Innovation – Page 11 – Naofumi Kagami

What Are “Services”

There is a lot of discussion on the Internet about how “services” are essential to tech companies.

Ben Bajarin recently raised the point that even though Google is using their services as a weapon to fend off the proliferation of AOSP (Android Open Source Project) devices, Google’s services are actually only relevant in markets like the US and UK, but much less so in other regions.

What you see with regard to the Google Play services availability is the biggest issue facing Google. It is one that is forcing, in a good way, local companies in those regions to create and bring to market services of their own to support their region. China is the best example of this do date. Granted China’s Android ecosystem is a bit messy with over 100 different app stores but the region is quickly fixing these issues and consolidating.

The fact that Android is being used as an open source platform is not necessarily a bad thing for Google. What is challenging is that they are not making the impact with their services the way they need to be in many of these regions. Their competition in this case is not from the likes of Apple or Microsoft necessarily but from savvy startups looking to solve a problem in their region and doing it better than Google can thus keeping Google out of regions they may wish to compete.

I totally agree with Ben’s argument, but I would also suggest that what we are simply calling “services” should be broken down into certain sub-categories. For example, looking at the Wikipedia table on Google Play availability, we see that “paid apps and games” are available in the majority of countries, whereas books, movies and music are not. Compared to the same chart for Apple’s iTunes store,, Google Play is extremely lacking in books, movies and music but not very different in apps. This suggests that digital distribution of apps is a very different business compared to that of books, movies and music.

The reason why there is a large difference is rather obvious. In the case of apps, Apple and Google are the gatekeepers. They do not have to negotiate with the content owners over whether they can distribute the content in a certain country and at what prices. They make the decisions or the developers make the decision when they submit the app.

For books, movies and music, the rights to distribute content are much more complicated. The content owners have much stronger bargaining power and they often have different agreements in each country. Each country may have their own distributor network which may have exclusive rights for distributing content in that country. Furthermore these distributors might have plans for their own digital distribution which would compete with what Google and Apple are planning to offer.

Hence the difference between Apple and Google Play is most likely the difference in negotiating power, skill and previous relationships with the content owners. Essentially, it boils down to the ability to make deals.

With this in mind, I propose that we break down “services” into the following;

self-owned services: These are the services where the provider has ownership of the content. Examples are search, social network services and web-based services (Google Apps, etc.).
self-controlled services: These are the services where the provider can distribute without negotiating with a strong content owner. The prime example is apps. App vendors are generally quite small and have little bargaining power relative to the service provider.
third-party owned services: These are the services where you are selling content that is owned by a third-party, and that third-party has strong negotiating power over distribution (unlike in the case of apps). Examples are music, books, movies, etc. Distribution of this content was historically done physically through retail networks and this resulted in complex networks and agreements, which are often different in each country. Also this content tends to be much more expensive to create than “self-owned service” content, thus requiring large companies to fund production. These large companies obviously have strong negotiating power.

When we map companies like Google, Apple, Amazon, Twitter, Facebook, Spotify, and Pandora to these categories, we find that no company is strong in all three. Twitter and Facebook are exclusively in the “self-owned services”. Amazon, Spotify and Pandora are exclusively in the “third-party owned services”. Google is mostly in the “self-owned services” and to some extent in the “self-controlled services”. They are however very weak in “third-party owned services”. Apple is strong in “third-partly owned services” and strong in “self-controlled services”. They are however weak in “self-owned services”.

From an international perspective, “self-owned services” and “self-controlled services” are relatively easy for the service provider to provide in many different countries. However, “third-party owned services” are very difficult. Amazon for example has very limited international reach. The fact that Apple has in fact been able to provide their services in a large number of countries is very much the exception.

These three categories will probably have very different dynamics and I sense that it will be very difficult for any single company to excel in all of them. At least that seems to be the case so far.

How Many Companies Use Lotus Notes

In understanding the process of innovation and technology diffusion, it is important to analyze how long it takes for an outdated and unpopular technology to actually be eradicated from the market.

That is why I am interested in knowing how many companies use Lotus Notes there days.

I’m having difficulty finding credible information, but what I’ll find, I’ll post here.

From the salesforce.com blog;

Well, the reality is that Notes penetrated companies pretty darn well back in the 90’s (like a Nirvana song permeated the radio waves), and the departmental applications sprouted and filled all the holes that IT often couldn’t get to. Love it or hate it, Notes became a mainstay platform of the enterprise. In a recent survey we did of our Dreamforce 2012 attendees, we found that 73% did indeed still use Lotus Notes. And that 70.3% were considering replacing Lotus Notes, the majority within the year.

