9-10-18 2:47 AM EDT | Email Article
By Tripp Mickle 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 10, 2018).

Apple Inc. is preparing to supersize its iPhone lineup, aiming to drive profit in its biggest business despite stagnant unit sales while also fueling growth for apps and services that are more appealing to users with bigger screens.

The technology giant on Wednesday plans to announce two new models with its largest iPhone screens ever: a lower-priced device with a 6.1-inch LCD display and a pricier one with a 6.5-inch display using more advanced, OLED technology, according to people familiar with the plans. The company also will unveil an updated version of its iPhone X, which has a 5.8-inch OLED screen, that will boast a faster processor for improved performance, they said. Apple declined to comment.

The trio of phones will boast other features, such as facial-recognition technology, but their display size stands out -- their average screen area, without accounting for a facial-recognition system that juts into the top of the display, is 23% larger than last year's three new phones and 28% bigger than the two models unveiled in 2016.

At a time when people are buying fewer new phones, bigger size brings two advantages. It helps Apple buoy prices and profit margins because it can sell larger phones at a greater markup than it pays suppliers for the larger screens. And it encourages people to use their phones more, helping momentum of Apple's services business, which includes app-store sales and subscriptions to video services like Netflix and HBO.

Users with smartphone screens 6 inches or larger, like Apple plans to launch this year, typically use twice as many apps as those with 5.5-inch screens, such as those on the largest versions of the iPhone 6 or 7, said Kantar Worldpanel, a market research firm. Users of the larger devices also are 62% more likely to play games, and twice as likely to watch video daily as people with smaller screens.

"The bigger the device, the more people are getting out of it, and the more opportunity there is for Apple to generate money from them," said Jennifer Chan, analyst with Kantar Worldpanel. She added that the larger phones typically carry faster processors, more memory and better graphics than smaller devices, which also contribute to usage.

Though the iPhone remains Apple's most important product, accounting for about two-thirds of revenue, unit sales growth has waned in recent years and is expected to flatten further as people hold on to their smartphones longer and it gets harder to keep raising prices.

iPhone revenue increased 15% to $129.51 billion over Apple's first three fiscal quarters through June, even as shipments rose 0.4% to 170.8 million units over the period. The services business jumped 26% over the same period to $27.2 billion.

Services are one of Apple's fastest-growing businesses. The company has 1.3 billion iPhones and other devices in active use and earns an estimated $30 per device annually from app sales, music subscriptions and other offerings, according to Morgan Stanley, which expects services to account for about 60% of Apple's revenue growth over the next five years. By contrast, the iPhone accounted for 86% of sales growth over the prior five years, Morgan Stanley estimates.

Apple plans additional services, such as Hollywood programming and a magazine-subscription offering, that stand to gain from bigger iPhone screens that make viewing shows and articles more appealing, said Carolina Milanesi, an analyst with Creative Strategies, a technology research firm.

"The larger screen is not just about real estate," Ms. Milanesi said. "It's a much broader play that benefits the Apple ecosystem."

The bigger phones land at a time of rising concerns over excessive smartphone use. After receiving a letter in January from investors urging the company to address a potential health crisis due to youth-smartphone addiction, Apple this month will make available to all iPhone users new software tools announced in June to let them monitor usage. The company's executives said the tools will limit distraction and improve parents' ability to control the way their children use devices.

Other updates planned for the newest iPhones are expected to be more modest than last year's iPhone X overhaul. In keeping with its tradition of offering hardware refinements a year after a major iPhone redesign, Apple is bringing facial-recognition technology to all three new devices this year and jettisoning fingerprint sensors, people familiar with the plans said.

Some 6.5-inch OLED devices also will be able to use two SIMs, a microchip that allows smartphone users to connect to a wireless network, allowing travelers to access overseas wireless networks more easily. The feature will allow Apple to keep pace with competitors in China, where dual-SIM phones are popular.

Wednesday's event, to be held in Apple's flashy new headquarters for the second year, also is expected to detail new fitness features for an updated smartwatch and an update to its line of wireless headphones, AirPods, according to analysts and people familiar with the plans.

The new iPhones are likely to start at $800 for the LCD model, $900 for the iPhone X update and $1,000 for 6.5-inch OLED model, up from last year's starting prices of $699, $799 and $999, according to Nomura Group's global equity research unit. It predicts average iPhone selling prices will rise by $20.

Bigger displays -- much like larger memory chips in years past -- only marginally increase Apple's costs, but the company charges customers nearly $100 more for those bigger devices, said Wayne Lam, an analyst with research firm IHS Markit. As a result, Apple pocketed nearly $77 more in profit from the iPhone 8 Plus ($288) because it cost just $33 more to make than the iPhone 8 ($255), he said.

"They have such great supply-chain management and purchasing power that they can make all these different models without incurring additional costs," Lam said. "It's a much more sophisticated sales strategy than their peers."

--Yoko Kubota and Yang Jie contributed to this article.

Write to Tripp Mickle at Tripp.Mickle@wsj.com


(END) Dow Jones Newswires

September 10, 2018 02:47 ET (06:47 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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