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The Product That Apple Needs to Build

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investors are eagerly awaiting the next big thing from Apple (NASDAQ: AAPL), especially now that Wall Street analysts are questioning the company’s ability to continue innovating and growing. From a new Apple TV to a smart watch, there are all kind of rumors and speculations, many of which have some real long term potential. But simple and less dramatic innovations, like a bigger iPhone, should not be dismissed.

A Booming Niche

Phablets are nothing else than big smartphones with a screen size somewhere between a regular smartphone and a small tablet. The most popular product in the category, the Galaxy Note 2 from Samsung, for example, has a 5.5 inch screen. These kinds of products are certainly not for everyone, and the Galaxy Note didn´t get much respect from the investing community when it was first launched. But it has been selling surprisingly well, and industry analysts have some very bullish forecasts for the category.

A recent story by Reuters recounts the success phablets are having in emerging markets, and it includes a quote from Neil Mawston, executive director of Strategy Analytics' global wireless practice which is quite straightforward: "We expect 2013 to be the year of the phablet

Barclays believes that the market for phablets will quadruple in value to $135 billion in three years. The bank estimates a compound annual growth rate of 65%-70% in the volume of these handsets from 2013 to 2015, driven by hardware upgrades in central processing units and displays, and pricing as low as US$200 to US$350 without subsidies.

These predictions may seem exaggerated considering that phablets are not as popular as smaller devices in the US. But the key thing to consider here is emerging markets demand: last year; the Asia Pacific region absorbed 42 percent of global shipments, a proportion that will expand steadily over the next few years to account for over 50 percent of shipments by 2017, according to ABI figures.

Phablets are not an easy choice, they don´t fit into pockets at all, and that´s a big drawback, especially for male users who don´t usually carry bags or purses. But for those who are used to carrying a phone and a tablet - or an e-reader - carrying a phablet instead seems like a smart solution.

Besides, high-end phablets are starting to include processors and storage capacity that put them on par with low-end laptops, so they can be a very convenient replacement for those who now carry both a smartphone and a laptop. Tablets outsold notebook computers in the US and China during 2012, and NPD DisplaySearch estimates that the trend will expand globally in 2013.

These products may be quite uncomfortable when it comes to phone calls, but that doesn´t seem to be a problem for many consumers either. After all, we spend most of the time in other activities like web surfing and social networks, so a bigger screen makes sense when it comes to prioritizing the most frequent uses for the device. According to The Telegraph:

The average smartphone owner spends more than two hours each day using the device. During that time, smartphone owners spend an average of 25 minutes using their phone to browse the web, 17 minutes on social networking, 13 minutes playing games and 16 minutes listening to music.

Making phone calls with the smartphone was only the fifth most popular use for the gadget, only slightly more time than they spend writing and checking email (11 minutes) and text messaging (10 minutes).

In the end, phablets can be a great solution when it comes to integrating many different devices into one, and that´s probably the main reason for their success in emerging markets. The way things are going, it seems that this big smartphones have plenty of room for growth over the next years.

The case for an Apple Phablet

A phablet would have many advantages for Apple, especially when it comes to emerging markets expansion. Competition in those countries has been a big issue over the last quarters, with many Android products – especially from Samsung - gaining market share versus the Cupertino giant.

Google (NASDAQ: GOOG) has been remarkably smart in allowing different device manufacturers to use Android freely at no cost. This means that all kinds of smartphones, tablets and phablets are available with different sizes and specifications, and consumers can choose their best fit knowing that the product will have the support of a deep ecosystem with all the necessary applications. 

This is a platform competition, not only a matter of devices. Many customers choose their products based on IOS or Android preferences. Google has made it possible for the Android platform to be available at different sizes, prices and quality levels, so Apple needs to start closing that gap if it wants to increase its chances in emerging markets.

This product could actually help Apple when it comes to working around its pricing problem in emerging markets too. The iPhone may be too expensive for many consumers in the region considering that it´s only a smartphone, but if you are buying a single device which satisfies your different phone and computing needs, that price may become much more reasonable.

A phablet would fit quite well into Apple´s current line of products, between the iPhone 5 and the iPad Mini, and it would allow the company to position itself better in emerging markets. In the same way the company has launched a wide variety of iPods with different sizes and specifications over the years, there is no reason to believe that it won´t do the same with the iPad and the iPhone.

 Is It Coming?

Tim Cook has officially denied any possibility of a bigger iPhone coming from Apple in the middle term, during the company´s latest earnings report he said:

The iPhone 5 offers a new 4-inch retina display, which is the most advanced display in the industry. No one comes close. It also provides a larger screen size without sacrificing the one-handed ease of use. We put a lot of thinking into screen size and believe we’ve picked the right one.

But we know how these things work, a company like Apple needs to deny any rumor until it becomes an official launch. Apple refuted versions of a smaller iPad on several occasions, even down playing those kinds of products.  As it turned out, the iPad Mini is a big success for the company, so these kinds of comments from management should not be taken very seriously.

Analyst Brian White from Topeka Capital Markets has forecasted both bigger and smaller iPhones to be launched this year based on his channel checks. I think there is a really good case for a smaller iPhone too, and it doesn´t contradict the phablet thesis. The main point is to provide different alternatives and allow customers to choose the one that best fits their needs.

Those who think that this is a departure from the Steve Jobs philosophy of focusing on a few products may be missing the point here. Focus doesn´t mean that you can´t have different versions of the same product, just like Steve Jobs did with the iPod over time. I´m not saying that Apple will have more than 50 smartphone models like Samsung does, but having three different sized versions of the next iPhone sounds quite reasonable.

Bottom Line

While everyone is focused on rumors about new and revolutionary products from Apple, the impact of a broadening the iPhone product line should not be dismissed. Smartphones are still a high growth product in emerging markets like the phablet category demonstrates, and Apple still has an undisputable brand power in countries like China.  Innovation doesn´t need to be a big and disruptive change, small adaptations can have big economic implications, the iPad Mini and the different iPod versions can serve as example.


acardenal owns shares of Apple and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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