Why Apple Will Kill the iPod Touch and iPhone SE

Apple's week of new products has been a lot of fun. First we got iPads, then an iMac, then AirPods. On Twitter, though, I'm seeing people longing for the most beloved Apple gadgets the company is unlikely to improve: the iPod touch and iPhone SE.

Both products hit a bunch of sweet spots not found in other Apple devices. The iPod touch is an entry-level iOS device for kids, which also appeals to "disconnectors" who don't want to pay for smartphone service plans. The iPhone SE is a petite, portable way to enjoy iOS and communication without getting too sucked in, and it fits into tight pants.

I love both of these devices. I recommended the SE to a ton of people, and they're all happy with it. I'd love to see an iPhone SE 2 with a somewhat upgraded processor and more current LTE bands, so it can better connect to the latest LTE networks, but with everything else (especially the price) left the same.

But these devices get people into iOS with a low entry price, and that's a big problem for Apple.

With the smartphone and tablet markets stagnant, and no hot new product categories like cars or AR glasses in the short term, Apple needs to deliver increasing profits to its investors by raising average sales prices (ASPs). We've seen that with iPhones, where the device price (for a high-end model, but with base storage) has crept from $499 to $1,099 over the years. We've seen it with Macs, and we've even seen it with iPads over the long term. The $329 iPad, which Apple needed to launch at that price point because Chromebooks were eating its lunch in schools, was balanced out by the costlier iPad Pro line.

Used iPhones Are the New iPod Touch

Here's some sneaky math for you. Apple can raise average selling prices two ways: by selling more expensive devices or by cancelling less expensive ones. By cancelling or hiding the iPhone SE, the price of the cheapest iPhone goes from the $349 SE to the $449 iPhone 7—a bump investors will cheer.

And Apple isn't casting away the market of people who don't have $400. Apple has an answer for these folks, a sneaky one that doesn't affect ASPs: used iPhones.

The iPod touch starts at $199 at Apple. A used iPhone 6, on the retail site Gazelle, also costs around $200. If you buy a used iPhone, you're in the iOS app world, you're paying for and participating in Apple services, and you're contributing to Apple's global market share. But that hardware price doesn't hit Apple's bottom line. Apple didn't sell it. Apple's average sales price doesn't go down.

Used iPhones are Apple's magic answer for everyone who wants cheap iOS devices (if not for people who want small ones). Don't want to have a service plan? Don't insert a SIM.

Apple can use this strategy where Android vendors generally can't, because Apple products have much better support and longer lifespans than most Android phones. Apple supports its phones with software upgrades for five years after launch: the iPhone 5s, from 2013, runs iOS 12.2. That means three- or four-year-old phones, even, can be sold as "current." Apple makes enough money from its services, such as the 30 percent cut it gets from the App Store, that it's happy to defer hardware purchases if it means keeping users in the iOS fold.

With most popular Android phones, you're lucky to get one or two annual upgrades before the manufacturer gives up or gets distracted. Android phone vendors make all of their money from hardware; they've tried to start their own service ecosystems but generally failed. So Android makers need to keep selling you new phones, where Apple has a reason to keep supporting older ones.

None of this bodes well for the future of the iPod touch and iPhone SE. Wall Street doesn't like small, fresh, inexpensive iOS devices, and in our economic system, Wall Street makes the decisions. Enjoy your used iPhone instead.

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