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Apple's iPhone 6 Might Be More Expensive Than You Think

By now, we all know expectations are sky high for Apple's (NASDAQ: AAPL  ) iPhone 6, due out later this year.

The exact reasons driving this outsized interest are many, though some of them have little to do with Apple and more to do with its competitors in the global smartphone space. For instance, some are predicting Apple's iPhone might have gained an upper hand against its most ardent competition because some feel the companies have launched underwhelming updates to their respective flagship smartphones (read: Samsung Galaxy S5).

Either way, the stage is clearly set and expectations are outsized for Apple's iPhone 6. And it appears Apple is also well aware of this as word recently broke that Apple, in discussions with carriers, is exploring the possibility of hiking the price of the iPhone 6.

So as Apple prepares to potentially run away with the smartphone market in the second half, let's look at what the implications of such an iPhone price hike could entail for Apple investors everywhere.

Apple to carriers: Let's make a deal
According to reports initially circling back to Jefferies analyst Peter Misek, Apple has pitched the idea of starting its iPhone 6 at a subsidized price of $300 when the device debuts later this year. 

It's hard to tell how seriously Apple is pursuing this route, but it's certainly interesting to try to get a handle on exactly what impact such a move could have on Apple's financial performance if it were to come to fruition.

If Apple were to successfully gain the support to a significant enough portion of their telecom partners to accept this supposed $100 price increase, Misek estimates that in a so-called "worst case" scenario, Apple would see its unit shipments fall 10% due to the price increase. But baking in the effect that that incremental $100 per device, Misek's model suggest that Apple's EPS would still increase 14% overall, even after the 10% drop in unit sales. On a more positive note, he also models the financial impact of the $100 price hike if iPhone shipments were to remain unaffected by this development. In this scenario, Misek's models claims that Apple's EPS would grow 24%.

Another theory that Misek suggests is that this is merely a negotiating tactic on Apple's part and that the company's real agenda is to get handset makers to "meet them halfway" to support an easier-to-swallow $50 increase for the iPhone 6. But he also modeled out two possible scenarios for such a price change. At the $50 increase range, the model predicts "worst case" scenario would lead to a 5% decline in overall iPhone sales but would still yield a 6% lift to Apple's EPS. And under more optimistic assumptions of the $50 per unit increase leading to no decline in iPhone shipments, Misek's model predicts Apple's EPS would surge 11%.

The real point takeaway to focus on is investors would see Apple's earnings per share increase under any of these circumstances.

But could Apple pull this off?
Stomaching any kind of price hike would be a tough pill for Apple's telecom partners like AT&T or Verizon to swallow, which makes this scenario seem at least somewhat unlikely in my mind. It would leave them with the unpalatable option of eating some portion of this price change to keep the price of the iPhone 6 unchanged, which would certainly hurt their own margins. The other option in this scenario would be for the telecom providers to pass these costs along to the consumers, which could also damage subscriber growth rates.

If Apple were able to pull this off, it would certainly signal that it's hand is stronger than most of us realize today, either because the new iPhone will feature some new truly game-changing technology or that this year's other major smartphone launches are perhaps performing substantially worse than expected.

Either way, this is by no means a sure thing as Apple would have to navigate some extremely tricky negotiations. But as we pay more attention to the iPhone 6, the possible financial impact from these stories is always worth examining for Apple investors everywhere.

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  • Report this Comment On April 16, 2014, at 10:20 AM, GaryDMN wrote:

    The iPhone 6 could be less expensive. Apple has gone to great lengths to reduce it reliance on key component manufactures, by buying key technology pieces and exclusivity from it's supply channel, which could bring their hardware cost down, even while they use more expensive materials. For example, in the last few months, Apple became the worlds largest producer of sapphire glass, with a significant patent portfolio to protect their investment. The same is true of Liquidmetal, which will allow them mass produce the worlds strongest case, using high volume plastic injection molding machines, that produce a finished product, with no machining needed.

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Andrew Tonner

Andrew Tonner is a tech specialist for The Motley Fool. He is a graduate of The University of Arizona with a degree in Finance.

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