On Sept. 12, Apple (AAPL 0.64%) is hosting an event at which it is expected to unveil a trio of next-generation iPhones.
Though it's widely anticipated that the direct successors to the current iPhone 7 and iPhone 7 Plus will launch at similar prices to those models, the company is also said to be preparing a premium smartphone at a higher price.
Image source: Apple.
That premium model is expected to include a full-face organic light emitting diode (OLED) display for improved image quality, as well as 3D-sensing technology that can be used for applications like facial recognition and augmented reality (AR).
It's also expected to start at $999 for the base model -- a $350 premium to the base iPhone 7 model and $230 more expensive than the base iPhone 7 Plus model.
It's natural for a company to want to get paid a premium for a superior device -- after all, companies want (and, in this Fool's opinion, deserve) to be paid for the innovation that they deliver to their customers.
Per a recent research note from noted analyst Ming-Chi Kuo with KGI Securities (via AppleInsider), one component that's adding significantly to the costs of producing the premium iPhone is its OLED display, sourced from Samsung (NASDAQOTH: SSNLF).
Let's take a close look at the details.
A large cost increase per phone
Kuo said that Apple will shell out between $120 and $130 per OLED panel, up from between $45 and $55 for the high-quality liquid crystal display (LCD) used in the iPhone 7 Plus.
Unfortunately for Apple, Samsung is reportedly the only company capable of manufacturing the OLED panels that Apple needs in the quantities that it requires. This, unsurprisingly, means that Samsung can crank up the prices that it charges for the panels: If Apple wants to ship OLED smartphones, it has no choice but to pay what Samsung wants.
This is in sharp contrast to the situation in LCDs, where there are multiple capable suppliers vying for Apple's business, which shifts the bargaining power back to the buyer.
Apple's solution
At the end of the day, if Apple wants to sell iPhones with high-quality OLED displays at lower prices, it will probably need to wait for other suppliers to offer viable product.
Now, Apple, with its supply chain virtuosity, is unlikely to just sit around and hope for more OLED manufacturing capacity to come online somewhere. What it's more likely to do -- and, in fact, is already showing signs of doing -- is work with other suppliers to get the right technology and capacity in place.
Apple won't be able to shift away from Samsung in one fell swoop; instead, expect it to give small amounts of business to competitors while buying the bulk of its OLEDs from Samsung.
Over time, as those alternative suppliers prove their capabilities, Apple can start shifting additional orders to them. Eventually, when Apple is no longer quite so beholden to the demands of a single supplier (a supplier that is also Apple's main rival in the premium smartphone market), it will be in a better position to dictate the prices that it wants to pay -- ultimately lowering Apple's product costs, boosting gross profit margins, and giving it the the ability to charge less for its best smartphones.