From an old source but which mentions that companies might not be using Lotus Notes for Email, but for other stuff, which would make a market share comparison rather difficult;

Jim goes on to explain, that by a wide definition of “use Lotus Notes and Domino software” even Microsoft would be a Notes customer.

How Are iPads Actually Being Used in the Enterprise?

There is a lot of discussion on how tablets (iPads) are replacing PCs. I have been generally skeptical of this view based on tablet usage data (1, 2).

The discussion for tablets replacing PCs is generally based on the decline of PC sales coinciding with the rise in tablet sales. This is true. However, there is little discussion on cause and effect. It is totally possible that these sales trends are not strongly related; they may simply have happened at the same time by coincidence.

Also, there are many tech bloggers and analysts who claim that they have managed to get by on their iPads alone, and only using their PCs very rarely. Or some people will claim that their parents have simple needs which are completely covered by an iPad. I have no reason to doubt these arguments, but on the other hand, I have very little reason to believe that the majority of users, especially in corporations, would feel and act the same way.

What is sorely missing in the vast majority of discussions, is how corporations are actually deploying iPad. Things like to following;

How many people in the organization are getting iPads?
What are iPads being used for by which people?
Do the people who use iPads stop using their PCs?
How do the iPads integrate with the preexisting corporate IT setup?

We can only reach a good idea of the potential market size of corporate tablets if we carefully analyze these points.

A few days ago, an article was published on ITMedia (a Japanese IT publication) that described how and why a large company introduced iPads into their IT infrastructure. I thought that it was very insightful and I have listed some points below. It tells us what iPads are good for, and importantly, why they limited distribution to only their managers and executives.

The company is Mizkan, a food company that has been around for 210 years (a history almost as long as that of the United States of America). This company has 2,900 employees and a revenue of 170 billion yen (~1.7 billion USD).
They have been using IBM Lotus Notes/Domino within their IT infrastructure since 1996.
One main function of the Notes system was workflow management. Since their business involves products that can directly damage customer’s health, accountability is key. They need to have a strict approval process.
The managers who are responsible for the approvals are often on the road, who are often not able to frequently open their laptops. This led to delays in the approval workflow.
They installed “Lotus Notes Traveller” into iPads together with some custom applications designed to work together with Notes. These iPads were handed out to the managers and executives who were responsible for approvals.
As a result, they were able to significantly reduce the time to get approvals from all concerned executives and managers.
Some executives have expressed that they don’t take their PCs around anymore and that the iPad is sufficient when on the road or at home.
Importantly, Mizkan has no plans to introduce iPads to their lower-level office workers. This is because whereas executives rarely have to prepare documents themselves, normal employees have many jobs which use keyboards extensively. Mizkan predicts that normal employees will not be able to complete their tasks on tablets alone.

My takeaway from this article is the following;

Corporate IT has many more functions that email, document/file sharing and project management. There functions are already provided by legacy solutions.
The new generation devices (smartphones and tablets) are not going to replace corporate IT infrastructure overnight. Instead, they have to integrate with the current systems. This means integration with Lotus Notes, Microsoft Exchange and all the other solutions that corporate IT have accumulated.
The majority of workers in the office are going to stick to PCs. Hence PCs will most likely remain in the center.

Will tablets never replace PCs? I don’t necessarily think so. I think they eventually will. But I think it is increasingly important to reflect on Steve Jobs’ own words as he introduced the iPad;

Better at browsing the web than a laptop.
Better at Email.
Better at enjoying and sharing photographs.
Better at watching videos.
Better at enjoying your music collection.
Better at playing games.
Better at reading eBooks.

If there is going to be a third category of device, it gonna have to better at these kinds of tasks than a laptop or a smartphone. Otherwise, it has no reason for being.

Extending Steve’s discussion, if the iPad is going to replace the PC, it’s gonna have to better than a laptop at current corporate IT tasks.

That’s a pretty tall order.

2013 Smartphone Sales Decreased in Japan

MM Research Institute (MMRI) recently published a couple of reports (1), stating that in Japan in 2013, smartphone shipments decreased by 3.7%. This was due to a combination of the following factors;

Total mobile phone shipments decrease by 10.2%.
Smartphone penetration is nearing saturation at roughly 45% of total mobile phone subscriptions.

