iPhone 5: How Good Is Good Enough?

| About: Apple Inc. (AAPL)

Apple's (NASDAQ:AAPL) current business essentially boils down to two products: iPhone and iPad, which are decisive to Apple's stock market value. They account for 74% of Apple's total revenue in the most recent quarterly earnings report. In particular, the sales of iPhone accounts for 58% of Apple's revenue. There is no doubt that iPhone is the most important product for Apple. Currently, iPhone's major competitors include Motorola's (NYSE:MMI) Razr Maxx, Samsung's Galaxy S II, both running Google's (NASDAQ:GOOG) Android, and Nokia's (NYSE:NOK) Lumia 900, running Microsoft's (NASDAQ:MSFT) Windows 7.5, and some other Android phones from HTC, LG, etc. All of these competing phones are pretty much at the same level in terms of performance as iPhone, and even better in some aspects.

Perhaps the most important question for Apple's shareholders is: what does Apple have to offer with iPhone 5 in order to impress both consumers and investors?

First, let's start with a quick comparison between iPhone and its three competing products:

iPhone 4S Samsung Galaxy S II Motorola Razr Maxx Nokia Lumia 900
4G LTE No Yes Yes Yes
OS iOS Android Android Windows
Display 3.5 inches 4.5 inches 4.3 inches 4.3 inches
Pixel density 960 x 640 800 x 480 960 x 540 800 x 480
3G Talk time 8 hours 7 hours 21.5 hours 7 hours
Dimension 4.54 x 2.31 x 0.37 5.12 x 2.72 x 0.35 5.15 x 2.71 x 0.35 5.03 x 2.7 x 0.45
Weight 4.94 oz 4.71 oz 5.11 oz 5.6 oz

Except for being iPhone, iPhone has virtually no advantage over Motorola Razr Maxx, it is slightly better in display resolution than Galaxy S II and Lumia 900. If anything, Razr Maxx appears a better phone than iPhone 4S in hardware. In addition, all of Apple's competitors have already got 4G capacity almost one year ahead of iPhone. No wonder Verizon (NYSE:VZ) doesn't recommend iPhone to its customers. Of course, Android doesn't have Siri and still lags iOS in apps available. Nevertheless, the bottom line is that iPhone 4S has very few tangible advantages over its rivals. In order to stay as the market leader, Apple's next iPhone (iPhone 5) has better bring some surprises to wow consumers.

1. Screen size increase
It has been rumored recently that Apple will finally increase its screen size to 4" range from the 3.5" it has been using for all generations of iPhones. This is likely a welcomed change. In making this change, it also marks the wind change that Apple is starting to copy from its copycats. This change is entirely expected and it will hardly wow anybody.

2. Battery life increase
This would be positive change but hardly exciting. Right now, with a moderate usage, one change will be needed every two or three days on an iPhone. Further increasing battery life would have relatively low marginal value to most consumers.

3. Resolution increase
This is a dead end. With Retina display, Apple has maxed out on the highest possible pixel density that is meaningful to human eyes. So we should not see pixel density increase.

4. Thinner
This is something Apple can do and will make the new iPhone appear really cool to consumers. Currently, the thickness of iPhone 4S is 0.37 inches. Is it possible to thin it down to 0.3 inches or even thinner? It's certainly a possibility but may not be easy to achieve especially with a larger screen which drains power more quickly -- a larger battery would be required.

5. More colorful
Personally, I see the release of iPhone with multiple colored cases (instead of only black and white) as a negative signal. It indicates that Apple has problem creating new demand and has to differentiate its products using relatively trivial changes. Evidence is not very difficult to find: when Apple had many colors of iPods, iPod sales had pretty much peaked.

6. Software upgrade
In this category, it's hard to imagine anything more than an upgraded version of Siri.

In addition to the list above, obviously iPhone 5 will have a faster CPU, 4G capacity, and perhaps better front and back cameras. Those things are entirely expected and they will be shrugged off as given. On the technical side, hardly anything visible will be a surprise. The only way I see iPhone can wow people is in its looks. For the first time, it has become a fashion product. If iPhone 5 is a new beauty with an amazingly thin body, it may meet the current market expectation and keep Apple in the leading position. Anything short of that, the market may very likely be disappointed, and the stock will be punished.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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