Will Apple’s iPhone 6 Cost Too Much?

The high end of the smartphone market -- one in which Apple (NASDAQ: AAPL  ) plays pretty much exclusively -- appears to have saturated. Now, while some may mistake this for "on the decline," the fact of the matter is that this segment as a whole isn't growing anywhere nearly as much as the broader smartphone market. In order to grow, Apple needs to gain more share at the high end. The upcoming iPhone 6 is Apple's best shot at a return to profit growth.

The iPhone 6 will be more expensive to make
A faster processor, more RAM, larger chassis, bigger/higher resolution screen, and other goodies don't come cheap. Apple needs to pay for it. Now, there's no doubt that it will squeeze its suppliers to the extent that it can, but even still, it would be remarkable if Apple actually found a way to keep the cost of its next-generation iPhone 6 flat relative to the 5s.

That said, despite an increase in the bill of materials, Apple could end up growing its sales pretty significantly as a result of share gains at the high end against Samsung, HTC, and other Android players. So, just what kind of market share gains does Apple need in order to offset a bill-of-materials increase? This is tricky to forecast as we need to come up with good estimates for the following:

  • The underlying secular market growth at the high end
  • What kind of potential market segment share gains at the high end Apple could get with a 4.7" iPhone
  • How much more expensive the iPhone 6 (4.7") will be relative to the iPhone 5s.

Projected iPhone 6 specifications
To help understand (3) above, it's worth building upon the analysis presented in "Apple's iPhone 6 Specs Revealed" to try to come up with a potential bill-of-materials cost for the iPhone 6 relative to the iPhone 5s (iPhone 5s numbers from IHS iSuppli).

Components

iPhone 5s (16GB)

Cost

iPhone 6 (16GB, Projected)

Cost (Projected)

NAND flash

16GB NAND

$9.40

16GB NAND

$9.40

DRAM

1GB LPDDR3

$11.00

2GB LPDDR4 (?)

$25.00

Display + touch screen

4-inch 1136x768 touch display

$41.00

4.7-inch, 1600x900 touch display

$52.00

Processor

Apple A7 + M7 co-processor

$19.00

Apple A8 + M8 co-processor

$22.8

Camera(s)

8MP + 1.2MP

$13.00

8MP + 1.2MP

$13.00

Wireless (Cellular)

Qualcomm MDM9615 + WTR1605L + RF Front End

$32.00

Qualcomm MDM9x25 + WTR1605L + RF Front End

$35.20

UI + sensor

Touch ID

$15.00

Touch ID

$15.00

Connectivity

Broadcom-based, Murata 802.11n module

$4.20

Broadcom-based, Murata 802.11ac module

$5.00

Power management

Dialog + Qualcomm

$7.50

Dialog + Qualcomm

$7.50

Battery

~1570 mAh

$3.60

~2300 mAh

$5.00

Mechanical/Electro-Merchanical

 

$28.00

 

$34.00

Box Contents

 

$7.00

 

$7.00

Total cost

 

$190.70 + $8 manufacturing

 

$230.90 + $8 manufacturing

Data source: IHS.

Now, if Apple ends up selling these at the same $649 (16GB) price as the iPhone 5s, then it is clear that there will be some margin compression in going from a device that costs about $200 to build against one at $240. However, the effects of this margin compression diminish with the size of the flash memory on board as the $40 delta becomes a smaller part of the selling price. Also, it is likely that Apple will offer a 128GB version at an even higher price point that'll carry even better margins to help offset the decline in the smaller ones.

How much volume does Apple need to grow?
For simplicity's sake, let's assume that 80 million of the 150 million iPhones sold in a given 12-month period is the latest and greatest. A $40 increase in cost over 80 million units suggests a hit to gross profit on the order of $3.2 billion a year. However, given that the iPhone 6 will still likely generate at least $400 in gross profit per unit, Apple needs to sell at most 8 million incremental iPhone units to maintain similar levels of profitability (in reality it could be less depending on the mix of 16/32/64GB models).

Now, 8 million incremental high-end units imply approximately 10% growth. The 4.7" screen should entice buyers of Android handsets to switch (as the iPad Mini did in tablets vis-a-vis the Android tablets of the time), and hitting that target is likely more than achievable. The question is whether Apple can do more than that in order to grow gross profits.

