Apple iPhone 5 and why my next smartphone may be...an iPod

There's lots of alarm at disappointing iPhone sales during the just gone Apple [AAPL] quarter -- expectation of a new model has impacted sales. How will Apple protect itself against this in future? That's simple: it will diversify its iPhone range.

[ABOVE: Some like it small.]

Diversification works

The company has done this before.

  • Recall the iPod? That device was joined by the iPod mini, iPod nano, iPod touch and iPod shuffle. Each of these appealed to a slightly different crowd.
  • Remember the iMac? This was made available in numerous colors for a while. It was joined by the PowerMac (later MacPro), iBook, and the Mac range was later boosted by the Mac mini and MacBook Pro.
  • Even the iPad will reportedly soon be joined by a 7.85-inch variant.

If you think about it, the iPhone's one-size-fits-all status makes it unique: except Apple's already diversified the range -- it still offers the iPhone 4 and iPhone 3GS as well as the most recent configuration.

Understandably, analysts and investors are spooked by the iPhone. After all, iPhone and iPad sales together comprise 72 percent of Apple's revenues. The company's seeming determination to upgrade its best-selling product every year leaves it exposed to strong devices from other manufacturers and a historically recurring pattern of purchase behaviors.

Pressure is on

As North Shore Asset Management’s Michael Obuchowski points out: "Pressure is mounting … Because everybody else has a much faster design cycle, Apple has to come up with a new phone that’s competitive not just when it comes out, but will stay competitive for a long period of time. That’s going to be increasingly difficult."

He's right, of course. The dance between Apple's iPhone and Samsung's Galaxy range exemplifies this. Apple ships a better iPhone one month, and Samsung ships a competitive Galaxy device a few months later. This symbiosis is so overt the two firms are locked in legal struggles worldwide while Apple tries to argue Samsung is copying its ideas. That's not a discussion I want to enter into today.

It remains an unavoidable truth that the minute Apple reveals the full details of its product, competitors begin attempts to create compelling alternatives with which to woo customers away.

Clearly Apple cannot continue to rely on a device that's upgraded once a year. It leaves the firm too vulnerable to changes in consumer purchasing patterns as they leave off hitting the 'Buy It Now' button pending a new model. That's what's got analysts spooked.

But Apple's a little smarter than this. It already offers three iPhone models, so perhaps it can introduce new devices to populate the three tiers: low-cost; mid-cost and premium iPhones.

In other words, rather than simply replace the iPhone 3GS with the iPhone 4 on release of version 5, the company could introduce a new model iPhone that's custom-built to deliver a package of interesting features within a completely different design.

Is the iPod getting a SIM?

I'm pretty certain that's something Apple management are thinking about. Diversification works for Apple. The iPod mini and the iPod nano that replaced it both became the biggest-selling iPods very rapidly. The iPhone has been made available predominantly as one annually-upgraded system since 2007.

The thinking has to be that if low-cost devices are going to cannibalize Apple's hard-won position in a market, it might as well ensure Apple makes the devices that do that cannibalization.

There's been years of rumor speculating about an iPhone nano. This hasn't happened yet, but perhaps the story has moved on for Apple to dust off its plan for a uniquely-designed, cheaper device equipped with many (but not all) of the features of the iPhone.

In June the Wall Street Journal published an interesting observation from analyst Nobuo Kurahashi, who said: "The smartphone market has become diverse, but the iPhone still sets the agenda." That remains true with competitors looking to match the features of each generation of Apple device, but the meat's at the end, when Kurahashi added:

"If Apple ever released a lower-priced iPhone, that would be more of a sign that the changing market environment is beginning to affect the company."

Apple's most recent financial results prove that the changing market environment is beginning to affect the company.

You'd have to be a dummy not to respond to changing market conditions when you're in business, and whatever competitors and critics might be praying for when they mourn the loss of co-founder and visionary Steve Jobs from the company, dummies do not run Apple.

Developing the ecosystem

In February, CEO Tim Cook let slip a few hopes on Apple's future within the smartphone market. He noted the billions of phones that are expected to be sold by 2015 and called this an "opportunity". He also discussed plans to "develop the ecosystem around the iPhone".

Informa Telecoms & Media principal analyst Malik Saadi last year told me: "I believe Apple could leverage their brand and create a new family of connected devices."

These connected devices don't need to be called iPhones. They just need to run iOS. Every Android phone isn't called Android, after all.

Saadi said: "Apple needs to protect the iPhone brand. I believe Apple should develop a new family of connected devices to target the mass market but I don't agree the category should belong to the iPhone brand. That's because there's a risk of low-end devices in the brand damaging the prestige of the flagship devices."

Bloomberg last year claimed Apple to be working on a smaller, cheaper version of the iPhone for sale off contract. The prototype was alleged to be around one-third smaller than the iPhone 4 with a processor, display and other components similar to that model.

This device was going to be sold off-contract and to cost around $200. I believe Apple has held this skunk-works plan since launch of the original iPhone.

I suspect the deep competition between Apple and its present processor manufacturer, Samsung, may have delayed the firm's execution of this. It is interesting then to note the increasingly close relationship between ARM and Apple's favored alternate processor supplier, TSMC.

Pure speculation, but perhaps TSMC just needed time to create production lines for new families of low-cost chip for Apple's devices. (So Samsung couldn't easily learn about the tech inside driving them, a paranoid competitor might note.) TSMC was rumored to be in the frame for iPhone processor production last year.

Interesting too that the company is expected to move to a smaller, thinner Dock Connector and to field the smaller nano-SIM within the next-gen iPhone. These dinky solutions could therefore be adopted within smaller devices, surely? Interesting too that Apple has reportedly been meeting with carriers in all its existing markets in recent months, ostensibly focusing on the iPhone 5.

Like an iPhone, but tiny...

Also interesting, given the Bloomberg description of the so-called 'iPhone nano' from last year are the current descriptions of the forthcoming iPod nano.

AppleInsider tells us this new device may (to paraphrase): "Resemble a tiny iPhone, with dedicated iTunes services and a small touchscreen."

I'll admit we're in the realms of speculation here, but looking at what the analysts are saying it surely makes sense for Apple to maintain two or even three iPhone-style devices as part of its response to its seasonal sales patterns.

If it did it could stagger upgrades for each product across the year. This would boost its competitiveness, widen its market and enable it to control its vulnerability to those seasonal sales patterns.

Is it going to happen? I think it should. What do you think?

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