My Phablet Skepticism Thesis

I have been publicly doubting the existence of the 5.5 inch iPhone for some time. I promised many on Twitter I would share my overall thesis on the category so here it is.

Starting from the data points, we know several things. In the USA, phablet sales are quite small. Our estimates have the active installed base of all Galaxy Notes in the US at under 10m units. Phablets, or smartphones with screen sizes above 5.3″, have tended to not sell well at any price point in the US market. However, the US market is not the only one that matters.

Phablets are successful in some parts of Europe but much more so in Asia, so we will focus there. You could argue Apple needs to make a 5.5″ phone primarily to serve the Asian market and you may be right. But let’s focus on the data at hand.

Here is a chart Guardian journalist Charles Arthur made of active screen size of Android device according to Google’s data.

As you can see, the vast majority of Android devices in use are not phablets. Now, it is entirely possible Google is not tracking or including China’s AOSP Android ecosystem in this chart. If they did, it could certainly bump the active use of phablets a bit higher but it would not be by much.

Another data point is IDC’s own projection of the phablet market which is, somewhat conveniently for my thesis, hot off the presses. This statement can be found in their latest press release.

The other widely discussed trend has been the shift towards large screen smartphones. IDC expects “phablets” (smartphones with 5.5″—7″ screens) to grow from 14.0% of the market in 2014 to 32.2% of the market in 2018. With the expected entry of Apple into this market segment, and the pent-up demand for a larger screen iPhone, Apple has the ability to drive replacement cycles in mature markets despite the slower growth seen in recent quarters.

IDC is stating 14% of smartphone shipments this year will be phablets, growing to 32% in 2018. In raw numbers, based on consensus of smartphone forecasts, that equates to approximately 165m phablets in 2014 and approximately 576m in 2018. In neither case are those small volumes. However, of the vast majority of phablets being sold in Asia, more than 80% cost less than $350. An interesting question is, where do premium phablets, like the Galaxy Note series, sell in volume in high prices points? The answer is South Korea. Good estimates of the Galaxy Note installed base in total is around 60 million. Nearly half of those can be found in South Korea. ((This estimate comes from network data I have on the region as well as some publicly stated numbers of Notes by Samsung. Notes appear to have the greatest concentration in South Korea. However, since Samsung uses shipment numbers not sell through numbers, it is entirely possible millions of Notes are sitting in a warehouse somewhere collecting dust. Perhaps if this is true it helps my thesis even more.))

What we know today is:

Phablets are not the majority of form factor sales. The price points they do move at in volume are not price points Apple seemingly would want to play at with an iPhone. Where phablets do sell at high price points, and where Apple would seemingly play, are in Samsung and LG’s home country of South Korea. A market Apple has very little share in today.

When I share my skepticism, it is due to the nature of what we see regarding phablets today. However, there are always other ways to look at this data.

Firstly, perhaps the large screen phones have not sold well in the US because Apple does not offer one? Possibly yes. However, if I had to place a bet on which of the two larger screen models Apple offered would do better in the US, I would bet the 4.7″ would be the better seller.

The real question to dig into around the necessity of an Apple 5.5″ iPhone is to address a market that may be choosing Android instead of the iPhone specifically due to that sized phone. Apple will address many people’s desire for a larger phone with the 4.7″ and, in many markets, particularly the US market, it will likely bring users back to the iPhone who may have left and bought a Samsung Galaxy S series because it had a larger screen. But ultimately, Apple already dominates the US market and has an extremely loyal customer base. I don’t believe the argument for a 5.5″ has anything to do with the US.

So — back to Asia. The affluent audience who purchases iPhones in that market due so because of the status that accompanies buying an iPhone. It is entirely possible there are more iPhones in active use in Asia than in the US thanks largely to the secondary market. A 4.7″ iPhone alone will be a huge hit in Asia and break sales records at whatever price. So why offer a 5.5″ also? Is there evidence that those in Asia who can afford a $650 iPhone (not the majority) are choosing to buy an Android phablet for $350 just because Apple doesn’t offer one in that screen size? I see no evidence of this and it is the primary source of my skepticism. The decision to release two new flagship models, at the same time, and possibly causing some difficulty deciding between the two by Apple’s core customers, has to be to appeal to new customers who don’t just want a bigger iPhone (the 4.7″ will do this already) but want one specifically at the increased size of 5.5.”

Bottom line, phablets move in volume at lower ASPs than iPhones in Asia. Those who can afford iPhones in Asia will buy whatever Apple makes due to status. I’m not convinced Apple is or would lose customers in Asia if they did not make a phablet. That being said, and looking at the data I have, there are always times to forget data and go with your gut. It will be exciting to see what Apple’s gut has told them to do.