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Apple's Next iPhone: What We Think We Know

New iPhone Hardware

In the fiscal second quarter, Apple's iPhone gained market share in U.S., the UK, Japan, Canada, Germany, France, Vietnam and Greater China, and other countries, and managed to set a new all-time record for total iPhone sales in the BRIC countries. The third quarter reinforced the enthusiasm for the iPhone, with Cook highlighting strong sales of the iPhone, as well as the Mac in the company's earnings press release.

It's expected that the next iPhone will come in two sizes, both a 4.7-inch version and a 5.5-inch version, which may allow the company to charge more for a larger phone, given demand for Apple products. On the fiscal quarter earnings call, Cook was asked about this factor, and said that Apple would charge a price for its products what it sees as appropriate, but did not commit to a particular price. "We price things that ... are priced in such a way that we think it's a fair price for the value that we're delivering and we make those on each thing as it gets closer time to come to market," Cook stated.

Cantor Fitzgerald analyst Brian White believes that both versions will be unveiled next week, but the larger 5.5-inch iPhone is more important to the company's position in China. "In our view, it doesn't matter if the two new iPhones are available in September or October; however, we believe it is important for Apple to launch a 5.5-inch iPhone Air this year to better penetrate China," White wrote in a note. He rates Apple a "buy" with a $123 price target.

Apple is also expected to introduce a mobile payments service with its new offerings, with Bloomberg and technology Web sites Re/Code and The Information having reported that Apple has signed deals with American Express (AXP) , Visa (V) and MasterCard (MA) . "I see mobile payments for Apple in the context of their platform and ecosystem strategy," said Hudson Square Research analyst Dan Ernst via email. "By making mobile payments easier to use, and potentially more secure with TouchID, it gives users, developers, and partners another reason to choose Apple over Android, but does not in itself add to the bottom line."

Apple CEO Timothy D. Cook has hinted that the company could look into mobile payments, via TouchID, which was introduced on the iPhone 5s. "The mobile payments area in general is one that we've been intrigued with, and that was one of the thoughts behind Touch ID," Cook said on a Jan. 27 earnings call. "But we're not limiting ourselves just to that. So I don't have anything specific to announce today, but you can tell by looking at the demographics of our customers and the amount of commerce that goes through iOS devices versus the competition that it's a big opportunity on the platform."

Apple's iTunes platform has more than 800 million accounts with credit cards linked to them, potentially making this a lucrative area for Apple. "Clearly they have to be working on stuff," said one hedge fund analyst long Apple who declined to be name. "It's just been a tough slog for them -- and Google -- to dislodge incumbents. It's why PayPal (EBAY) is so damn valuable." Forrester Research expects the U.S. mobile payments to reach $90 billion by 2017, indicating there is space for additional companies to enter the space.

Introduced as part of iOS 6, Apple offers an app, Passbook, which stores boarding passes, movie tickets, retail coupons and loyalty cards, which some thought to be Apple's first foray into the digital wallet or mobile payments space.

With a larger screen, it will allow users more visual area to work with. This is important since Apple introduced Continuity at Worldwide Developer Conference (WWDC) earlier this month. The program allows users to start an activity (email, document, etc.) on one device and continue working on it on another.

There's also increased speculation about the glass Apple is using for its next iDevices, potentially making them unbreakable. Apple has contracted GT Advanced Technologies (GTAT) for its sapphire plant. The Merrimack, N.H.-based company recently gave 2014 guidance, and said it expects revenue to be back-loaded toward the second half of 2014. GT Advanced recently filed an amended 10-Q showing that the $225-million prepayment from Apple is used to retrofit and qualify GT Advanced's Salem, Mass.-based furnace, as well as build out the company's Mesa, Ariz.-based facility. It's possible that the next version of the iPhone uses sapphire for its glass, as sapphire is one of the hardest and most scratch-resistant minerals on Earth.

Outside of the glass and size of the iPhone, it's likely that Apple will include updated versions of its mobile chips. Last year, Apple announced the A7 and M7 chips for the iPhone 5s, with the M7 being used for motion-sensor detection. That fits in well with Apple's recently announced Health app, that will centralize a user's health and fitness data.

iOS 8

Though much of the speculation around the next iPhone centers on its hardware and mobile payments, the announcement of iOS 8 at WWDC indicates that Apple has bigger plans for the iPhone than just sending texts, surfing the Internet and downloading apps.

The long-awaited iOS 8, which is available for developer download now and will be available to the public later this month, brings new features, especially geared toward the health and fitness market. 

With the Health app, which many believe is part of Apple's push into wearable technology, given the oft-rumored wearable device (which may also be unveiled at the Sept. 9 event), the health and fitness market app market is exploding. By unveiling this, it's clear Apple wants to be part of a growing trend.

According to a report from research firm Research2Guidance, there are now more than 100,000 dedicated health and fitness apps on Apple's iOS and Google's Android platform, with the projected revenue to be $26 billion by the end of 2017. This is up from $2.4 billion this year, so it's clear the segment is exploding. Though much of the revenue is concentrated at the top with the top 5% of app publishers seeing more than 500,000 downloads, making more than $1 million a year in sales.

Additionally, the company launched what it calls smart home technology, known as Homekit, that will allow its users to integrate computing hardware with smart appliances. Currently, there are a few partners for HomeKit, including Honeywell (HON) , Texas Instruments (TXN) , iHome, Phillips (PHG) and others. "HomeKit is a new framework for communicating with and controlling connected devices in a user's home. Apps can enable users to discover devices in their home and configure them, or you can create actions to control those devices. Users can group actions together and trigger them using Siri," according to Apple's Web site. HomeKit will allow locks, lights, doors, thermostats, garage doors and other home-centric items to integrate into an iPhone or an iPad, using Siri to operate them.

Some of the smaller issues that have been changed with iOS 8 include predictive typing, using Apple's QuickType keyboard, and for the first time ever, allow Swype keyboard technology into iOS. Apple's iOS 8 also comes complete with an iCloud Photo Library. This is a simpler, faster and more intuitive user experience that will give users a lot of new functionality.

Apple also gave Messages a boost, implementing new features that will allow users to share voice, video or photos with a single swipe. For some who have been on long, annoying group messages, Apple has now created the ability to remove oneself from those group messages. Apple also introduced a feature that allows some of these messages to self-destruct after a predetermined period of time, a nod to messaging apps such as Snapchat.

--Written by Chris Ciaccia in New York

>Contact by Email.

Follow @Chris_Ciaccia

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