- The phablet has emerged as the latest fad within the mobile space.
- Apple would risk alienating its core customers if it were to follow Samsung into the phablet market.
- Apple would remain a solid, long-term investment without adding a phablet to its lineup.
The phablet represents the latest catchphrase at the beginning of a long line of alleged Apple (NASDAQ:AAPL) iPhone killers. This line of supposed iPhone killers would include Android, Microsoft (NASDAQ:MSFT) Windows 8, and even BlackBerry (NASDAQ:BBRY) 10. Interestingly, the phablet movement may have emerged as a separate wing of the Windows 8 vision that failed to get off the ground. On October 26, 2012, Microsoft made its Windows 8 software available to the public, as a fusion of traditional personal computer, smartphone, and tablet interfaces. From there, the Samsung (OTC:SSNLF) - Google (NASDAQ:GOOG) Android alliance was to emerge at the forefront of the phablet game. The phablet takes its name from its combination of smartphone and tablet features within one machine.
Bears have argued that the Apple Empire will ultimately collapse without a phablet machine. As usual, the Apple haters have misunderstood the marketplace. Similar to the Mac and PC, Android and iOS target markets are largely mutually exclusive. In reality, fans of the iPhone would be likely to shun product design divergence away from Apple minimalism and towards Samsung bulk. Apple should therefore cede phablet territory to Samsung in somewhat of a controlled retreat. The Apple iPhone 6 will be no phablet.
Apple iPhone and iPad: Better Off Alone
iPhone Unit Sales
iPhone Revenue Per Unit Sold
iPhone % of Apple Revenue
The Apple iPhone, of course, has emerged as the primary gateway into an integrated ecosystem featuring computing, telecommunications, and entertainment. Apple iPhone share of corporate revenue has steadily grown from 30.3% in 2009 to 56.4% during a Q1 2014 that largely coincided with the latest Holiday Season. In recent years, the iPad and iPhone platforms have combined to generate more than 70% of total net sales at Apple. Alternatively, the Apple iPod accounted for a mere $973 million in Q1 2014 sales, which was a 55% decline off the year-over-year period. Apple smartphones and tablets are both convertible into music players, which has literally made the iPod all but obsolete. Apple iTunes sales, however, have held relatively steady, in terms of percentage of revenue throughout the past five years. Triangulating segment sales data may serve as evidence that loyal Apple customers have refused to exit this ecosystem.
Apple iPad and iPhone revenue per unit sold have both declined between 2009 and 2013. Again, language written within current Apple financial reports has indicated that more value conscious consumers are purchasing older machines, rather than abandoning iOS, altogether. Recent data out of research firm IHS has even suggested that Apple iPhone and iPad profit margins have expanded while both product lines matured. CEO Tim Cook, operations man, has leveraged Apple's formidable buying power to squeeze price concessions out of the suppliers of iPad and iPhone shared component parts. In recent times, NAND Flash costs have declined to the point where a Lazard analyst Edward Parker simply classified Apple as a "storage company." IHS estimated $218.30 in bill of materials and manufacturing costs for the 64GB iPhone 5S that retails for $849. Consumers have been willing to pay $200 for memory upgrades above the 16GB 5S that cost Apple $19.60 to provide.
Apple would risk cannibalizing its meal ticket items if it were to ultimately roll out an iPhone 6 phablet later this year. The phablet may confuse the marketplace and draw the ire of staunch Apple loyalists. The oft misunderstood Apple 5C did actually have a place within the product portfolio, as it enabled Cupertino to generate some revenue upon repackaged, older phones, while also serving the marketplace with lower-cost options that competed directly against Samsung. At worst, the nascent phablet movement will degenerate into an ironically comical fad on par with 1980s excess. A recent report out of research firm Canalys estimated that only 3% of smartphones sold during the fall quarter featured six-inch and above sized screens. The sky would not fall if Apple were to sidestep the phablet movement.
