Where the iPhone SE Fits

on March 10, 2016
Reading Time: 5 minutes

In the next few weeks, Apple is likely to hold an event in which it will announce a new iPhone which, according to rumors, may be called the iPhone SE. This phone is supposed to be smaller (in line with the iPhone 5 models), made from similar materials to the iPhone 6 series, and feature some of the same components. Reporting on the phone has focused on the physical appearance, components, and specs, but there hasn’t been any solid sourcing on the reasons for the phone to exist or how it will be positioned in the lineup. As such, it’s worth thinking through why Apple might want to release such a phone and how it’s likely to fit into the overall portfolio of iPhones going forward.

This is one of two devices likely to be announced this month by Apple where the questions of pricing and positioning are at least as interesting as the devices themselves. The other being the new mid-sized iPad, which might well inherit the iPad Pro branding from its larger sibling. But I’ll leave that for another time.

Lessons from the iPhone 5c

The iPhone 5c was announced two and a half years ago and was surrounded by some of the same speculation ahead of time as the iPhone SE is today. Some speculated the C stood for China, others that it stood for cheap, though of course Apple never confirmed either. Opinions on the 5c vary, and I suspect many see it as a flop for Apple, though I think that’s wrong. The iPhone 5c did two things for Apple which were very valuable: at the very least, it served as a useful experiment but I think it also bolstered sales in the quieter spring and summer months when iPhone sales tend to lag. By definition, the kind of people interested in a 5c were not those who needed the latest and greatest device as soon as it was available. So it was a great fit for carrier promotions and other marketing activities in the March-August period. Q2 and Q3 sales are typically off by about a third from sales in Q4 and about 25% from sales in Q1, so boosting sales in this quarter would help even out the seasonal variability.

The iPhone 5c, of course, launched in the standard fall iPhone slot alongside the iPhone 5s, but this new rumored phone is apparently to be the first in years to launch outside that window. I suspect the reason is the 5c sold well during just this time of year, when sales of the flagships were down, and it will help to bolster sales during this off-peak period just as the 5c did before it. If that’s part of the intent, then why not launch it into this window, when it can gain the most attention and feel new and different, rather than getting overshadowed by brand-new top of the line phones?

Bringing 4-inch iPhones back

When Apple announced the iPhone 6, I wrote about how it closed one of the last remaining competitive windows by introducing iPhones with larger screens. But in doing so, Apple also opened another window by discontinuing new 4-inch phones at the same time. I believe Apple wanted to keep its portfolio simple and was also betting no meaningful competitor would take advantage of that window, so it could safely ignore the 4-inch size without losing those customers to competitors. However, what’s happened is many of those owners of smaller iPhones have simply stuck with them, which has also dampened iPhone sales over the last year and a half. By introducing a new 4-inch phone, Apple is giving those customers a reason to upgrade. Of course, many of those holdouts have opted out of having the latest and greatest device already, so they’re a good fit for the mid-year approach I outlined above. Again, this should help to boost Q2 and Q3 iPhone sales significantly.

Pricing and positioning

If that’s the purpose of this new phone, how should Apple price it and where should it fit in the iPhone hierarchy? Here is where I think a lot of the speculation has been wrong. As I’ve already said, I suspect this is far more about boosting off-season sales than it is about introducing a new iPhone at a dramatically lower price point, for example, for emerging markets. As such, I think we need to consider where this new iPhone would fit within the existing iPhone portfolio. Take a look at that portfolio as it stands today from a pricing perspective:

iPhone pricing March 9th 2016

In what’s effectively a three-by-three matrix, Apple has several empty spots, notably in the bottom left corner, where there’s no new 4-inch device. That might suggest a launch price for the iPhone SE of $550, to slot in neatly with the other two new phones. This preserves the $100 price differential between new phones based on size, which makes some sense.

However, there are a couple of reasons to doubt that strategy. For one thing, this new device won’t have all the same top-of-the-line specs as the iPhone 6S line, which that pricing would suggest. For another, this device is launching off-cycle and likely won’t get a price discount come September. As such, Apple can likely afford to sell it for less, and doesn’t want to put it at the same price point at the year-old 6S in September. For these reasons, I wonder if Apple might bring the SE in at $450 instead, replacing the 5S in the portfolio immediately rather than waiting until September to drop that device. It would then likely stay at that price point until next March, when it would presumably be replaced by another phone similarly positioned, assuming Apple deems the experiment a success.

What about emerging markets?

The big implication of all this is Apple won’t actually extend the bottom end of the price spread at all with this new device. In all likelihood, the SE simply takes the place of a device already in the portfolio from a price perspective. So what about emerging markets and the need to bring prices down there? For those markets, I actually expect Apple to continue its existing strategy of selling older phones, but with a new wrinkle: refurbished devices.

One of the biggest problems with the old-phones strategy for lower price points is those phones are likely to stay in market for several years from the time they’re bought. As such. you could easily end up with phones that are 5-6 years old still in market. While a handful of such phones will always remain in use, the risk for Apple is these numbers rise dramatically as it pushes this strategy in emerging markets, which may constrain its ability to move iOS and the iPhone platform forward. So it makes sense for Apple to start shortening the lifecycle of these devices, which is part of the rationale for the new strategy evidenced by the SE.

However, the other part of this strategy has to be putting more used phones back on sale. With the iPhone Upgrade Program, and the less high-profile iPhone Trade-in program, Apple now has a couple of channels through which to acquire used but relatively new iPhones which it can refurbish and put back on sale in emerging markets. Apple has long sold refurbished devices such as iPods, iPads, and Macs through its website, but it hasn’t done this with iPhones until now. Most of those devices will have been returned or replaced devices for which Apple gets no revenue, and yet they’ve still been discounted by as much as a couple of hundred dollars. With the iPhone Upgrade Program, Apple will already have received around $400 or more in monthly payments after the first year from a customer, and so could potentially afford to discount these devices even more heavily when resold.

You could see refurbished year-old devices on sale for several hundred dollars less than retail price for new devices. That could easily get those phones below the $450 floor for new, year-old and two-year-old devices. A price point of $350 for a year-old device seems entirely realistic, and you could even see $250 for a two-year-old device. That suddenly allows the iPhone to hit price points it’s never been able to hit before, which in turn could make it more viable in markets like India.

All this would leave us with a pricing approach that looks roughly like this after this month’s announcements:

iPhone pricing strategy post March 2016

Going forward, I could actually see the yellow box eliminated over time, with 2-year-old devices being replaced from a price perspective by the refurbished devices and the smaller new devices. We certainly can’t be sure about any of this, but I’m very much looking forward to Apple’s event in the next few weeks and watching how all this plays out.