Smartphone saturation

Observer the following graph from MMRI. This shows the number of subscribers. Blue is for smartphones and pink is for feature phones. The last bar is for Dec. 2013.

You can see how smartphone penetration is saturating. The current smartphone penetration is 44.5% and it looks like it might stop at 50%.

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Additional information from the report;

52.4% of feature phone owners answered that their next purchase would be a feature phone. Only 34.4% said that their next purchase would be a smartphone.
Reasons for not purchasing a smartphone include a) pricey data plans, b) no need for the additional features, c) difficulty of use.
Smartphone users average 6,826 JPY per month whereas feature phone users average 3,746 JPY per month.

In interpreting this data, you have to understand that Japanese feature phones are pretty capable. They can do email (even email to/from PCs), surf mobile web sites (and there are many of these in Japan), play music, watch TV, take photos, play games and make NFC enabled purchases. You can even use LINE, the explosively popular messaging app although features are limited.

Also, virtually all smartphone data plans in Japan are unlimited data. There are some pay-as-you-go schemes but you quickly reach the ceiling after which your plan actually becomes the same as an unlimited data plan. Pre-paid plans are rare.

On the other hand, feature phone typically do not need data plans to access email or watch TV. A cheap voice plan is sufficient. You can subscribe to a data plan if you want to surf the mobile web or do more complex stuff, but I suspect that most of these users are now using smartphones.

Smartphone sales decline

MMRI data for 2013.

Total mobile phone sales decreased by 10.2%.
Smartphone sales decreased by 3.7%
Apple garnered 32.5% (+9.2 points vs. 2012) mobile phone share, or 43.6% of smartphone share.
Other vendors are Sharp (14.6% share), Sony (12.6% share), Fujitsu (9.7% share), Kyocera (8.8% share), Samsung (5.9% share)
Percent of smartphones sold vs. total mobile was 74.1%.

Combining the subscriber base (44.5% on smartphones) to the annual sales (74.1% smartphones), it is clear that feature phone users are clinging on to their old models. This is probably because R&D on feature phones has ceased and no new features are being added. Additionally, carriers are not promoting feature phones.

Implications for countries outside of Japan

What this data means is that around 50% of Japanese mobile phone subscribers do not need the high-end features of smartphones, and would be satisfied with email and voice. They don’t need Facebook or LINE on their phones (although they could if they paid for a data plan). They just need a convenient way to communicate.

Now assuming that we can apply this 50% number to other countries. Since these countries do not have the feature-rich feature phones that the Japanese have enjoyed for more than a decade, we can assume that low-end Android phones on pre-paid plans are being purchased instead.

What I am trying to say is that although U.S. smartphone penetration is now at 64%, which is significantly higher than the Japanese 44.5%, a large proportion of this number probably includes subscribers on cheap pay-as-you-go or pre-paid plans. These subscribers may be using their smartphones in a manner that is similar to Japanese feature phone users, hence including them in smartphone market share is potentially misleading.

In other words, U.S. smartphone penetration may be significantly higher than Japan but the way that people are using mobile phones in general might be much more similar.

Smartphone penetration is not the right metric

Instead of looking at smartphone penetration, I propose that we should be looking at data consumption. We should be looking at what percentage of the subscribers use their smartphones to use services over the Internet thereby consuming lots of data, and what percentage use it only for voice and simple messaging. Instead of looking at the hardware, we should be looking at how people use them. If data consumption data is hard to obtain, we should be using their data-plan (unlimited, postpaid, prepaid) as a proxy.

Similarly, we should be looking at how many iPhone users consumer lots of data and how many Android users consume lots of data.

In other words, at the low-end, Android is not a smartphone platform. It is a platform upon which vendors build a feature phone.

1984 Demonstration of the Mac

I just had to link to this. Maybe I’ll write some of my thoughts later.

“Watch Steve Jobs’ First Demonstration of the Mac for the Public, Unseen Since 1984”

PC and Tablets Sales to U.S. K-12

The Wall Street Journal published an article titled “Chromebooks Take Other Mobile PCs to School” which cited estimates of laptop and tablet sales to U.S. K-12 schools.

This compares to data that was released from the NPD group late last year. The NPD group data was for PC (desktop and laptop) and tablet sales through “U.S. commercial channels” (sales through VAR that are mostly targeted towards education, government and corporations). I have previously commented on the NPD data on this blog (1, 2, 3).

