Hopeful speculations abound for possible low-cost Apple iPhone to return to Apple's product lineup. ... [+]
When people think of Apple's iPhone line and its brand, in particular, the term Premium products always come up. Over the years, their prices on many products were clearly in the premium price range, so the view that their products are premium is relatively correct.
Under Steve Jobs’ guidance, Apple has had the charter to create the best products they can in every area they compete, and the Macs and iPhones are no exception. Jobs made design, innovation and usability the heart of Apple's business model, and the fact that they ended up perceived as premium products were by design.
Even when Google came out with Android phones at much lower costs, Apple persevered and continued to create the best products based on their design goals and charged for them accordingly. One ironic twist of this strategy is that by holding this course since 2007, when the iPhone debuted, Apple continues to make the lion’s share of profits in the smartphone business. While unit shipments of iPhone pale in comparison to cheaper, low and mid-range smartphones, Apple continues to be the most profitable maker of smartphones by a wide margin.
The one exception to this premium pricing rule was with the introduction of the iPhone SE (Special Edition) in 2016. The 16 gig model launched at $399, but the demand for a phone with this little memory did not take off. Apple curtailed the 16 gig model and moved to 32 gigs with a slightly higher price of $449. But to potential Apple customers, Apple broke the under $500 barrier for the first time, and many who could not buy the higher end models got their chance to join the Apple ecosystem of software and services for the first time.
Officially, Apple stopped making the iPhone SE on September 12, 2018, partly because their newer models were starting as low as $699 with a lot of features that the higher-end models released at the time also had. A new processor, better screen, etc. drove a lot of what we would call lower-end smartphone buyers to move to these entry levels model of the new iPhone.
Today, if you follow the various Mac sites, you are aware of the banter from the iPhone fanboys that purportedly claim a new version of the SE is about to be released, possibly under the moniker of an iPhone 9 brand name. And the most recent stories suggest that it will start at $399 as it initially did with the 16 gig SE model in 2016.
I have no direct information as to whether a lower-cost iPhone SE or iPhone 9 is around the corner, but if it is, there will be some strong reasons for Apple to introduce a lower-priced iPhone at this time again.
I believe the iPhone SE introduced in 2016 was more of a pricing experiment than a long term strategy. One fact that is clear since the iPhone originally came out is that the upper end, higher-priced models always seem to be the best sellers with the Mac crowd. Each generation's entry model does well with the "switchers," people who were on other smartphones and decided to move to Apple's iPhone for many reasons.
The fact that they killed the SE in 2018 says a lot about a lower-cost iPhone's viability. Apple spends millions of dollars touting the new features and functions of each new model of an iPhone, and even their lowest-cost iPhone needs to have some of the bells and whistles that the upper-end models have in them. If not, the entry iPhones of any new generation would not be attractive to those wanting to come over to Apple's ecosystem.
If Apple decided to enter the sub-$500 iPhone market this time, this would not be another pricing experiment, as I believe happened with the iPhone SE. One primary reason is that Apple is a very different company in 2020 than they were in 2016. Back then, their services business was setting the foundation for Apple's current services program, which alone brought in $12.9 billion in revenue last quarter.
Some of the financial reports projecting Apple's long term services revenues suggest that by 2023, Apple's services could be a $100 billion business in its own right.
Apple will continue to produce high-end, premium iPhones for many years. But getting more people into the Apple ecosystem so that they can participate in Apple's services programs has become a new and essential part of Apple CEO Tim Cook's focus for this new decade.
A sub-$500 iPhone that has much of the updated technology, minus unique bells and whistles such as on OLED screen and three cameras, yet exceptional in its own right, could be attractive to switchers. It could also be a product that the carriers jump on for big promotions to get new iPhone customers on their networks. And if successful, it could bring tens of millions of new iPhone customers into the Apple ecosystem and millions of new customers into their services business.
One sticking point for investors and the financial market is how Apple manages the margins for any new sub-$500 iPhone.
Apple has margins in the 33% to 35% range on most iPhones now. Getting that kind of margin on a sub $500 iPhone could be difficult. Yet, Apple has a way of working with their supply chains and component suppliers, and I can't imagine that Apple would allow the margins on a sub $500 iPhone slip below 30%.
As I look at Apple's next decade, it is clear to me that their services business is their next cash cow, and getting more people to use these services will be one of Apple's primary focuses in the coming years.
The other area Apple is focused on for this decade is Augmented Reality. While they do have AR apps and support in iOS for AR today, I don't think their total AR strategy will be clear for another year or two as some of the technologies needed to bring AR to the masses are not ready for the market yet.
That is why a lower-cost iPhone could make sense early in this decade as a means of getting more people into Apple's ecosystem of products and services. All the while, building up more services and laying the foundation for an eventual AR push. It could make sense for Apple to do a sub-$500 iPhone this time as a very strategic means of building a bigger audience for their services businesses over the next five years.
