How Apple Is Trying To Bolster Margins With Its New iPhones

by Trefis Team
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Apple (NASDAQ:AAPL) launched a trio of new iPhones on Tuesday called iPhone 8 and 8 Plus – which are essentially upgraded versions of last year’s iPhone 7 – as well as an all new smartphone called the iPhone X, which features Apple’s first new industrial design in three years. While the devices look impressive, we do not see them driving an upgrade super-cycle along the lines of the iPhone 6 cycle in 2014. That said, Apple appears to be focusing on protecting and maybe improving its gross margins,  which have come under pressure over the last year or so, amid higher component costs and foreign exchange headwinds.

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iPhone X Likely Neutral To Margins, Despite Higher Price Tag

The new iPhone X will start at a price of $999, making it the most expensive smartphone Apple has launched thus far. Much of the price increase will go towards compensating for higher component costs. For instance, the new OLED displays on the device are reported to cost $120 to $130 per module –  about $75 more than the 5.5-inch LCD modules on the iPhone Plus models. The new depth sensing cameras – which are still uncommon in the smartphone industry – could also be relatively pricey for Apple. Overall, we believe that the iPhone X could still garner margins that are on par with previous models of the iPhone.

iPhone 8 Could Drive Gross Margins Higher

Apple could see higher margins with its iPhone 8 models. The iPhone 8 starts at $699, marking an increase of $50 over last year’s iPhone 7. The Plus version also sees a $30 price bump over last year, starting at $799. While both models offer more storage compared to last year’s models (64 GB vs 32 GB), the costs to Apple are likely to just be incremental. Moreover, manufacturing and casing related costs could be lower, as this is the fourth straight year that Apple is utilizing the iPhone 6’s basic design (albeit with a glass back). As the iPhone 8 and 8 Plus are likely to remain the choice of many mainstream customers, given the high price of the X, it could be accretive to Apple’s overall margins.

Apple Is Managing Soaring NAND Prices By Rethinking Its Storage Mix

NAND prices have been rising over the last few quarters, amid strong demand and some supply constraints as the industry migrates towards 3D NAND. This has caused Apple to rethink its storage mix strategy for its iDevices. The company is offering just two storage tiers on iPhone X and 8 (64 GB and 256 GB of memory) while eschewing a 512 GB version. Moreover, the 256GB version is priced at a $150 premium over the 64 GB version, unlike previous years when the second storage tier cost an incremental $100. Interestingly, Apple also increased prices for its iPad Pro models with 256 GB and 512 GB storage by $50 each, in order to compensate for higher memory costs.

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