The NPD Group data and following discussions pointed to the following;

Chromebooks are mostly selling to education.
Chromebooks are competing with iPads or expanding the market. They are not taking the market from Windows.
The NPD data is for computers sold to schools through VARs, not to students. The computers are strictly the property of the schools and hence purchase is not an end-user decision. In Steve Jobs’ words, these are sales through “orifices”.

Here I would like to take a look at the FutureSource data that the WSJ cites to better understand the picture.

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The FutureSource data seems to confirm the following;

Chromebooks are indeed selling well to education.
iPads are currently extremely strong in education. Much more so than Windows. It is understandable that the main battleground is iPad vs. Chromebooks and not Windows vs. Chromebooks.

Additionally, it seems that Android tablets are non-existent in schools.

As for the comments in the WSJ article that are in favor of the Chromebooks, they are interestingly from the school IT departments: the “orifices”.

One fan is Kyle Laauser, the information technology director at Saint Joseph Academy,
…
Explaining the purchase, Mr. Laauser pointed to the devices’ low price, $279 each including a $30 setup fee paid to Google, as well as the ease with which he could set them up for the entire student body.

All in all, the WSJ article seems to be in good agreement with the NPD data and the ensuing discussions.

Tablets and Laptops are Used for Different Things

There is a lot of talk about tablets replacing PCs (desktop and laptops). The people who make this point usually cite the decline of PC sales which coincided with the rise of tablets.

I have always been rather skeptical of this view because for me, laptops and tablets served very different roles. It’s not that I program therefore I need a laptop kind of thing. It’s that for any kind of work that I do in my office, a laptop is more convenient. On the other hand, when I am on my sofa playing with kids, then a tablet is much better.

The general tendency is to segment by people; i.e. power users who do a lot of stuff vs. casual users who mainly just do email and a bit of the web. I think this is the wrong approach.

The correct approach is to segment by the jobs-to-be-done. Hence even for a single person, he is sure to have multiple jobs-to-be-done in the course of a day. Some of these are better suited for a laptop and some are suited for a tablet. Or they may be an old lady who just wants to see photos of her grandchildren. A tablet would be ideal for her. Since this discussion is about form factors, the posture is also very important; are you at your desk, are you standing, are you reclining on the sofa, are you lying down on bed, or are you crouching in the toilet.

In March 2013, Chitika published data that showed when people used their respective devices to surf the web during the day.

Smartphones dip during working hours, but are still used during work hours, especially during commute hours.
Tablets are used a lot less during working hours and are mainly used for leisure.
PCs usage peaks during working hours and also during leisure hours.

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From the charts above, it is evident that tablets usage is not replicating PC usage. Although there is likely to be some overlap, it is clear that they are being hired for different jobs-to-be-done.

According to a recent interview between Apple executives Phil Schiller and Craig Federighi and MacWorld, Apple seems to think the same way.

“It’s not an either/or,” Schiller said. “It’s a world where you’re going to have a phone, a tablet, a computer, you don’t have to choose. And so what’s more important is how you seamlessly move between them all…. It’s not like this is a laptop person and that’s a tablet person. It doesn’t have to be that way.”

“Sometimes you want a large display, with many different windows open, and sometimes you just want to lay back on the couch or are standing at the bus stop. There’s a natural form factor that drives the optimal experience for each of those things. And I think what we are focused on is delivering the tailored, optimal experience for those kinds of ways that you work, without trying to take a one-size-fits-all solution to it.”

Thoughts on Mirrorless Cameras

Reuters had an article a month ago where they reported that sales of mirrorless cameras are “sputtering”.

This phenomenon is interesting for several reasons. Before we go into that, let’s look at what the article is saying;

Meanwhile, sales of mirrorless cameras – seen as a promising format between low-end compacts and high-end single-lens reflex (SLR) cameras – are sputtering as buyers put connectivity above picture quality.

Panasonic held 3.1 percent of the camera market in July-September, down from 3.8 percent a year earlier, according to IDC. Canon Inc, Nikon Corp and Sony Corp controlled over 60 percent between them.
“Only those who have a strong brand and are competitive on price will last – and only Canon, Nikon and Sony fulfil that criteria,” added Yoshida.

