Much has been said and speculated around the pricing for Apple’s iPhone 8. iPhone rumors is especially hot in the summer thanks to the slow news cycle and publications hunting down every story and angle which will generate interest and the iPhone 8 fits that need.
This is one of the most asked questions I get from clients, readers, and in particular the Wall St. community of investors. There is a range of concerns which I will cover and share my thoughts and perspective on, but I think it’s helpful to remember why–besides being a 10th anniversary year–this particular iPhone launch is of the utmost interest, and perhaps importance to Apple as a company.
Many may remember the iPhone 6 launch year and what many referred to as a “super cycle.” That simply means there was a large base of pent up demand of Apple customers who were in need of an upgrade to their 2-3-year-old iPhone. This cycle was also strategically important for Apple as the move to a larger screen form factor helped accelerate their installed base growth and subsequently boosted the annual percentage of customers switching from Android to iOS. We find ourselves in a very similar situation, and many hoping history repeats itself with this iPhone 8 “supercycle” should it happen.
The logic of these assumptions is the expectation/hope that:
- Apple breaks sales records of the fall thanks to pent up demand to upgrade (especially in China)
- The iPhone returns to growth (which is likely)
- These new devices to usher in another round of installed base growth driven by hoards of new switchers from Android.
As always, there are bull, base, and bear cases build around this cycle, but the hope is there that this cycle will generate a new growth period from Apple. Interestingly, some reports I’ve read are predicting iOS growth in 2018 to be higher than Android growth as the entire industry has been hit by a slowdown due to smartphone purchases being delayed. The data seems to suggest the slowdown in 2018 will hit Android more than iOS with iOS being posed for a growth year with estimated iPhone sales forecasts ranging between 230-250 million for Apple’s fiscal year Dec-Sep.
The two biggest parts of the bear case are the price and rumors of a delay. Those are the two I’ll spend time on and end with some thoughts on how Apple may shake up the lineup this fall.
Will the iPhone 8 (exact name TBD) Suffer Massive Delay?
This is probably the hottest question I get from investors. My answer is probably but not any later than November. The root of this concern is because of the number of innovations Apple is bringing to market with the highest end model of the iPhone 8. Things like OLED screen, breezeless design, new 3D image sensor technology, Touch ID under the display, new colors or materials, etc. Many of these technologies are in their infancy and don’t just suffer from challenges in manufacturing scale but also short supply. From my supply chain conversations, Apple has locked up a good chunk of the new 3D image sensor supply they are using but even then may not be able to secure enough to meet demand. These two issues combined are likely to result in some delay meaning customers who want the iPhone 8 will have to wait a month or two at most.
This is not a huge issue since early adopters who will likely be the target of this product will be willing to wait to get the latest innovative iPhone. Meaning, if Apple comes out with a supply of 35-45 million supply in the Dec quarter (estimated 35-45% mix of Dec qtr sales), they will sell all of them and keep their higher end product mix in line with past quarters.
Overall, the delay will be widely critisized in the news but if the supply chain reports are accuate and late October/early November is the longest consumer will have to wait then it seems a big quarter is possible and likely in Dec for Apple.
Price has been another major concern. The concern being the iPhone 8 assumes a much larger bill of material (BOM) cost which will drive it’s price up well over $1000 dollars. Folks have speculated it could be $1400 or $1500 which I don’t feel is likely.
A cost analysis of how Apple prices it’s premium products against other premium players in a given category shows that Apple never prices too high above the competition. This true of iPad, Mac, iPhone, and other products in Apple’s lineup as well. While Apple’s products are the most expensive in most categories they compete, they are never too expensive compared to their competition. This is a key point when addressing this concern since the root of the worry is that if the iPhone was too high priced that devices like the Samsung Galaxy S8 and soon to be launched Note devices may become more attractive. Or that consumers may start to feel like Apple is price goughing them and get fed up and switch to another vendor or cheaper iPhone model. Here agin, knowing Apple tries to be price compeititve should give us all the historical context for pricing we need.
My gut is we will see and entry level 64gb iPhone 8 (x, pro, TBD) in the $900 dollar range and a 256gb version starting at $1000-$1100. Yes that would make it the first time in USD the iPhone crosses $1000 in price but a high end 7 Plus today is not that far off in price.
The other angle Apple can pull is lower the price of the updated iPhone 7 models, if indeed they update the models instead of redesign all three offerings. This move would absolutely add to their installed base it makes it easier for Android switches to enter the Apple ecosystem with more affordable current generation models. While most believe Apple will update and release three newly redesigned iPhones in the fall, the iPhone 8, 8 Plus, and Pro/X(TBD), some analysts think Apple may be extremely aggressive and even lower the price of the 8 and 8S in order to further grow their customer base. While I have a feeling they are skipping the 7s and 7s plus cycle and releasing three new iPhones, two LCD, and one OLED, I’m not as confident they will be extremely price aggressive with 8 and 8 Plus. But this logic does give more reason for a buyer to be interested in the 8 Plus given its screen size will be similar to the iPhone 8 (X, Pro, TBD).
I’m intriqued by the price aggressive theory with current generation phones as it would absolutely lead to an injection of growth many did not see coming. Given Apple’s continued strides in monetizing users through the ecosystem and creating massive value for developers and other third parties, it seems like the more Apple aggressively grows its base the bigger and more robust its services revenues can become. I’m still not confident of this thesis but I find it intriguing given the growth injection to Apple’s customer base it would cause.
It’s fun to speculate, but I’m not as worried as others at this moment given the historical context on pricing I provided above. Things like augmented reality will continue to help further Apple’s differentiation in the market and provide a new batch of iOS only experiences. This will help China, India, and key parts of Europe as the smartphone market reaches maturity and consumers are harder to excite. Ultimately, I’m still bullish on the iPhone 8 supercycle but once we have the details in September, it will be easier to provide more concrete scenarios for the Dec quarter.