Apple set to expand phone size — and profits


Expectations are rising for Apple’s (AAPL) newest iPhones, coming next month, which will carry larger screens and possibly fatter profit margins.

With Apple’s rumored iPhone introduction less than a month away, Asian factories have already cranked up production on the next version of the popular smartphone, generating numerous leaks of new features. Apple shares are up 16% over the past three months, as anticipation builds. After closing at $99.16 on Monday, the stock is nearing its all-time high, adjusted for the June split, of $100.72, reached in September, 2012. In afternoon trade on Tuesday, shares are at $100.29.

Investors and analysts say a larger screen is likely the top new iPhone feature, based on the leaks and credible media reports. Such a move would also be consistent with Apple’s strategy of revamping the iPhone’s physical appearance every two years, as it last did in 2012.

Apple’s current models offer just a 4-inch screen, but the 2014 versions are expected to provide 4.7-inch and possibly even 5.5-inch views. The 4.7-inch model would be around the same size as some of the most popular phones over the past few years that run Google’s (GOOGL) Android software.

Is bigger better?

Amid the solid leaks of models with bigger screens come somewhat less certain rumors of new pricing tactics. Unlike last year, when Wall Street wanted but didn’t get a cheaper iPhone to sell better in emerging markets, this year the focus is on higher prices. If Apple introduces a 5.5-inch model, it will certainly cost more, but some analysts think even the 4.7-inch model could carry a $100 premium. That could offset a normal decrease in profit margins that Apple typically suffers in the quarter when it rolls out a major new product.

Screen size was the most important design feature among U.S. smartphone buyers in the first quarter, coming well ahead of design attractiveness and quality of materials, according to a survey by Kantar Worldpanel Comtech. High-speed LTE broadband capability was the most popular function buyers sought, beating out camera quality and battery life.

Some phone makers have added even larger than 4.7-inch screens lately, such as HTC’s One M8 model with a 5-inch screen or Samsung’s Galaxy S5 with a 5.1-inch screen. But those models collectively haven’t sold as well as hoped, says Ben Bajarin, principal industry analyst at Creative Strategies.

“It’s a foregone conclusion, given the leaks, that there is a 4.7-inch model, which I think is the right size for many markets,” he says. “Anything above 5 inches has not done well in Western markets.”

Analysts and reporters have also spotted prototypes of a 5.5-inch iPhone, but whether Apple will opt to offer a device in the so-called phablet category is unknown. Samsung and others have been successful, mainly in Asia, selling phablet devices, which offer the connectivity of a phone combined with the larger screen size of a tablet.

“The big screen is especially important in Asia, where phablet-style phones have become very mainstream,” says Jan Dawson, chief analyst at Jackdaw Research. Assuming the rumors are true, “they’ll win more converts from Android than they normally do, because there are people who are choosing Android simply because it offers larger screens and the iPhone hasn’t.”

Bigger screens could also help Apple cure a perception problem among investors that it is losing sales to otherwise inferior competitors. While overall U.S. smartphone sales growth has slowed dramatically, the market for phones larger than 4.5 inches more than doubled in the past year, according to Comscore. So a screen upgrade would be the most significant new feature for shareholders, says John Bright, an analyst at Avondale partners. “Apple has been lagging its competitors in terms of visual appeal,” he says.

Rising projections

Analysts are raising projections for iPhone sales, based on the desirability of models with larger screens and surveys showing significant pent up demand for upgrades. Citigroup (C) analyst Jim Suva projects Apple will sell 140 million of the high-end model “iPhone 6″ in the 12 months after it is released.

One survey in June by RBC Capital Markets found 50% of consumers who planned to upgrade a phone wanted to buy an iPhone, and 35% of the remainder who didn’t want an iPhone would reconsider if a larger screen model were offered.

Another possible upgrade could be that Apple will replace the Gorilla Glass, made by Corning (GLW), in iPhone screens with an even tougher material made entirely or partially from synthetic sapphire crystal. Apple last year purchased a plant in Arizona and contracted with GT Advanced Technologies (GTAT) to make sapphire materials. Shares of GT have nearly tripled over the past year.

Tougher, shatterproof glass would provide an appealing selling point, as Youtuber Marques Brownlee has been exploring recently.

A final important aspect of every year’s new iPhones is Apple’s upgrade to the iOS software. Apple unveiled iOS 8 in June at its developers conference and showed off several potentially enticing new features, including a health tracking system called HealthKit and a home automationcontrol center dubbed HomeKit.

HealthKit is likely to take off more quickly, as many consumers are already tracking exercise and health data with existing apps and products. Apple may even offer its own health band to aid in tracking, says Gartner analyst Van Baker. A watch-like device, the much rumored “iWatch,” is also a possibility, he says: “The health band segment is not huge right now but just because it’s Apple, they’d probably do pretty well.”