iPhone XR Accounted for an Estimated 32% of U.S. iPhone Sales in November

[SteveW928]

It doesn't matter what you think. All that matter is what's shown in the financials. Ever since Steve Jobs introduced the 1st iPhone, Apple's gross margins have remained steady at around 39%. If Apple was raising prices just for the sake of raising prices, that would be reflected in higher gross margins. What you feel about that is irrelevant. What you're really asking is for Apple to take a hit on its gross margins.

Are you talking about Apple in general, or particular phone models?

Unless there is some expensive licensing going on, there's just no way the component costs have risen enough to equal-out the selling price rises. The margin can't be the same.

Do you have evidence to show that the market is plenty big enough, otherwise you're asking Apple to make an iPhone based on speculation.

Well, there is plenty big enough to justify it, and then there is plenty big enough to consider it important in the minds of the Apple execs in comparison to other models. The former, easily. Just look at the graphs.

Could Apple sacrifice some of these “features” to make cheaper devices sold at the same gross margin? Yup.

In the big picture, though, I don't think these features cost that much more, especially in comparison to how much features cost them in previous generations of iPhone... whether that be hard component costs or R&D effort. What parts are now so expensive on these new phones?

The one place I disagree with you is the SE. I think it’s too early to make a guess, even an informed one, about why it got nuked this year. I can think of several plausible explanations that aren’t “the niche market is too small / demand would be too low.” Product confusion, which you mentioned and is already a problem, may be one of them. Cannibalization is another. A third is wanting to nudge sales toward the XR, which is positioned as an entry price point with killer features (note to potential replying posters: whether this is accurate is irrelevant) but has the same gross margins as its more expensive siblings. A fourth is brand equity. I could rattle off others, but those are the big ones that come to mine.

And that’s all why it wouldn’t surprise me that as some of the costs of the higher-end components come down, we might see a re-introduction of a smaller form factor in 2019 or 2020.

I hope you're right about a re-introduction, and agree that any/all of those reasons make more sense that 'too small a market'. Maybe, as I said above, too small in comparison, but certainly not too small. Many competitors would kill for a market that big.

I worked with an iPhone 4 that had an inoperable home button for 3 years. Just enable the virtual home button via Settings>General>Accessibility>Assistive Touch —> On. Works great on my iPhone 6S when I need it as a backup home button.

Yeah, workable, though a pain. I did that with a previous iPod touch.

IMO, the reason for no SE model is that the financial and engineering reasons for it do not line up - there IS a market for that form factor, but that market is not large enough for Apple to commit engineering, development, assembly and marketing resources to it. The primary reason is that, despite its smaller size, the cost of development and components isn’t necessarily much less, if at all, compared to larger and better selling models. It would require a rethink of the small chassis, a complete rework of internal structure and boards, plus the potential issues of using an upgraded CPU like the A11 and the limited battery capacity in the design. Apple would need to price this small form factor unit at at least $600-700 with 64GB-128GB storage to justify the effort and that would directly compete with the 8. Selling only 10-15M units annually probably wouldn’t make it worthwhile despite the fondness on many SE owners for the device. IMO, That is precisely why aside from one Sony unit, there are also no other android devices in this form factor either.

I don't really buy that. I don't think it would be all that hard to update the SE with current series components, for the most part. Maybe not the camera or a few other things... maybe not Face ID. But, unless they try and update the chassis (hopefully not!) it shouldn't be a huge project.

And... for those who want the small form factor, they could price it at $1000 and we'd still pick it over the 8 or X, etc. Don't confuse the small with cheap. Apple has solved the cheap by selling outdated models at low prices (a practice I don't like, but solves the problem of the SE not having to be the cheap model).

 

[Easttime]

It’s only case study data, but all 4 adults in this family finally upgraded from iPhone 6’s (not 6s’s; sorry about the apostrophes) to XRs in December and we’re all very happy with them. I used to prefer smaller phones, but now prefer the large screen. Not sure how I will carry my XR come spring when the winter clothes get put away (they hide the humongous belt case) but it does fit in my front pants pocket. After a week I much prefer Face ID/swipe up over Touch ID, in fact I have an iPhone 8 for work and keep trying to swipe it to open. The camera upgrade is great. The only drawback was price, but the wife and I both got bonuses and the “kids” got Christmas deals from the phone company. Given we use our smartphones constantly for multiple purposes and tend to keep them for a long time, we feel we can sort of justify the cost.

 

[john123]

In the big picture, though, I don't think these features cost that much more, especially in comparison to how much features cost them in previous generations of iPhone... whether that be hard component costs or R&D effort. What parts are now so expensive on these new phones?

The OLED, mechanical, and electro mechanical. Those 3 have a cost—excluding any R&D amortization—that’s almost equal to what the whole 5S originally cost to build.

We’ve just hit diminishing returns here. Anything new isn’t critical and it costs a lot more. Sucks.

 

[SteveW928]

The OLED, mechanical, and electro mechanical. Those 3 have a cost—excluding any R&D amortization—that’s almost equal to what the whole 5S originally cost to build.

We’ve just hit diminishing returns here. Anything new isn’t critical and it costs a lot more. Sucks.

Yeah, if so I agree there (ie: sucks). I don't really care about OLED. Not sure what mechanical and electro-mechanical are... you mean just to build, or taptic, etc? Even the XR is much more expensive, though (sans OLED).

But, even so, why not keep a lower end model w/o the extra (non-critical) stuff then? What's the point of upping the cost of the entire product line if they aren't making anymore profit margin?

