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Why Apple's Supposed New, Smaller iPhone Makes Sense

A new four-inch iPhone might help Apple better capitalize on emerging markets and the growing popularity of pay-as-you-go services

Vjeran Pavic

At a time when bigger is better when it comes to smartphones, Apple appears poised to make a contrarian move on Monday and unveil a new four-inch iPhone.

Variously dubbed the iPhone SE or iPhone 6c, the new, less-expensive smartphone could help Apple to capture a bigger share of the pay-as-you-go market in the U.S. and Europe and capitalize on opportunities in emerging markets such as India.

But it won’t exactly be cheap. The new iPhone is essentially an upgraded version of the iPhone 5s, including the current-generation A9 and M9 processors, Apple Pay mobile payments and new camera features, according to 9to5Mac. Analysts predict prices will start at $450 — what Apple now charges for the iPhone 5s, which debuted in 2013.

Apple certainly isn’t talking about its news before its unveiling event in Cupertino, and declined comment for this article. But there are plenty of reasons for the company to get small with its newest phone.

Smaller phones are still the biggest part of the global smartphone market

While the broad trend over the past several years has been for smartphones to get bigger, phones measuring four to five inches in screen size — what you might consider midsize — account for nearly half of the global smartphone market, according to Strategy Analytics. By comparison, so-called “phablets,” which look like the love-child of a smartphone and tablet, make up a little more than one-third of worldwide sales. So, bigger isn’t always better in the eyes (and wallets) of the consumer.

 Global smartphone sales by display size.
Global smartphone sales by display size.
Source: Strategy Analytics, Wireless Smartphone Services

The tinier the screen, however, the smaller the share of the global smartphone market, according to another analysis. The research firm Canalys estimates that devices with a display size of less than 4.5 inches command a single-digit share of worldwide smartphone shipments, down from more than 20 percent in early 2014. And plenty of vendors have abandoned these smaller phones.

Global smartphone shipments by screen size

But Apple believes there’s still good demand for a smaller-screen iPhones — particularly a new model that boasts the latest technology, said Canalys analyst Chris Jones. Hence, the refresh.

Cheaper smartphones dominate in emerging markets

Apple captures a significant portion of the high-end worldwide smartphone market with its iPhone 6s, 6s Plus and other models. Researcher IDC estimates Apple sold one out of every two devices that cost more than $400 last year.

Meanwhile, there’s a big opportunity in selling less-expensive phones — those costing less than $200 at wholesale. Around the world, and especially in countries like India where carriers don’t subsidize the cost of buying a phone, sub-$200 smartphones make up nearly two-thirds of smartphones sales, according to Strategy Analytics.

Strategy Analytics Wireless Smartphone Strategies

Don’t expect Apple to chase the smartphone equivalent of the Tata Nano business with its BMW brand. Doing so would risk eroding the average selling price of its phones and chip away at its healthy margins.

But a more modern version of the entry-level iPhone could help Apple grow its business in emerging markets where it’s already making headway, including India (sales up 76 percent year-over-year last quarter) and in Korea, the Middle East and Africa (up more than 45 percent from a year ago).

The iPhone 5s is losing cachet

The iPhone that was all the rage in 2013 is beginning to show its age. (And it doesn’t work with some of Apple’s new services, such as Apple Pay.) Sales of the iPhone 5s and its siblings have fallen off dramatically, according to IDC. A newer, similarly priced product with updated features could reverse that trend.

Source: IDC

A less-expensive iPhone would help Apple with prepaid mobile subscribers

Emerging markets aren’t the only place where people are sensitive about the price of a new smartphone. In the U.S., pay-as-you-go services like MetroPCS are gaining in popularity — reporting 28 percent year-over-year growth, according to IDC.

Consumers who use these so-called “prepaid” wireless plans once were stuck with crummy flip phones (the no-frills devices the industry perversely calls “feature phones”). Now these services offer consumers a greater variety of devices to choose from, but they mostly run Android.

An upgraded version of the iPhone — especially a current model that uses some of the latest technology — should help Apple grab a bigger share of this business.

Oh, and that thing about quarterly results

Last quarter, Apple’s iPhone sales grew at the slowest pace since its introduction in 2007. A new phone that broaden’s Apple’s reach should help drive growth in the iPhone business, which represents about two-thirds of the company’s revenue.

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