need to wipe away many times that in iPad sales given that the gross margins on the iPad are more along the lines of 20%-30%, and the ASPs are lower. Since a total wipeout of iPad sales as a result of a larger iPhone is extremely unlikely, Apple would be remiss to avoid a larger iPhone to "save" iPad.

Conclusion

Apple's larger iPhone 6 is set to break records when it debuts. It will not only provide a compelling reason for folks with iPhone 4s, 5, and even 5s devices to upgrade, but it will likely bring back those who defected to Android in search of a larger screen. On top of that, thanks to a very efficient iOS, coupled with Apple adopting new technologies like 802.11ac and LTE-Advanced about a year after the component launches, Apple should see a pretty reasonable cost increase in moving from iPhone 5s to iPhone 6, limiting the initial gross margin hit.

Brace yourselves for what will probably be the biggest iPhone launch in Apple's history -- it's going to be epic.


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