Despite the fact that Apple's (NASDAQ: AAPL) new iPhone 5s has just been released to the world, the rumor mill (Bloomberg) is already buzzing with claims that Apple is planning to launch two larger iPhones — one with a 4.7" screen and one with a 5.5" screen.
While Apple's move to larger iPhone models is inevitable, the company must be extremely careful about how it manages its suite of smartphone models going forward. Releasing a new, larger iPhone will help address more of the market, but there's a risk that if Apple simply kills the smaller iPhone, it may alienate a substantial number of its customers.
Notice something interesting?
When the large Android phone craze began to take hold, driven by models like the Samsung (NASDAQOTH: SSNLF) Galaxy series, it seemed that Apple eventually needed to get on board to keep its share in the high-end. Apparently, sales of Samsung's high-end Galaxy S4 and Galaxy Note III are sputtering, while the iPhone 5s continues to see demand that dominates supply. Sure, there's a market for larger phones, but high-end buyers have voted loudly with their wallets and have signaled that the current iPhone form factor is still a top choice.
Will Apple mess with its winning formula?
There's certainly nothing stopping Apple from introducing a whole family of iPhones to cater to a wide variety of tastes. Since Apple puts the bulk of its engineering effort into a few device launches per year, the company needs to be careful not to introduce too many variants to try to appease every little niche.
The smaller 4" iPhone should certainly be allowed to continue (as many simply prefer that form factor), but a slightly larger phone to capture more of the market would be a great move. As long as it's tastefully done and the product lineup makes sense (similarly to how the iPad Air and iPad Mini Retina are positioned), then there will be no problem.
Companies like Lenovo (NASDAQOTH: LNVGY) and Samsung have seen robust market share in the Asia-Pacific region, precisely because larger phones are simply the preferred form factor there. Apple can, and should, aggressively move to take share in this region. While Apple's brand isn't quite as strong there as it is in the U.S., there's very little to stop Apple from making an even more aggressive push with the right products.
How about the low end?
While it would be in Apple's best interest to cover as much of the high end as possible (since this is where much of the profitability in this space lies), there is the ever-present question of whether Apple should try to attack the low end of the market. In this Fool's humble opinion, this would be a mistake. While this would help raw market share numbers and drive incremental revenue, it's not clear how profitable such a venture would be for a company like Apple, which is well known for refusing to cut corners for the sake of cost savings.
In fact, in this space, the majority of the profits go to Samsung. While Samsung isn't an innovator in the same vein as Apple, it has a great cost structure since it can source almost any component that it wants in-house. This allows Samsung to build "good enough" phones at a great cost structure and flood the market with them. This just isn't Apple's style, nor should investors expect it to be.
Foolish bottom line
Apple expanding the iPhone family to include a larger phone to satisfy that portion of the market currently satisfied by Android would be a good move. However, replacing the current, smaller iPhone may be a mistake. A low-end iPhone, while great for market share and ecosystem lock-in, is also not a great idea since it's unclear if Apple could participate in this market and still generate meaningful profit.
Apple's past, present, and future are based on ownership of the highest end, most lucrative segments of the computing market. Management's job now is to find a way to grow sales domestically, and a good place to start would be by taking share away from the high-end Android players. After that, the company can worry about its next revenue expansion opportunity.
