Apple Documents Leave No Doubt Larger iPhones Are Coming

In internal documents released during the Apple-Samsung patent trial, Apple acknowledges, "Consumers want what we don't have."

Samsung and Apple are back in court in California, and documents released as part of the patent-infringement trial speak volumes about issues on which Apple has been publicly silent.

While Apple executives have said that consumers like a phone they can use one-handed and reach a thumb across, and the company has stuck by its lofty pricing, insisting it's more interested in making great phones than on sales number, an internal slide from a fiscal year 2014 offsite planning meeting was titled "Consumers want what we don't have."

Growth, it shows, is coming from devices with screens larger than 4 inches and prices under $300.

A still more telling slide shows year-over year iPhone unit growth. In fiscal year 2009, Apple's iPhone growth was 107 percent; in 2010 it was 93 percent; in 2011, 78 percent; and in 2012, 74 percent. In 2013 it dropped precipitously, to 26 percent during the first quarter, then 12 percent during the second and 8 percent during the third.

These figures give a very different impression from what comes across during Apple earnings announcements.

Apple CFO Peter Oppenheimer told analysts during Apple's fiscal 2014 first-quarter call: "Despite supply constraints on iPhone 5S, we sold 51 million iPhones compared to 47.8 million in the year-ago quarter. That's an increase of 3 million phones, or 7 percent, and a new quarterly record. iPhone sales growth was very strong year over year in Japan … [and] we also generated strong year-over-year growth in greater China, Latin America, the Middle East and Russia. In the U.S. market, Apple remains the leading smartphone manufacturer."

"So what is going on?" asks another slide, getting to the bottom of Apple's falling sales growth. Apple points to three factors: Consumers want larger screens and less expensive phones; competitors have "drastically improved" their hardware and in some cases their software; and the carriers are no longer loving Apple.

"Carriers have strong interest in capping iPhone [sales] due to one or more factors," says the slide. These include the premium subsidy carriers pay (Sprint, finally getting the iPhone in 2011, likened the financial hit it was taking to making a Moneyball bet), "'Unfriendly' policies" and a "lack of alignment."

With the iPhone 5, Apple for the first time increased the iPhone's display to 4 inches on the diagonal, after generations of sticking with 3.5 inches.

With the release of the iPhone 5C, a slightly less expensive model with a plastic case, Apple also experimented, for the first time, with introducing two new iPhones in one year.

This year, it's expected that Apple will again push itself on both fronts, introducing two new iPhones, and both with much larger displays. Multiple reports have said Apple is planning a 4.7-inch model alongside a 5.5-inch "phablet."

Apple is also likely to reassess its marketing strategy this year. Competitors, it said in the internal documents, are "spending 'obscene' amount of money on advertising and/or carrier/channel to gain traction."