The Phablet Competition and Specifications
In a January 21 Pocket Lint piece, Chris Hall and Mike Lowe presented their list of the best phablets heading into 2014. Hall and Lowe identified the Samsung Galaxy Mega, Samsung Galaxy Note 2, Samsung Galaxy Note 3, and Nokia Lumia 1520 as the leading phablets now on the market. The Nokia Lumia 1520 stands 6.4 inches tall by 3.4 inches wide. The Lumia 1520 six-inch screen displays high-definition graphics in 1920 x 1080 pixel resolution. A 16GB Nokia Lumia 1520 handset retails for $199, if carrier customers agree to the terms and conditions of a two-year contract. Still, the Nokia Lumia 1520 remained part of a Windows ecosystem that captured a mere 3.2% of the U.S. smartphone market throughout the holiday quarter, according to comScore data. Again, the phablet is not exactly an automatic game changer.
Apple bears, or haters, may attempt to highlight the success of the Samsung Galaxy Note as evidence proving testimony that Apple will ultimately lose the smartphone war, without a phablet in the lineup. The Samsung Galaxy Note 3 is often cited as the best phablet available in stores. The Galaxy Note 3 is notable for its 5.7-inch AMOLED screen that offers 1920 x 1080 pixel resolution. As somewhat of a throwback, the Note also features a stylus to help users write and execute on-screen commands. Phone carriers now retail the 32GB Samsung Galaxy Note 3 for $299, if customers agree to be locked into a two-year service contract. Retail customers would purchase an unlocked (no service contract) Samsung Galaxy Note 3 for $724.99. Still, the Galaxy S# series will likely remain Samsung's premium offering, despite the phablet hype.
Apple bulls, of course, may recognize mobile market share data to be somewhat misleading. Again, Apple has historically been willing to cede market share percentages to the likes of Samsung and Android, in order to maintain high return on investment. Apple still generates nearly three-fourths of all profits within the mobile space, despite losing the market share battle to Android at 51.7% to 41.6%. As original equipment manufacturers, Apple and Samsung closed out the latest holiday quarter with respective 41.6% and 26.7% shares of the U.S. smartphone market. If anything, Apple would risk alienating its customer base after attempting to force its way into the phablet arena.
The Bottom Line
2-year Contract 8GB
2-year Contract 16GB
2-year Contract 32GB
2-year Contract 64GB
The technology commentariat has speculated that Apple will maintain several pages out of the 5C / 5S playbook with the looming iPhone 6 launch. Apple did deliver relatively larger screens after transitioning to the iPhone 5 and its more vertical profile. Going forward, Apple may release two new phones in two separate sizes prior to the Holiday Season. These two phones would likely retail at the initial 5C and 5S price points, while the then old 5S would be given away free of charge to two-year contract carrier customers. The iPhone 6 launch may branch off into one 4.7-inch display handset alongside another 5.5-inch handset. The iPhone 6 would expand upon the 4-inch iPhone 5S screen, while still remaining significantly smaller than the iPad Air and its 9.7-inch screen. At this size, the iPhone 6 would not be considered a phablet. Again, the Samsung Galaxy Note 3 and Nokia Lumia 1520 phablets feature 5.7-inch and 6-inch screens, respectively.
Beyond screen size, the iPhone 6 displays will likely be made of more durable sapphire crystal, instead of Corning Gorilla Glass. GT Advanced Technologies (GTAT) SEC filings have indicated that this Apple partner plans to fill large orders during the second half of this year. GT Advanced has customized its Mesa, Arizona facility specifically to serve Apple. A more powerful A8 chip may also drive the iPhone 6. Last year, Apple made waves with its 64-bit 28nm A7 chip. This year, a new partnership with Taiwan Semiconductor (NYSE:TSM) may deliver 20nm A-series chips and a 20% improvement in performance above the prior A7 line. For its 2013 fiscal year, Apple did report 150.3 million iPhone unit sales, which was a record and a 20% improvement above 2013. Long-term Apple shareholders would still remain comfortably in the catbird seat, if Cupertino were to ship 165 million iPhone units through 2014.
The Apple cash cow has already pledged to return $100 billion in capital back to shareholders via dividends and buybacks through the end of 2015. Apple closed out its Q1 2014 books with $158.8 billion in cash and investments above $95.5 billion in total liabilities on the books. These positions calculate out to $63.3 billion, or $70 per share in net liquidity. Apple shares last traded hands at $532.87 at the March 21 closing bell. Apple stock also trades for a mere eleven times earnings, after backing out its net liquidity position. Carl Icahn may agree that any decision to buy and hold Apple stock would be a "no brainer."
Disclosure: I am long AAPL. 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.