Bigger iPhones Spell Big Trouble for Samsung

Posted on Sep 16, 2014 11:34:00 AM

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Last week, Apple announced two new iPhone models that are both larger than any model the company had previously released. Both are poised to be spectacular success for Apple, and will drive upgrades by customers with older models in huge numbers. The company logged 4 million preorders in the first 24 hours of their availability, which, obviously is great news for Apple. It's also great for consumers, who have been clamoring for larger iPhones for some time. It is undeniably bad for Samsung. This is for two main reasons: large smartphones ("phablets" = tablet + phone) are high-end devices, and Samsung's profit margins derive chiefly from these large devices, which, until last week, did not have a legitimate competitor.

Phablets have been de facto high-end devices. The cost of components is higher, and lower-end devices with smaller screens cater more toward the crowd of people buying smart phones for their necessity, rather than the status the more expensive devices confer. Most of the high end in smart phones goes to Apple devices, however, there is a significant portion of these purchases that go toward non-Apple devices. Those non-Apple devices are the ones that are in trouble here, as Apple is now covering a lot more of its addressable market with its two new devices. The smaller device, at 4.7 inches, is around standard now, while 5.5 is the sweet spot for those buying big phones. Anyone seeking a big screen first and foremost now also has the iPhone 6 Plus to consider, and you better believe that they will, in huge numbers.

This is where Samsung’s profit margins are. While there will be people who continue to buy those devices, it will be for the reasons people bought the more expensive Android devices before screen disparities were so prominent: expandable storage, gimmickry, etc. But notably, with the changes to iOS that allow apps to communicate more with each other and enable certain functionality (multiple keyboards, widgets), the reasons to choose Android over iOS have slimmed considerably. Especially for people in subsidized markets like the United States, this represents a considerable erosion of the advantages Apple’s competitors had. (Even better for Apple, the Plus carries an extra $100 on its price tag, ensuring it is the status symbol-est iPhone ever created, in addition to goosing the company’s margins.) Samsung has already seen earnings slow—Apple may have realized that, rather than fighting Samsung in court, in can achieve better results in the marketplace.

As an aside, it’s possible to say that Apple releasing a huge phone is Apple backing down from its design principles—the very principles that makes it so different from other companies in the same industry—and that is a fair argument, to some extent. But the company was also prudently responding to market realities, while allowing the company to continue producing quality phones without sacrificing margins by moving downmarket. I’m excited to try the new devices, because I imagine that the iPhone 6 will remain usable one-handed by the majority of the population, while the Plus will require two hands by all but those with the most generous manual endowments. In other words, I suspect that, in two devices, Apple has nearly covered the entire range of use cases suggested by the high end Samsung’s bloated smartphone lineup. It’s a strategic masterstroke.

One concern that has been expressed is that the large iPhone will cannibalize iPad mini sales. I believe this is true, to an extent, but not of concern. Here it is, encapsulated in an excellent tweet:

The mini was necessarily a lower-margin product for Apple—they’d much rather sell you an $800 phone than a $329 tablet.

Apple has done a remarkable job here creating two new phones that address market needs without capitulating to any demands that they move downmarket and dilute the brand. And their new Pay and Watch products dictate that in spite of all this, the device is actually becoming a new digital hub that will serve as the center of an ecosystem that further drives revenue (and profits) in Apple’s direction.

Beyond the sizes, Apple has introduced some new hardware functionality, like a better video camera and the Secure Element that makes Apple Pay possible, but many of the major benefits of these new phones will be baked into iOS 8 itself. Apple has positioned the new devices, with their greater extensibility (multiple keyboards) and ability for apps to communicate with each other (untold possibilities), as strong answers to the features proffered by Android manufacturers as selling points for their devices. Android will likely always have more features than iOS, but Apple incrementally—and strategically—cherry picks the best ones.

Apple indeed has guns pointed many places, and the biggest one has Samsung's name on it.

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