Why the Next Big Change for iPhones Will Be Bigger iPhones

AP The Wall Street Journal reported recently that Apple (AAPL) will roll out not one but two iPhone models with bigger screens later this year. Considering Monday’s disappointing quarterly report, it looks like the consumer tech giant needs them.

The market was surprised to learn that Apple sold just 51 million iPhones during the period. That was a new quarterly record — up nearly 7 percent since the prior year’s holiday quarter — but analysts had been holding out for more.

Last year’s rollout of the iPhone 5s and the iPhone 5c was supposed to give Apple an even more dramatic boost in smartphone sales. The iPhone 5s with its fingerprint identity sensor and superior camera raised the bar, and the burst of colors made available on the $100 cheaper iPhone 5c looked to have broad appeal. With two new ways to hook potential buyers, analysts expected as many as 56 million iPhones to be shipped during the quarter. It didn’t happen.

Bigger Is Better

The Journal’s source claims that Apple is working on a phone with a 4.5-inch screen and one with a 5-inch display. The smaller iPhone is further along in development, but both should be ready to hit the retail market later this year.

It may not seem like much of a difference, but anyone doing a side-by-side comparison of the iPhone 5s with its 4-inch screen and the Samsung Galaxy S4 with its 5-inch display — or with some of the even larger Android “phablets” and phones on the market — will appreciate why Apple needs to keep up. An iPhone isn’t cheap, and Apple can’t justify the price when it’s attached to a form that is so 2010.

Screen size isn’t the only reason why Android smartphones are growing in popularity at a faster pace than iPhones. Android devices come in a wide variety of configurations and prices. However, it’s clear that a bigger iPhone can only help at this point.

Apple’s moves to differentiate its devices from the competition are getting harder to accomplish over time, and consumers are starting to associate larger screens as a premium perk that the iPhone presently does not offer.

Paying Up for the 5s

The silver lining in the otherwise disappointing iPhone sales data is that folks did favor the costlier iPhone 5s by a wide margin over the iPhone 5c. Saving $100 wasn’t worth it for consumers if it meant getting a plastic shell and inferior specs.

Apple doesn’t break down sales by model, but dividing the iPhone revenue by the number of units sold shows Apple’s first increase in average selling price in a year. This can only mean that folks bypassed the iPhone 5c in favor of the more expensive iPhone 5s.

In theory, the relative failure of the colorful iPhone 5c is a disappointment. It just wasn’t cheap enough to capture the entry-level market that Apple was hoping to bite into. However, the number of consumers gravitating to the iPhone 5s suggests that Apple’s still the device of choice for well-to-do smartphone buyers. That makes going bigger with its next generation of iPhones that much more important to make sure that it doesn’t use the affluent and upper middle class that can afford the subsidized iPhone 5s and the costly data plans.

If the Journal’s story bears out, one would expect to see the iPhone 5c replaced by the 4.5-inch model and that the iPhone 5s will receive the 5-inch diagonal display. They’ll cost a little more to make, but Apple should make that back with a boost in sales.

Right now, it doesn’t have much of a choice. Sales of iPhones are growing, but not as quickly as the smartphone market itself. Apple needs to make big things happen, and bigger screens are a smart place to start.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our newsletter services free for 30 days.

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