Foolish bottom line
At the end of the day, even a more expensive to make iPhone 6 will probably drive enough revenue growth to at least hold the line on raw gross profitability. Of course, to command a meaningfully higher multiple, Apple will need to grow high-end units in excess of that 8 million mark, but this should be achievable given the underlying secular trends and the market share growth opportunity. 

Is the iPhone 6 even the most interesting thing going on at Apple?
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.


Read/Post Comments (14) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2014, at 12:20 PM, Chiam wrote:

    Salem alechim.

    Great article but apple products are about to take a dive especially in China.. Competition is destroying them. They know that. It is now officially over!

  • Report this Comment On April 06, 2014, at 1:25 PM, artlaz wrote:

    Apple might increase the price by $50 on the 4.7" phone and $100 on the 5.5" version thereby negating the cost increase. Other premium phones in the market sell at those prices. And, after all, if it is going to be a status symbol, being premium-priced might actually make it more desirable.

  • Report this Comment On April 06, 2014, at 3:12 PM, twolf2919 wrote:

    Good article. But the largest cost increase you project isn't even for the screen but of memory! Why do you think Apple should spend an extra $14 to increase the memory to 2GB? Please give a reason other than "Android phones come with 2GB". In other words: how will a customer benefit from the extra RAM?

  • Report this Comment On April 06, 2014, at 3:16 PM, vernr75 wrote:

    More wishful thinking. Apple's not going to gain any further market share at the expense of anyone. Those days are over and no iPhone iteration is going to change the current trends without a drastic shakeup in price and hardware strategy from Apple. At 4.7 inches, the iPhone 6 is still going to be the smallest in the pack. The phablet version, assuming it's not just vaporware, is going to be too expensive for most iPhone users and some of them who can only afford the outdated smaller iPhone models might actually decide to go Android instead of buying another small phone. Right now what I'm seeing is a new trend where all top end Android phones are now universally arriving with support for 128GB SD card storage...and that's on top of the 16-32GB internal storage memory. That's going to shake things up more in Android's favor. Few people are likely to choose a 16GB iPhone phablet over a 144GB -160GB Android phablet sold at the same price or less.

    Apple's big problem right now is that each passing year sees it getting a smaller and smaller number of first time users. This has been an established trend for a few years, but it's beginning to show up as a drastic loss of steam in their sales growth. Their sales growth is so heavily dependent now on upgrade purchases from established iPhone customers that if too many of the faithful decide to skip this year's upgrade ritual because they don't see the value over an iPhone 5S they already have, Apple's in deep crap.

  • Report this Comment On April 06, 2014, at 6:31 PM, WalterPidgeon wrote:

    It should be known that Samsung is the world leader in smartphone sales by a wide margin. Samsung currently has a market share of about 33% to apples telescopic distance away of 15%. So apple has no realistic chance of gaining MS with the IPhone 6 versus the Samsung's giant marketing ability.

  • Report this Comment On April 06, 2014, at 6:44 PM, yep11222 wrote:

    Who cares, we all know bigger is better when it comes to smart phones! Whatever Apple wants, Apple gets! Thanks for writing an article thats does not make any sense! Find a new story like what was on that soldier's mind at Ft. Hood last week! If you want an bigger iPhone you will pay for it, again what Apple wants, Apple gets (period) right?

  • Report this Comment On April 06, 2014, at 8:35 PM, Sabrfan30 wrote:

    This may sound crazy but I have read on many websites that the I-phone 6 will stay the same in price & the larger version may or may not go up. Reading articles on other websites that say the same thing really makes you think Apple isn't going to raise the price. JMHO

  • Report this Comment On April 06, 2014, at 8:54 PM, frellmedead wrote:

    There are a lot of people, myself included, who want a screen larger than four inches, but smaller than the phablet sized Samsung and others. However, Apple needs to upgrade their cameras and include an SD card slot. If Samsung came out with an 4.5-4.7 inch version of their flagship phone, I would jump to buy it. Right now, it looks like I will be getting the HTC One Mini.

    @yep11222: Nobody knows what was on that soldier's mind, so what is the point of having a bunch of useless articles that are only speculating (aka journalists and armchair psychologists pulling theories out of their butts)?

