Here's Apple's REAL iPhone Problem (Hint: It's Not About Screen Size)

tim cook

Photo: AP

My boss, Henry Blodget, desperately wants a smartphone with a giant screen.He talks about it all the time in our office. So, being the good employees and friends that we are, we handed him a Samsung S III. It has a 4.8-inch screen.

What did he do with the S III? Thank us? Stop complaining about the small screen on his iPhone? Nope! He just let it sit there.

Why? He’s a creature of habit. He had no desire to learn Android. He likes his iPhone operating system and doesn’t want to learn a new system.

His strategy, instead, to get a bigger smartphone is to complain loudly, and often, about Apple not making a 4.8-inch iPhone. He often veils it behind the notion of analysis of Apple’s business. Which is what he did today.

Blodget says Apple is hosed if it doesn’t make a bigger iPhone as soon as possible. He believes that Samsung has reached parity with the iPhone and therefore Apple’s core business — selling iPhones — is in peril if it doesn’t make a bigger phone.

A bigger iPhone from Apple would be nice for some people like Blodget. But, screen size is not going to make or break Apple.

Apple’s iPhone franchise is at risk because of pricing and distribution, not screen size.

In the United States, where the iPhone has price equality with big Android phones, and distribution on all the major carriers, it is winning in sales. Kantar shows Apple had 51 per cent of new U.S. smartphone sales last quarter. comScore also reported that Apple beat Samsung in U.S. smartphone sales in the three month period ending in December.

And it’s not just during the quarter of the iPhone 5 launch. Carrier numbers from July tell the same story.

If screen size was really a problem for Apple, then it would be getting trounced in the U.S.

Here’s more evidence screen size isn’t the issue: On Apple’s earnings call, management said it had trouble meeting demand for the iPhone 4, which has a relatively tiny 3.5-inch screen. If people truly hated small screens they would skip the iPhone 4 and buy an Android with a big screen that costs the same amount.

Outside of the U.S. Apple is losing because it’s not a level playing field. Elsewhere in the world, carriers don’t subsidise the cost. So, the iPhone is selling for $600-$800, versus $300-$600 or less for Android phones.

There’s another problem internationally. At Goldman Sachs’ technology conference this week, Tim Cook pointed out that the iPhone is only available on 50% of the world’s carriers. That means Apple is missing out on half the market.

This again is a pricing problem. A lot of those carriers don’t want to agree to Apple’s terms for subsidies. They also don’t want to give Apple as much control as it wants.

If Apple really wants to take market share, then it needs to get on more carriers and sell a less expensive phone. The screen size doesn’t matter.

Selling a cheaper phone presents its own problems for Apple. It means Apple’s sales and profits are going to take a hit. And its phenomenal growth will come crashing down.

These are the real problems Apple has to confront, not whether or not it should make a bigger iPhone.

Because, while a bigger iPhone would be nice, the market has already shown that it’s not make or break for Apple.

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