Mirrorless cameras such as Panasonic’s Lumix GM eliminate the internal mirrors that optical viewfinders depend on, so users compose images via electronic viewfinders or liquid crystal displays. This allows the camera to be smaller than an SLR, while offering better quality than compacts or smartphones due to larger sensors and interchangeable lenses.

From a high level, mirrorless cameras have the following characteristics;

They are technically simpler than SLRs.
They are smaller and more convenient than high-end SLRs.
They are a middle category sitting between low-end compacts/smartphones and high-end SLRs.

In regards to the 3rd point, mirrorless cameras targeted a speculative market that was hoped to exist between the low-end and the high-end. In reality, that market did not exist or was much smaller than expected. Furthermore, due to technical advancements in sensor and processing technology, the low-end cameras became more sophisticated and more capable of taking good photos. Thus any middle market that did exist became narrower and narrower with time.

It is also interesting that Canon and Nikon seem to be relatively immune to the onslaught of smartphone cameras. This is simply because the high-end SLR market was never about convenience or taking simple snaps, but has been for a long time about taking really good pictures. Smartphones with their tiny lenses are severely limited by their optics and are not capable of taking artistic level photographs. You could say that the high-end is serving a very different market or that the jobs-to-be-done are very different from smartphones.

With this perspective, it is relatively straightforward to predict the future.

For casual photos that most people want to post online, smartphones will evolve to be more than enough. As smartphone penetration increases, low-end cameras will continue to be squeezed out.
Mirrorless cameras will find a niche for consumers who want something a little better than smartphone cameras. This niche however will shrink with time. Connecting mirrorless cameras to the Internet so that you can easily upload photos will shortly extend the life of this niche. However this feature alone cannot save this category because ultimately, the jobs-to-be-done is in direct competition with high-end smartphone cameras.
High-end SLRs will continue to do just fine. Smartphones cannot touch this market due to optical limitations. The lower-cost SLRs may be more vulnerable. Connecting to the Internet may help sales, but a more desired feature is probably to effortlessly transfer photos to iPads etc.
Price erosion may further happen in the low-end, but not in the high-end. Companies from Korea and China may try to enter the high-end but will easily fail. This is firstly because Nikon and Canon have a very high professional brand, and secondly because the expertise in optical mechanics is not something that the Korean and Chinese entrants are likely to possess. Korean and Chinese companies have high-level expertise in digital electronics and this allows them to compete in the low-end. However, without expertise in analog optical mechanics, you simply cannot create a good high-end SLR.

If it somehow becomes possible to take better pictures than a high-end SLR using a different technology, then it will become possible to disrupt the duopoly of Nikon and Canon on the high-end. That is after all, how Nikon and Canon disrupted the German camera makers which had been using range-finder optics (Leica, Contax, etc.) with the then new SLR technology in the mid 20th century.

Market Leader Mentality vs. Follower Mentality

When comparing market leaders and followers, I often notice large differences in how they view the market and future innovation. These have large implications on their respective strategies and what products they introduce.

Market leaders look for ways to expand the market. They notice new applications that will bring in new customers. They simplify the product so that it becomes accessible to a wider audience. They often redefine the market to look for more room to grow.

Followers look for ways to take customers away from the leader. Instead of expanding the market, they try to attract customers with higher specs and lower costs. They tend to be oblivious to whether the specs are truly useful or not and are more focused on specs that attract the attention of prospective customers.

By market leaders, I am not referring to the companies with the largest market share. I am using this term to identify the companies that define the market and how it will evolve. These are often the companies that initially created the market and are also the companies that have a strong brand. Sometimes a market will no longer have a leader. Sometimes a market leader will not have the largest market share. If a leader is present however, that is the company in which the vast majority of innovation will be found.

What is interesting is that market leaders in a certain industry segment are also often leaders in another. For example, IBM was the undisputed leader in mainframe computing. It also continued to be the leader in personal computing. Even though it found its market share eroded by Compaq and other IBM-clone vendors, it still was the leader in laptop computers with the ThinkPad line. The ThinkPad brand was strong, not because they had the laptops with the highest specifications or because the laptops were the thinnest and the lightest. People bought ThinkPads because they trusted IBM to make the decisions that meant most to people in business. Decisions around the keyboard, pointing device, durability and all the things that do not make sexy specifications. IBM knew what business people really needed and made decisions that really counted for getting work done.

