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Thursday, May 01, 2014, 11:23 am PT (02:23 pm ET)

How iPhone 5c helps Apple move toward larger new iPhones in the future

Apple started 2014 with a diverse lineup of iPods and iPads in multiple sizes, but the company still only makes one form factor of iPhone. Here's how the company's iPhone 5c experiment has helped it to develop the operational sophistication needed to produce multiple sizes of iPhone.

iPhone 5c


From one $400 iPod model in 2001 and one $500 iPad model in 2010, Apple has incrementally expanded its offerings to create a range of iPods from the $50 iPod shuffle to the $400 64GB iPod touch, and a range of iPads from $300 entry level iPad mini to the most expensive $929 128GB 4G iPad Air.

In iPhones, however, Apple continues to sell one basic model that starts and ends at essentially the same prices that the iPhone debuted at. For the last several years, Apple has sold one new iPhone and two previous years' models each year. This stands in marked contrast to other handset manufacturers that have long offered everything from very cheap to very expensive phones, very large to very small phones, all in a very diverse array of wildly different form factors and colors.

iPhone 5c: "For the colorful"



Last fall, Apple introduced a slight tweak to its product lineup by differentiating its "last year's" model as "for the colorful," with a new design and minor enhancements. This appeared to be an experiment in handling multiple product lines, and a progression of the 2012 strategy that launched multiple colors of the company's iPod touch. As the world's largest volume manufacturer of premium smartphones, the introduction of multiple iPhone 5c colors was a significant new challenge for Apple.

While Apple sold around 26 million iPods in 2013, only about half were iPod touch models. That means Fiscal 2013's iPod touch color experiment involved operational management of around 13 million devices.

iPod touch 2012


In contrast, Apple sold over 150 million iPhones that year, which helps explain why the company took a slow and cautious step toward releasing just three color finishes of its high end iPhone 5s while focusing its broader color experiment on the refreshed, cheaper iPhone 5c, which it knew (or at least certainly had to have hoped) would make up a minority of its total iPhone sales for Fiscal 2014 (which at the end of March is now half over).

Rather than being a flop and grave mistake as Apple's critics have sought to insist, iPhone 5c was an iterative learning experiment that helped Apple perfect its operational management and large scale production of multiple iPhone models on a global scale. While iPhone 5c's multiple models were differentiated by color, the lessons Apple learned apply to any sort of product variation, including the parallel production of multiple sizes of new iPhones.

The phone industry's exceptional underdog



While Apple quickly took over the high end of phones, it's useful to keep in mind that the company has only been in the phone business for 7 years. It has never sold a large percentage of all the world's phones or even all the world's smartphones, particularly when the definition of smartphone is expanded to include hundreds of millions of extremely low end devices with outdated specs, poor performance and reflect the simple user behaviors of basic phones the industry used to call "feature phones."

After releasing iPhone 4 in June 2010, the company struggled to perfect the production of its planned white version until April 2011. That highlights the complexity of the product development and operational challenges involved in managing the production of devices on the scale of iPhone.

Within 2010, while it worked to develop a white iPhone 4, Apple's iPhone sales hit 47 million, or less than a third the number Apple currently produces. The jump from April 2011's white iPhone 4 to multiple colors of iPod touch in late 2012, and then multiple colors of iPhone 5c a year later show a rapid ramp, not just in technical competency but in managing complexity while volume production quickly escalated in parallel, from a few million white devices to tens of millions of iPhones in a range of colors.

That operational sophistication relates to more than just mass producing precision devices in multiple colors; it also applies to other variations, including the iPhone's first major departure from a "one size fits all" product lineup. In order to build multiple sizes of iPhones, Apple needed to rapidly develop the same sort of expertise that much larger, more experienced phone makers like Nokia, Samsung and Motorola had gained from building broad ranges of products for many years.

Apple becoming the new Nokia



In 2006, Nokia had over 65,000 employees and Motorola employed over 66,000 people. Not all of those were working on phones, but compared to Apple's 20,000 employees (including temp workers and contractors), Apple was clearly a far smaller company. On top of that, a significant number of Apple's employees worked in hundreds of retail stores, something neither Nokia nor Motorola had.

Today, Apple has over 80,000 employees, of which more than 26,000 work in U.S. retail alone. So despite incredible growth, Apple currently continues to be about the same size as Nokia and Motorola were before the iPhone appeared.

Apple jobs


The big difference is that Apple is earning far greater profits than Nokia or Motorola ever did, because it isn't using its similar number of employees to design, test, market and sell a vast portfolio of products at increasingly razor thin margins, the way that Samsung currently is.

Samsung's status quo is a strategy that quickly drove Nokia and Motorola from leading, profitable mobile firms to today's "discontinued operations" that are now being sold off as scrap after posting quarter after quarter of massive, million dollar losses.

Apple is selling affordable luxury. In phones, Apple is exclusively selling premium models at prices above $400, far higher than the average selling price of Nokia, Motorola, Samsung or anyone else in the industry.

Going forward, Apple is not only tasked with adopting more of the product diversity of other phone handset makers, but must also maintain its current profitability to avoid suffering the business implosion, financial losses and employee layoffs that Nokia and Motorola have both suffered. It's not surprising why Apple refuses to follow the hindsight-driven guidance of today's financial analysts to dictate its business decisions.

How easy will it be for Apple to muscle its way into the larger screen phone market pioneered by Motorola and Samsung? While we have to wait for Apple's new products to launch and then wait a bit longer for the sales numbers, there is already convincing evidence that should leave Android makers very concerned. The next segment will look at what's involved in the trend toward new sizes of phones, and how the groundwork laid by iPhone 5c in moving Apple into more direct competition with its phone industry competitors has historical precedence.