  • Report this Comment On April 06, 2014, at 9:34 PM, tdawgjenkins wrote:

    There's one big problem with the claim that Android phones are superior and will only continue to eat away at Apple's marketshare: the Android OS itself. I've been an Android user for 4 years now I can tell you that I will never buy another one again. I give them credit for how far they've come over the years but the fragmentation, lack of updates and glitches are frustrating to deal with.

    The Android phone experience varies greatly from vendor to vendor depending what their take on Android is. You could be running the same exact version but have a very different layout...and don't get me started on OS updates. The manufacturer then carriers ultimately decide if you get an Android upgrade after it's released. HTC decided to drop support for my phone after a year and I've been stuck on 4.2 since then. Doing a CyanogenMod update isn't desirable since it's too technical and also aspects of your phone won't work right if they haven't fixed the glitches for your device. I shouldn't have to pay $400 after one year to buy another phone just to get the latest version of Android, only to get dumped next year.

    Apple on the other-hand will continue to upgrade the OS on your device for at least 2 generations. Will it run superfast on an older device? Probably not, but at least you get the latest features. Apps and the user experience are more stable and tightly controlled. I don't care about how much I can customize the device myself since I (and most other people) are not interested in a funky colored keyboard with a moving spaceship background...we just want the thing to work right, get great battery life and be supported in the future. This is why Apple will continue to be successful while Android/Samsung will continue to come up with gimmicks that most users don't really care about. I do think this is a tremendous opportunity for Microsoft though to gain share with Windows Phone if they capitalize on these flaws in Android.

  • Report this Comment On April 06, 2014, at 11:38 PM, frellmedead wrote:

    @tdawgjenkins: Don't forget the fact that after about 18 months, Android phones get buggier and buggier (much like a Windows computer). That is done intentionally through all of the ads and OS "upgrades" so that users get frustrated with their phones and rush out to buy a new phone as soon as their contract allows.

  • Report this Comment On April 07, 2014, at 4:11 AM, JT1951 wrote:

    Hasn't anyone learned that Apple products are not price sensitive? Apple sells a premium product at a premium price. The iPhone is the worlds most popular smart phone. Even at $650 it is in demand and not effected by the $100 Samsung smart phones out there. The only reason that the Samsung Galaxy line has been a success is that Apple does not make a large format smartphone. Watch what happens to the Galaxy sales numbers when Apple offers a 4.7 or 5.5" smartphone.

  • Report this Comment On April 07, 2014, at 5:53 AM, ackmondual wrote:

    As to the question why the iPhone6 needs 2 GB of memory... well, why did the iPhone5s need to go 64-bit? Same issue here.

    I only update my os when I need to. updating from ios3 to ios4 on my old IptT3 was great because I can finally have folders to organize all of those app icons on the home screen. Otherwise, I've only ever updated since a game or app I wanted required the latest version. Ditto for my Android phones.... by the time I was ready to go to And 4.x, it was time for me to get a new phones anyways. On my Samsung Galaxy s4, I'm still holding off on 4.3 and sticking with 4.2.2.

    iOS has had their own glitches too. And with larger screens, there's going to be more fragmentation with them too.

    Push come to shove, it's still more difficult to program for Android, but these differences are getting smaller. As of mid 2013, figures indicated that more than 50% of users were on Android 4.x. That simplifies development a lot. It consolidated the tablet and phone development side of things, which used to be 2.x for phones, and 3.x for tablets.

    People still on Android 2.x are mostly in it for phone calls, txt messages, and some pics. They probably wouldn't have been interested in your apps anyways. All of this coming from 2 different Android devs when I attended Google Developer meetups, who state that "fragmentation is mostly a thing of the past".

  • Report this Comment On April 07, 2014, at 2:30 PM, TMFBWItime wrote:

    Great article! I really enjoyed reading this. Your industry expertise is tremendous.

  • Report this Comment On April 08, 2014, at 2:32 AM, tomdc1020 wrote:

    @ JT1951 You say the only reason the Galaxy line has been successful is that apple doesn't have a larger screened phone? Ever thought there might be other reasons, such as people preferring Android and not loving Apples extremely closed and limited environment? I never hated the 4 inch screen size but I do hate the operating system.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2903458, ~/Articles/ArticleHandler.aspx, 11/27/2014 9:42:01 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement