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July 11th, 2017: Thoughts on New iPhone Pricing and Naming
Today's update will take a deep dive into my thinking regarding new iPhone pricing and naming.
Thoughts on New iPhone Pricing
Apple is expected to unveil three new iPhone models in September:
A completely redesigned OLED iPhone
An updated 4.7-inch iPhone 7
An updated 5.5-inch iPhone 7 Plus
It is also widely expected that Apple will price the OLED iPhone higher than any previous iPhone. (The iPhone 7 Plus starts at $769.)
John Gruber, over at Daring Fireball, thinks the new OLED iPhone won’t just be priced higher than the iPhone 7 Plus, but will be priced significantly higher - to the tune of $1,200 with certain configurations running as high as $1,400. Those prices set off a firestorm around the web.
Gruber discussed his logic behind those price estimates.
"It sounds to me like the OLED iPhone is a phone which Apple can’t make 40 million of per quarter, at least not today. And if that’s true, that means it should be more expensive. Not should in any moral sense, but simply because that’s how the principle of supply and demand works. When supply is constrained and demand is high, prices go higher. The higher prices alleviate demand...
The prices for these [OLED] iPhones need to be high enough so that tens of millions of people still want to buy the iPhone 7S and 7S Plus. If the 'iPhone Pro' or 'iPhone Edition' or whatever it is that Apple is going to call this phone starts at $800 or even $900, who is going to buy an iPhone 7S or 7S Plus? Not enough people, that’s who. Apple needs tens of millions of people to buy the 7S and 7S Plus because they aren’t going to be able to produce the 'Pro/Edition' model in sufficient quantity."
I think Gruber is overthinking this (which isn’t a bad thing – Apple pricing is a very interesting topic to muse on).
Gruber’s stance is that since Apple won’t be able to produce enough OLED iPhones, they need to price them artificially high to make sure people don’t buy them. Instead, consumers will be forced to pick the lower-priced updated iPhones in plentiful supply.
At first, this seems like completely new territory for Apple. However, there is a recent example of Apple doing something similar with the original Apple Watch Edition. Apple priced 18-karat Gold and Rose Gold Apple Watches artificially high to drive up their scarcity value. Sure, the gold and rose gold cost more to make than the other Apple Watch models, but not to the tune of up to $17,000.
The key difference between gold Apple Watches and iPhones is that Apple likely never had any intention of shipping Apple Watch Edition in bulk. In fact, Apple may have only been able to produce a certain number of Edition Watches - which goes back to raising pricing to account for that lack of supply. Regardless, a little over a year after unveiling the Edition collection, Apple completely changed its strategy. The Edition collection is now represented by the much lower-priced $1,249 white ceramic Apple Watch.
IIf Apple was to actually follow a strategy of basing product pricing on supply, quite a few Apple products would be priced significantly higher. AirPods would have launched at $299 or even $399, not $159. Seven months after release, there is still a six week wait for AirPods at Apple Retail. Apple could have launched Apple Pencil in late 2015 at $149 or $199, not $99. The Apple Watch Series 2 could have been priced higher since it took a few months to get demand and supply balanced. Apple is more likely to underprice new products, not raise prices artificially.
Read between the lines, and I think Gruber is making a more subtle point in his piece. If Apple can increase the screen-to-bezel ratio on the OLED iPhone, the device can fit an iPhone 7 Plus screen into an iPhone 7 form factor. In that case, why would anyone be interested in buying an updated iPhone 7 Plus or iPhone 7? It would seem like the OLED iPhone is the perfect combination of screen and form factor. Everyone may want the OLED iPhone. According to Gruber, since supply will be very tight, Apple will price the OLED iPhone artificially high to make it less accessible and to temper demand. This would then cause people to settle for the lower-priced updated iPhone 7 or iPhone 7 Plus. If that strategy sounds extremely crummy to the user, it’s because it is.
My thinking on new iPhone pricing is quite a bit different.
The OLED iPhone may very well turn out to be the most popular model in the iPhone line. Ming-Chi Kuo is estimating 50% of new iPhone sales in 2017 (part of FY4Q17 and the entire FY1Q18) to be the OLED iPhone. If true, that would be a huge percentage. In the beginning, the iPhone Plus had close to 30% of overall iPhone sales (now more like 40%). As we discussed last week, Ming-Chi Kuo's sale estimates don't contain the same kind of accuracy as detailed iPhone and iPad product information.
Turning to OLED supply, rumors from Apple's supply chain actually point to better OLED supply than originally thought. (We discussed this topic last month in the email from June 13th.) If we take these rumors and combine them with Ming-Chi Kuo's estimates (which may very well simply be based on the same rumors), Apple will ship close to 40M OLED iPhones in FY1Q18. Those aren't sales belonging to a $1,200 to $1,400 iPhone. Instead, those sales are for an iPhone that may have a higher price tag than any other iPhone but is still in reach to most of the iPhone user base. That's an OLED iPhone priced to sell.
Another way to think about this topic is to look at the current iPhone line. Demand for the higher-priced iPhone 7 Plus is exceeding Apple’s expectations while iPhone 7 (and iPhone 6s) demand has been disappointing. This tells us that an increasing number of consumers are willing to pay an additional $120 for the differentiating features found in the iPhone 7 Plus, including the dual camera system and larger screen. However, it is extremely important to point out that the iPhone 7 is still outselling the iPhone 7 Plus in absolute terms. Not everyone wants the features found in iPhone 7 Plus, at least not at current prices. My takeaway from this is that Apple can increase iPhone pricing as long as it is commensurate with added features. Meanwhile, a significant portion of consumers will base their purchase decision on price. These users want an affordable iPhone.
