iPhone XR Will Cannibalize Sales Of Premium iPhones, But That Shouldn’t Worry Apple

by Trefis Team
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Apple (NASDAQ:AAPL) launched three new iPhones, which include an upgrade to the iPhone X, called the iPhone XS (starting at $1,000), a new plus-sized version called iPhone XS Max ($1,100) and a relatively more affordable 6.1 inch LCD version called the iPhone XR ($750), which sports a similar design and signature features. While it’s highly likely that the XR will cannibalize some sales of the more premium lineup, considering its compelling value proposition, we believe that the overall impact of the new lineup on Apple’s ASPs (which grew 20% year-over-year in Q3), overall revenues and margins will be very positive. Below we take a look at some of the reasons underlying this view.

Our interactive dashboard on What’s Driving Our Price Estimate For Apple details our expectations for the company through the rest of the year and the factors influencing our price estimate. We are in the process of updating our model to account for the new iPhone launches.

The Relatively Affordable XR Will Hit Sweet Spot For Most Customers

The iPhone XR has a starting price that is almost $250 less than the base version of the iPhone XS, and still offers the same edge-to-edge design of the X line, Face ID biometrics and the new A12 bionic processor. The device is also expected to offer better battery performance compared to the XS lineup. Moreover, Apple is offering a 128 GB version of the device at $800, which is $200 less than the 64 GB iPhone XS, and this could hit the sweet spot for many customers. We expect the XR to emerge the best-selling iPhone, as it could attract buyers of lower- and mid-range iPhones, considering it is the first relatively affordable model Apple has launched with a new design. The last mainstream iPhone design update came back in 2014 with the iPhone 6. The starting price of the device is also above the $724 average selling price Apple posted last quarter, meaning that it should only be accretive to Apple’s ASP metric.

Profitability Should Remain Strong

Apple should be able to maintain healthy margins on the iPhone XR, as it has eschewed some costly features, including OLED screens that it has had issues procuring, in favor of widely available LCD displays. Moreover, the LCD display on the XR has a resolution that is actually lower than the company’s legacy Plus models. The company has also removed the 3D touch pressure-sensitive tech that has been a staple of most iPhones launched since 2015, while only offering a single camera, as opposed to the dual rear camera setup on the iPhone XS and 8 Plus models. The price of NAND memory is also on the decline (a drop of  10% is forecast in Q3 alone) helping the company bolster profits on its higher storage tier models.

iPhone XS Max Should Drive High-End Sales

While the XS models are likely to see weaker product differentiation with the launch of the XR , they could cater to users looking for better displays, camera technology and more storage space (the XS models offer as much as 512 GB). The XS Max model, in particular, could be appealing to power users, as it is priced in the same ballpark as Samsung’s latest Note series of phablets while offering a slightly larger screen. This device could be very profitable for Apple, as it charges customers a $100 premium over the iPhone XS, although the incremental costs of the larger screen are likely to be much lower.

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