If that's really the case, then I'd have to say Cook just doesn't have much business smarts. At least the 'raising prices to keep profits up amid falling unit numbers' theory makes Wall Street 'business sense'.

 

[john123]

Yeah, if so I agree there (ie: sucks). I don't really care about OLED. Not sure what mechanical and electro-mechanical are... you mean just to build, or taptic, etc? Even the XR is much more expensive, though (sans OLED).

But, even so, why not keep a lower end model w/o the extra (non-critical) stuff then? What's the point of upping the cost of the entire product line if they aren't making anymore profit margin?

If that's really the case, then I'd have to say Cook just doesn't have much business smarts. At least the 'raising prices to keep profits up amid falling unit numbers' theory makes Wall Street 'business sense'.

I’m out of my element here (I’m a business, finance, analytics, and product guy—so not an engineer or supply chain guy) and thus you should take anything I say here with a grain of salt—but my understanding is yes, it’s stuff like what you mentioned. I think some of the FaceID stuff is included too.

I’m afraid it’s less poor business sense and more lack of ideas. The most useful features generally require some sort of third party cooperation or network effects—or both. And those are sloooow. For pure hardware and solo phone experience, until we get something wacky like futuristic 3D screens, I’m just not sure what other game changers exist.

So they could sell the same old stuff really cheap with an A12 and lose a ton of brand equity. And they probably crunched the numbers and found that would result in lower net profits.

It’s just a bad situation. They need a new product...or not. Plenty of “old” companies do just fine selling the same tired thing over and over with minor tweaks for decades. Apple’s cemented itself pretty well into a firm market share with high switching costs, so while that pivot would be so very boring for us, it’s not crazy or unheard of.

 

[I7guy]

I think you guys are both partly right and partly wrong.

Agree with you 100% on margins and component costs. It’s pretty clear that’s driving the bus on pricing. You don’t get that kind of quarter to quarter stability otherwise. And that’s why the price complaints so badly miss the mark.

Could Apple sacrifice some of these “features” to make cheaper devices sold at the same gross margin? Yup. Can I guarantee that their finance department has done the math and determined that would be sub optimal? Yup. So really what they are doing is the only logical corporate course of action.

The counter argument that Apple can make it up on services sales misses the mark a bit. They’ve built a customer base for a decade now with a largely closed (quasi monopolistic) ecosystem. There are also switching costs for users. The reality is that the finance department has also done plenty of demand elasticity analysis. What they’re doing is what they think 1) maximizes long-term EPS while 2) preserving the stability that investors have come to expect.

The one place I disagree with you is the SE. I think it’s too early to make a guess, even an informed one, about why it got nuked this year. I can think of several plausible explanations that aren’t “the niche market is too small / demand would be too low.” Product confusion, which you mentioned and is already a problem, may be one of them. Cannibalization is another. A third is wanting to nudge sales toward the XR, which is positioned as an entry price point with killer features (note to potential replying posters: whether this is accurate is irrelevant) but has the same gross margins as its more expensive siblings. A fourth is brand equity. I could rattle off others, but those are the big ones that come to mine.

And that’s all why it wouldn’t surprise me that as some of the costs of the higher-end components come down, we might see a re-introduction of a smaller form factor in 2019 or 2020.

Regarding cannibalization. My theory Apple probably crunch the numbers of cannibalization vs loss of revenue from churn and determined that cannibalization was higher than churn. Hence no SE. Maybe a sucky way to determine the product line, but it's only a guess. Nobody here (probably) knows the real rational.

 

[john123]

Regarding cannibalization. My theory Apple probably crunch the numbers of cannibalization vs loss of revenue from churn and determined that cannibalization was higher than churn. Hence no SE. Maybe a sucky way to determine the product line, but it's only a guess. Nobody here (probably) knows the real rational.

My suspicion, too, is that's exactly right. Mostly because the alternative makes no logical sense.

"Let's sell super expensive phones but make overall less long-term profit so we can call ourselves 1337?" Yeah....

Regardless of how anyone in this thread feels about Apple and it decisions, love em or hate em, they're really really good at making money.

 

[ftaok]

Are you talking about Apple in general, or particular phone models?

Unless there is some expensive licensing going on, there's just no way the component costs have risen enough to equal-out the selling price rises. The margin can't be the same.

Actually, Apple's margins on iPhones have been flat to falling for the last several years.

Here's a link showing iPhone margins falling every year since 2012.

https://www.statista.com/statistics/666993/iphone-estimated-gross-margins/

And here's a link/chart showing that the margin on individual iPhone models (BOM vs Retail Price) has been the same for a while now.

https://www.theinformation.com/articles/apples-iphone-prices-soar-but-not-profit-margins

 

[john123]

Actually, Apple's margins on iPhones have been flat to falling for the last several years.

Here's a link showing iPhone margins falling every year since 2012.

https://www.statista.com/statistics/666993/iphone-estimated-gross-margins/

And here's a link/chart showing that the margin on individual iPhone models (BOM vs Retail Price) has been the same for a while now.

https://www.theinformation.com/articles/apples-iphone-prices-soar-but-not-profit-margins

This is great. I've been doing bunches of calculations on this thread and others myself, digging up the raw data and crunching the MSRP/teardown part cost ratios. This graph is way better, and it lines up pretty perfectly with the numbers I've been running.

Every time someone whines about how "greedy" Apple has become under Tim Cook, we should re-link this.

I do so love facts....