If Apple prices the OLED iPhone at $1,200, we are looking at a $430 premium to the iPhone 7 Plus. That's huge. What features will the OLED iPhone have to drive such a premium? An OLED screen that is roughly the same size as that found in the iPhone 7 Plus? 3D camera technology? It's tough justifying a $430 premium, especially when you consider that the iPhone 7 and 7 Plus will receive their own updates as well.
Here are my thoughts regarding new iPhone pricing (these would be starting prices):
iPhone X (the OLED iPhone): $999 ($1,099 for the special case color that everyone will want)
iPhone 8 Plus: $669 ($769 for Jet Black)
iPhone 8: $549 ($649 for Jet Black)
Wild card: Apple will drop the price of iPhone SE to $349 (from $399).
(We will go into more about iPhone naming down below.)
A couple of items to consider:
1) It is important to point out how talking about iPhone pricing without knowing the features found in each model contains risk. While it sure sounds like the OLED iPhone will lack fingerprint recognition and Touch ID, what about the other two new iPhone models? There is still quite a bit of unknown found with those iPhones in terms of new features.
2) My projections have Apple reducing the price of LCD iPhones (iPhone 8 and iPhone 8 Plus) by $100. This would address Gruber's question regarding who would actually want to buy a LCD iPhone when there is an OLED model in the lineup. A $100 price cut for new 4.7-inch and 5.5-inch LCD screen models would certainly get people interested. As for the precedence this may set, there likely won't be any as Apple is expected to sell three new OLED screens next year. In terms of overall iPhone ASP - it will still go up thanks to the iPhone X.
3) If the iPhone X ships later in 2017, many people will need a new iPhone before that point and will choose a new iPhone 8 or 8 Plus. This may be why Ming-Chi Kuo is still thinking 50% of new iPhone sales will be the LCD models. In addition, for those consumers basing their purchase decision on price, the iPhone 8 or 8 Plus will be their preferred option.
4) Every iPhone is launched into a severe demand/supply imbalance. That's just the nature of the iPhone business. The iPhone X won't be any different. Apple may very well push back the launch until later in the year (even as late as November or early December). However, my suspicion is that Apple won't price the device high in order to reduce demand. Instead, the higher price will be justified by the added value and functionality. There will likely be a considerable wait for iPhone X delivery.
5) At $999, we are looking at the iPhone X having a $230 premium to the iPhone 7 Plus. That's manageable for many people. On a monthly basis, that comes out to something like an additional $10 per month.
6) Apple can take a page from the Jet Black playbook and price the hottest iPhone X case color at a $100 premium. Storage configurations can also be modified to boost profit margins. This same strategy can be utilized for the iPhone 8 and 8 Plus. Apple can use storage configuration options to get consumers to pick the higher-margin storage options, offsetting the adverse impact on margin from a $100 price cut.
Thoughts on New iPhone Naming
The current iPhone numeral nomenclature has lost all of its meaning. Consider the iPhone naming timeline:
iPhone 5s & 5c
iPhone 6 & 6 Plus
iPhone 6s & 6s Plus
iPhone 7 & 7 Plus
The iPhone “S” cycle actually ended years ago, around the iPhone 5s. This is when the year-to-year changes seemed to be in many ways more significant during S years than non-S years. From that point forward, the S basically just represented the filler year between whole numbers.
Consider how the iPhone 7 could have easily been called the iPhone 6ss in terms of feature set. Instead, Apple stuck with the existing strategy and gave the model that next whole number. The intention was for the new whole number to signal to consumers that the model was a considerable upgrade from the iPhone 6s.
My thinking regarding new iPhone naming:
iPhone 8 Plus
Apple could change things up and instead call the two new LCD models the iPhone 8 and 8 Plus. However, there is risk in this strategy. Judging by iPhone 7 sales trends, the intention of using whole numbers to signal bigger iPhone changes may already be getting a bit stale.
As for the OLED iPhone, I’ve always had a thing for calling it “iPhone X.” The name would stand for the 10th anniversary iPhone. However, the name is a bit risky. It would be pronounced “iPhone Ten” just as Mac OS X was pronounced “Mac OS Ten”. However, some people may think it is pronounced "iPhone X" as in the letter X. Is that a big enough reason to not pursue iPhone X? No.
The idea behind naming the OLED iPhone iPhone X is that Apple would eventually rename the model anyway the following year as two new OLED iPhone models are introduced - one bigger and one smaller than this year's OLED iPhone. In that case, calling this year's OLED iPhone the "iPhone Edition" or "iPhone Pro" seems even messier. What happens next year? Apple just calls the largest iPhone, the iPhone Edition?
My theory is still that over time Apple will drop the numbers altogether and just go to a simple:
This will likely make much more sense once Apple ships three iPhone models where the major cosmetic difference is screen size. As the iPhone upgrade cycle gets longer, this new naming nomenclature will also make more sense.
One can also make a case for Apple taking the "pro" route with iPhone (like they have done with Mac and iPad). However, I still have issues with using "pro" in product naming these days as the definition of professional has changed. Will we get to the point where only one iPhone model is for "pros"? That doesn't seem right. Meanwhile, the pro in iPad Pro seems to stand more for productivity. What does that then mean about the non-pro iPad models? Are they for less productivity? This is the downside of using "pro" in naming in an era when mobile gadgets redefined consumer and professional computing.
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