Apple's (NASDAQ:AAPL) iPhone has no doubt revolutionized the smartphone industry and Apple as a company since its inception. It was the main driver behind Apple briefly becoming the most valuable company on the planet by market cap last year. However, slowing growth in iPhone sales and a lack of new catalysts on the horizon for growth in the market have conspired to punish Apple shares of late. While it is true that Apple is still selling an enormous amount of iPhones, new research published last week from Transparency Market Research shows that Apple's steadfast obstinacy towards producing a larger iPhone with a bigger display will cost Apple dearly in terms of smartphone market share in the future. This article will examine the impacts of such a scenario on the smartphone giant.
A relatively new segment of the mobile computing market is the so-called "phablet" market; phones that have screens so large they are meant to function as miniature tablets as well as performing the same functions a traditional smartphone can accomplish. Samsung (OTC:SSNLF) is the undisputed leader in this small-but-growing market, with an estimated 70% market share, according to the cited research. Also-rans in the space include Google, HTC and LG, among others. Samsung's most recent phablet offering, dubbed the Note II, offers a massive 5.5" screen in comparison to the iPhone's relatively small 4.0" screen. The Note is basically a typical top of the line Android smartphone but with a huge screen. This is more important than it may sound at first because smartphone displays have been steadily growing in size in recent years. Consumers are demanding more screen space for movies, games and internet browsing and Android manufacturers, particularly Samsung, are responding to this demand.
Phablets and super smartphones only accounted for about 12% of the smartphone market last year, according to Transparency, but that market share is slated to grow to a staggering 70% by the year 2018. If this were to prove true, the consequences for Apple would be catastrophic. With an estimated phablet market of $116 billion in 2018, Samsung, at its current market share, would be in line for something like $81 billion in phablet revenue in 2018 while Apple gets left behind and fades into irrelevance.
If smartphone growth trends towards larger phones and phablets in the coming years, Apple's stubborn opposition to making a larger iPhone will have catastrophic results for shareholders. Margins are already under pressure due to a shift into iPad Minis and higher component costs and if Apple refuses to see the writing on the wall and make a larger iPhone, this will continue and the stock will get hammered.
I understand Apple's desire to make the best product it can regardless of the fads that inexorably occur in a fast-moving market such as smartphones, but as Apple begins to cede market share to its competitors, particularly Samsung, how long will management stand by and watch the company's relevance fade? Blind opposition to change is no way to run a company and unless Apple is already working on a larger iPhone and management is just lying about it, I fear what may happen to this company. Indeed, if Apple never makes a larger iPhone or iPad Mini phone device, the decline in shares from $700 to $400 will seem like just the beginning.
There is still plenty of time for Apple to get into the phablet market and I hope the company is already working on a larger iPhone or phone-capable iPad Mini. However, CEO Cook has repeatedly denied that Apple is doing just that so unless he is just wearing his poker face to throw competitors off the scent, Apple could very well be in big trouble as the legacy iPhone eventually fades from relevance and popularity.
It is true that iTunes and the App Store are huge competitive advantages for Apple as the ecosystem of Apple devices and software has large switching costs for consumers that are already Apple users. However, consumers will eventually get tired of Apple making marginal updates to the iPhone and tagging it with an "S" or the next number in the sequence as though it is a new device. If Apple wants to remain on top, it needs to act quickly. There is still time, but it is fading quickly. I sold my Apple shares earlier this year because there is no catalyst for growth any more. If Apple wants to change that fact, new thinking is necessary and the phablet market could very well be the place to start. There is still time for Apple to avoid becoming the next Nokia, but the company must put aside its blind opposition to deviating from its script and adapt to the marketplace.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.