Apple's (NASDAQ: AAPL) iPhone 7 and iPhone 7 Plus are available in three different storage configurations: 32GB, 128GB, and 256GB. It's widely expected that the company's upcoming iPhone 7s and 7s Plus will also be offered with similar storage configurations to the current iPhone 7-series phones.
However, according to a note from analyst Simona Jankowski (by way of MacRumors), Apple's premium iPhone 8 won't come in a 32GB configuration; it'll be available only in 128GB and 256GB configurations.
Here's why what Jankowski says makes perfect business sense.
iPhone 8 needs to be expensive
It's clear that the upcoming iPhone 8 is being positioned as a "premium" alternative to the standard iPhone 7 and iPhone 7 Plus. What this means is that the iPhone 8 will have features -- such as an OLED display and 3D sensing technology -- that simply wouldn't fit in the cost and margin structure that the selling prices of the standard iPhone models command.
Apple has historically used higher storage tiers as a relatively straightforward way to improve iPhone average selling prices, since each incremental storage tier adds about $100 to the selling price of the phone. It's also employed this strategy to improve iPhone gross profit margin, since the incremental cost of the additional storage is generally less than $100.
If Apple were to offer, say, a 32GB version of the iPhone 8, it'd have two obvious choices on pricing. It could either start the 32GB model at $999 and move up from there, or Apple could offer the 32GB version at a lower price than the rumored $999 starting price for the OLED iPhone -- say, $899.
The problem with going with the latter option would be twofold:
- To the extent that customers choose an $899 OLED iPhone with 32GB of storage versus an $869 iPhone 7s Plus with 128GB of memory, Apple might lose out as the raw gross-margin dollars on the OLED iPhone might be lower than those on the iPhone 7s Plus.
- Apple would be giving up on what I call the "implicit upsell" to a 128GB model in opting for an OLED iPhone 8; in other words, individuals who normally wouldn't pay extra for a higher-than-32GB storage tier but really want all the cool features of the iPhone 8 will pay up.
In addition to simple margin and upsell arguments, there's the simple fact that the iPhone 8 is very likely going to be pushed as a premium device, and that will fundamentally be part of its appeal.
Indeed, the very fact that the iPhone 8 will represent the very best iPhone available to the public and that only customers who pay for the privilege to have the premium iPhone could make it more attractive to a certain subset of the customer base that views smartphones as fashion accessories or luxury items.
A final thought
In addition to all that, there's the simple fact that the customers who are likely to be wooed by the technological and aesthetic advances are probably more likely to be heavy users of their phones. That means their storage needs are likely to be greater than those of, say, the average smartphone buyer -- or even the average iPhone buyer.
Thus, a 32GB version of the iPhone 8 would probably be a relatively niche product, and it probably wouldn't be worth the added supply-chain complexity to bring it to market.
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