When Apple (AAPL) released the iPhone 5S and iPhone 5C this fall, investors were wringing their hands — this wasn’t the cheap iPhone analysts were looking for to drive up sales volume. So what do you suppose would happen if the iPhone 6 expected in 2014 is actually more expensive than current models?
According to All Things D, Susquehanna analyst Chris Caso is suggesting Apple could do just that, jacking the price of next year’s flagship iPhone by as much as $100. Why would Apple consider breaking with tradition and boosting iPhone prices?
Going cheap has never been Apple’s way of doing things. While the strategy cost its ownership of the PC market to computers running Microsoft (MSFT) Windows, Apple’s PC division still does quite nicely. Despite refusing to drop iPad prices and seeing a resulting slide in tablet market share, Apple continues to be the largest tablet manufacturer and commands high profit margins on those devices — the iPad Air has a 45% margin and is selling well, despite competitors like the Kindle Fire HDX 8.9 sold by Amazon (AMZN) for $100 less at break-even pricing.
While tablets are profitable, the iPhone has been Apple’s golden goose when it comes to margins.
The Susquehanna analyst says a faster processor and bigger display would be the driving factors that could boost the iPhone 6 price tag another $50-$100.
Based on build costs (excluding manufacturing, shipping, packaging and marketing) when the company released the iPhone 5 last year, moving to a bigger display and camera dropped profit margins to 68% from the 71% of the iPhone 4S. However, the current iPhone 5S — which retains the same display but includes improved camera hardware and the new Touch ID sensor — saw margins creep back up to 69%.
When the iPhone 6 is released, I don’t put much faith in the theory that a faster CPU is going to raise iPhone 6 manufacturing costs in a meaningful way. Every generation of iPhone has received an upgrade, and if any version should have seen a significant boost in cost, it’s the iPhone 5S which moves to 64-bit and gains the M7 motion co-processor. Instead, Apple’s bill of materials declined for this version.
However, a bigger, higher-resolution display could certainly make the iPhone 6 more expensive to build, especially if Apple decides to curve it, as has been suggested.
According to IHS iSuppli, the current 4-inch Retina touchscreen display is the most expensive iPhone component, costing Apple $41. In comparison, the 5-inch AMOLED HD touchscreen display used by the Galaxy S4 costs Samsung (SSNLF) $75, so even if Apple went with a straight-up upgrade to 5-inches, the iPhone 6 could cost $34 more.
All other things being equal, the iPhone 6 price would then need to increase by $100 — in other words, have a starting price of around $749 (or $249 to $299 on contract) — just to maintain current margins.
So, will you be seeing a $749 iPhone next year instead of the $649 we’ve grown accustomed to?
Yes. Apple has demonstrated both its insistence on maintaining a premium pricing model and the power of its brand over the past several months.
The iPhone 5S has sold better than expected, despite the release of the less-expensive iPhone 5C, proving that Apple customers are willing to pay the extra for a flagship phone bearing that white logo. And when the iPad Mini replacement was revealed in October, instead of lowering the price of its cheaper iPad, as was widely expected (given that it already cost $100 more than most 7-inch Android competitors), Apple instead raised the price to $399 — a 21% increase.
A bigger iPhone 6 is as close to a sure bet as you can get with Apple. Whether the display is 4.8-inches or 5-inches, curved or not, the company simply needs a bigger option to be competitive in a market where consumers are demanding smartphones with larger displays than anything it currently offers.
Yes, Apple has pretty much stuck to its guns to this point (the half-inch bump of the iPhone 5 was a minor concession), but it had the same firm stance (in reverse) on big tablet screens being the only way to go, before caving to consumer demand and releasing the iPad Mini.
The other sure bet with the company is its addiction to fat profit margins. The only way Apple can sell a bigger iPhone 6 at the current $649 price is to find a bigger display that’s dramatically cheaper than Samsung’s, figure out another way to shave component costs, or relent on margins. The first will be tough to pull off without sacrificing quality, and the second is probably wishful thinking.
I think Apple will sell a boatload of the bigger, more expensive iPhone 6’s. There are plenty of current Apple customers still clutching an aging iPhone 4S and casting envious looks at the iPhone 5S, but refusing to make the jump until Apple offers something bigger. A good chunk of iPhone 5S owners are likely to see the display side increase as a worthy upgrade. And on a device that’s already expensive, tacking an extra $100 isn’t likely to cool upgrade demand.
But expect Apple to keep selling a cheaper iPhone option like the iPhone 5C next year, just in case.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.