In comparison, IBM-clones were more focused on low-price and high specifications. Decisions were made to bump up the specifications while keeping prices low. The actual usability of the keyboard or pointing device was often neglected, because they don’t add to the specs. IBM-clone vendors had little regard for actual business needs.

When discussing Apple and trying to figure out what their next move will be, it is important to understand that there are these two completely different mentalities in the market.

Apple obviously has the market leader mentality. They have continuously expanded the personal computer market, first the the Apple II, then the Macintosh. After Steve Jobs’ return, the iPhone and then the iPad. All of these products brought new customers and completely new applications to personal computing.

Looking at the smartphone and tablet market, all the other vendors, including Google appear to have the follower mentality. Google copied Apple’s touch user interface and then attempted to gain market share by providing it for free. Google also copied Apple’s AppStore concept which allowed users to download and purchase software easily and cheaply. Samsung copied Apple’s designs and created phones that had very powerful CPUs and large screens; sexy specifications. Both Google’s and Samsung’s penchant for being a follower actually goes back before Android. In fact the original prototypes for Androids were Blackberry clones. Also if you look at the designs for Google Docs, you can easily identify the similarities with Microsoft Office. Google Docs is an attempted clone of Microsoft Office that is free to use.

It has been discussed that Apple should and will offer a larger size screen for the iPhone. This is typical follower mentality. Large screen phones are succeeding in the market and maybe eating away at Apple’s market share, hence Apple needs a large screen phone. This conclusion may or may not be true, but this is not really the point. The point is that because Apple has market leader mentality, it does not really care about specs. What market leaders often care about is whether or not large screens will allow new applications and expand the market as a whole. I doubt large phones will.

When we realize that Apple is more concerned about expanding the market rather than fending of Samsung, then we can make very different predictions. First of all, expanding the market means much more than selling iPhones in China. It means making iPhones and other iOS devices a larger part of our lives. It means truly integrating with cars and many more devices. Importantly, I suspect that it means iPhones should be smaller and lighter so that we can take them along even when we are not wearing baggy jeans or carrying a purse; for example, when we go jogging.

Going further, it is possible that Apple is not thinking of smartphones in the same way as they did in 2007. Steve Jobs introduced the iPhone as a “Phone, an iPod and an Internet communicator”. I suspect that Apple might have gone beyond this definition and moved towards something different. The clue is that they included the M7 chip inside the iPhone 5s. The M7 chip is something that most people would expect to find in a wearable device. It is therefore possible that they now define the iPhone itself as the wearable device that everybody is clamoring about. If so, the direction would be to make the iPhone as small as possible.

Smartphone Screen Size and The Reason To Exist

There are speculations that Apple may introduce a larger iPhone in 2014. The reasoning is that high-end Android smartphone users generally tend towards large displays and therefore the iPhone has to have a larger screen to compete.

I think that this line of logic forgets that fact that smartphones are no longer just phones or even Internet communication devices. Smartphones are general purpose computing devices that you can carry around with you, almost all the time. This should be the new definition of what smartphones are.

Why is this important?

If you consider smartphones to be primarily Internet communication devices, then yes, a larger screen size may be preferable (this is actually debatable because mobile websites are becoming better and better, making a smaller screen more comfortable for web browsing, but that’s another discussion).

However if you use a smartphone as a fitness tracker, then smartphones should get smaller. When you are running, you are probably not wearing baggy jeans nor are you carrying a purse. You will put your phone on your regular size pocket or strap it to your arm or something.

Apple integrated the M7 chip on the new iPhone 5s, strongly suggesting that Apple wants users to carry around the iPhone all the time. Obvious applications are fitness, but I expect more than just that. This suggests that the direction Apple is heading is not larger phones, but rather phones that are even smaller and lighter.

You have to remember that Apple seriously thinks about why certain products exist. Products have to fulfill a meaningful use-case, and have to fulfill it better than any other product. If you create smartphones that are larger, then they basically become half-sized tablets. There remains little reason why a large smartphone and small tablet (like the iPad mini) should co-exist.

My guess is that Apple is positioning iPhones as devices that you carry with you all the time almost like a wearable. Hence iPhones will evolve to make you more likely to keep in your pocket, not less.

Reiterating my point, I don’t necessarily doubt that a larger iPhone would make financial sense, at least in the short term. It is very possible that such a product would boost iPhone sales. I just don’t think that that is a priority for Apple. I sense that their priority is the long term evolution of smartphones into something more.